Judgment of the Federal Administrative Court 1 December 2020 (A-1795/2017): refund of withholding tax; denial of tax avoidance in an old reserves case.
The A. (CH) acquired the fiduciary company B. (CH) from D. in 2005 for CHF 1.1 million. D. was domiciled in a non-DTA state. As of 31.12.2004, B. had retained earnings of CHF 636,174, which were offset by, among other things, CHF 759,414 in liquid assets.
In 2010, B. distributed a dividend in the amount of CHF 820,300 (withholding tax: CHF 287,105). The FTA refused to refund CHF 222,661 to A., i.e. to the extent of the pre-existing retained earnings (as far as can be seen, only A. explicitly referred to them as "old reserves"), as it assumed tax avoidance pursuant to Art. 21 para. 2.
The FTA took the view that the procedure chosen was peculiar and inappropriate to the economic purpose pursued (acquisition of companies operating in the fiduciary sector). In doing so, it argued that the mere purchase of a company did not in itself constitute tax avoidance, but was a strong indication of such.
The Federal Administrative Court upheld A.'s appeal against the refusal to refund withholding tax in its entirety. This was due in particular to the following considerations:
- The A. (as well as its parent company at the time) pursued expansion in the fiduciary sector for several years by acquiring corresponding active companies. The acquired B. continued to be managed accordingly until 2008 and the distribution did not take place until years after the acquisition. A. already held three companies in this area prior to the acquisition of B. Further participations were added in 2008 and 2010. In addition, at the time of the acquisition of B., A. had contractually undertaken to continue its business until the end of the year of acquisition.
- The purchase of B., which was active in the trust business, was in the economic interest of A. and its parent company (expansion). In this respect, it does not appear outlandish that the liquidity and reserves were of such additional interest. The fact that A. and its parent company had intended to make further investments with the funds of B. does not seem out of line with the economic strategy. It is admittedly surprising that no acquisitions were made for some time thereafter. But this can be explained, for example, by economic reasons. In any case, the FTA does not fundamentally question the usefulness of liquidity. Thus, the FTA does not show that the net dividend (after deduction of withholding tax) and the part of the dividend exceeding the old reserves would not have been useful for A. since then.
- The time span of more than 5 years between purchase and distribution also reinforces (not least in the light of the direct tax regulation on indirect partial liquidation) the consideration that the transactions in question were not unusual in character.
- Although the purchase of the shareholding was financed with outside capital, the FTA does not show to what extent the financing was provided by B. or whether there was any other special financing.
- From a subjective point of view, the FTA then claimed that the seller's intention to avoid the distribution of a dividend subject to final withholding tax was the sole reason for the chosen course of action. With the purchase, A. had enabled the seller to realise the latent withholding tax burdened reserves via the purchase price.
- The FTA is thus merely accusing A. of passive behaviour. However, A. does not have its own fiscal interest, which is why this is not sufficient to justify tax avoidance. This applies even if it was contractually agreed that the tax risks of this course of action were to be transferred to A.; for it is not established in what way any economic advantage should have accrued to it as a result of this assumption of risk.
- The concurrent commercial interests of A., its parent company and B. at the time of the sale, as well as the continuation of B.'s business, do not support a purchase for purely tax reasons.
Author's note: The acquirer was a Swiss national. As far as can be seen, the FTA's argumentation was materially based on the old reserves practice, but not on the assumption of an international transposition.
