In its ruling 9C_690/2022 of July 17, 2024, a five-judge panel of the Swiss Federal Supreme Court ruled on the binding effect of the "safe harbour" interest rates published annually by the Swiss Federal Tax Administration ("SFTA"). According to the Supreme Court, the tax authorities are not bound by the published interest rates if interest rates agreed between associated companies are below or above the published minimum or maximum rates. In this case, according to the Federal Supreme Court, the tax authorities must instead determine the "actual" arm's length interest rate.
The appellant company (A. AG), a subsidiary of a corporation incorporated based on federal law (B. AG), is subject to limited tax liability in the Canton of Zurich on the basis of permanent establishments. [1] In 2013, A. AG entered into a credit facility agreement with its parent company with a maximum credit limit of CHF 1 billion. On the basis of this agreement, the two companies agreed on a fixed term loan (61 months) of CHF 500 million at an interest rate of 2.5% per annum. For the difference between the credit limit and the fixed loan, a current account was agreed at an interest rate of 3% per annum.
The Cantonal Tax Administration of Zurich ("TA ZH") took the view that the agreed interest rates were not at arm's length, in particular because the existing government guarantee of the parent company had not been taken into account when determining the disputed interest rates. The TA ZH subsequently claimed deemed dividends for the 2014 and 2015 tax periods. The deemed dividends were initially calculated on the basis of an interest rate of 1% per annum, which was determined at the discretion of TA ZH. A. AG's objection to this was partially upheld by the tax administration and the at arm's length interest rate was set at 1.08%. The TA ZH calculated the rate of 1.08% on the basis of the average interest rate for the refinancing of B. AG with bonds of 0.83% and added a margin of 0.25%. This approach was confirmed by the Tax Appeal Court of the Canton of Zurich in its decision of March 10, 2002.
The Administrative Court of the Canton of Zurich partially upheld the appeal against the ruling of the Tax Appeals Court and referred the case back to the lower court for recalculation and a new ruling in line with the considerations. In essence, the Administrative Court was of the opinion that the interest rates published annually by the SFTA should be adhered to and that these rates define the arm’s length range of applicable interest rates. A correction of a not at arm’s length interest rate was therefore only possible to the amount of the published minimum or maximum interest rates. The TA ZH appealed against this ruling to the Federal Supreme Court, which rejected the position of the Administrative Court and upheld the opinion of the TA ZH.
On the merits of the case, the Federal Supreme Court addressed the objection raised by TA ZH that the interest rate circulars published by the SFTA are not applicable to state and cantonal income taxes and are only binding for the purposes of federal income tax and withholding tax. In this respect, the Federal Court recalled that the income tax rules are harmonised between the federal and cantonal levels, which means that the SFTA interest rates are also applicable to federal and cantonal income taxes.[2]
With regard to the nature of the SFTA circulars on permissible interest rates, the Federal Supreme Court first stated that they serve to simplify the application of the arm's length principle. The simplification lies in the fact that the published interest rates, as "safe harbour rules", justify the assumption that there is no deemed dividend if the taxpayer complies with these rules. [3] Conversely, or if the taxpayer deviates from the published rates, there is a rebuttable presumption of a deemed dividend. In this case, it is up to the taxpayer to prove that the interest payments are in fact at arms' length. In addition, the Federal Supreme Court stated that the interest rate circulars of the SFTA should only be deviated from if the applicable legal provisions are not convincingly specified. [4]
With regard to the case at hand, the Federal Supreme Court stated that the binding effect of the interest rate circulars only exists as long as the taxpayer itself adheres to the interest rates defined therein. If the taxpayer deviates from these rates, there is no reason why the tax authority should continue to be bound by the safe harbour rules and not be allowed to determine the actual arm's length interest rate. [5] In these cases, there is neither a violation of the protection of legitimate expectations nor of the principle of equal treatment, especially since the taxpayer itself has deviated from the SFTA interest rates. Finally, the deviation from these interest rates would also undermine the purpose of the safe harbour rules, i.e. administrative simplification, as the tax authorities would have to check in these cases whether the interest rate claimed was in line with the arm's length principle. [6] Against this background, the Federal Court did not see any violation of the law in the TA ZH's determination of what it considered to be the arm's length interest rate, which deviated from the FTA interest rates.
However, with regard to the actual determination of the arm's length interest rate by the TA ZH, the Federal Supreme Court found that the Administrative Court of the Canton of Zurich had not addressed the issue of the legitimacy of taking into account a "margin" of 0.25% based on the interest rate circulars of the SFTA. In this respect, the Federal Supreme Court referred the matter back to the lower court for reconsideration.
The above-mentioned decision of the Federal Court raises several questions, both in terms of its reasoning and its possible consequences for practice, which will be addressed in the following.
To the extent that the Federal Court has denied a violation of the principle of equal treatment, one can agree with the court as long as it will be ensured that the tax authorities consistently apply the arm's length interest rate in all cases where a taxpayer deviates from the SFTA interest rates. In other words, the tax authorities should not be able to rely on the SFTA rates on a case-by-case basis as this would lead to unequal treatment of taxpayers who deviate from the SFTA rates. Similarly, the individual application of the effectively higher administrative costs by the tax authorities when assessing the participation exemption would also violate the principle of equal treatment – to the extent that this was actually intended by the legislator .[7] – gegen den Grundsatz der Gleichbehandlung.[8]
The Federal Court's argument that the purpose of the interest rate circulars in terms of administrative simplification can no longer be achieved if the taxpayer deviates from the maximum permissible interest rates is not entirely convincing, if at all. According to the case law of the Federal Supreme Court, the tax authorities can no longer limit themselves (while maintaining the principle of equal treatment) to examining the transfer pricing studies submitted as evidence of the arm's length principle, but must now - if they are of the opinion that the arm's length principle has not been verified - determine the effective market interest rate. It is true that the taxpayers' (attempted) proof of arm's length interest rates, as opposed to the SFTA interest rates, involves additional work for the tax authorities. However, this in itself only partially limits the purpose of administrative simplification. This purpose is only completely thwarted by the TA ZH's position, now confirmed by the Federal Court, that it is the tax authority's task to determine the specific market interest rate to be applied (and not merely a range of arm’s length interest rates). If it is indeed (only) a matter of administrative simplification, there is no obvious reason why the SFTA interest rates could no longer be used as a basis (for simplification reasons) if the arm's length interest rate cannot be proven. Instead, the tax authorities will have to determine the arm's length rate in accordance with best practice.
With regard to the requirements for the tax authorities to provide evidence of what they consider to be the arm's length interest rate, it seems reasonable to apply the same requirements for the evidence of the arm's length principle or the transfer pricing study as those defined in the SFTA applicable to taxpayers. The transfer pricing study to be carried out by the tax administration would therefore have to include the following elements, whereby the taxpayer's duty of cooperation could be invoked for the first two points[9]:
In terms of applicable transfer pricing methods, the Comparable Uncontrolled Price Method (CUP Method) is the primary transfer pricing method to be used for interest rates. In addition, the cost of funds method is also recognised in Swiss practice and appears to have been used by TA ZH in the present case. According to this method, the interest rate is determined on the basis of the lender's cost of funds plus a risk premium and a profit margin. The determination of the margin requires a case-by-case assessment, taking into account the borrower's credit rating. Against this background, the Federal Court's decision to refer the case back to the Administrative Court with regard to the 0.25% interest margin applied by TA ZH, which in turn is based on the SFTA's interest rate circular, is only consistent in the light of the other considerations.
Lastly, the statement by the Federal Court that it is the task of the tax authority to determine a specific interest rate to be applied and not (merely) a range of interest rates also raises questions. This statement cannot be reconciled with state-of-the-art transfer pricing methodology. The Federal Court fails to recognise that, in principle, only a range can be determined for the market interest rate or that it is unlikely that there is only one market interest rate for a specific transaction. [10] The principle applies that a correction to the actual terms agreed between related parties is only permitted at the upper or lower end of the identified arm’s length range. This principle has now been unnecessarily called into question by the Federal Supreme Court, at least as far as interest rates are concerned. It is also questionable to what extent the interest rates published by the SFTA correspond to the arm's length principle, if they cannot be used as a basis for determining deemed dividends. In this context, it should be noted that some tax administrations have taken the view that the range of arm's length interest rates is relatively narrow, meaning that a deviation of more than 25% from the SFTA interest rates is per se inconsistent with the arm's length principle and that the taxpayer is (effectively) denied the opportunity to provide rebuttal evidence. [11] This position can no longer be maintained if the case law of the Federal Court is consistently applied.
With regard to the specific facts of the present case, it can be said that the deviation of the TA ZH from the SFTA interest rates can be regarded as appropriate in individual cases. However, the reasoning chosen by the Federal Supreme Court to justify the deviation from the SFTA interest rates is not convincing and leads to unnecessary uncertainties. It would have been more appropriate to emphasise the special nature of the individual case at hand and thus follow a factual line of reasoning. In this respect, the Federal Supreme Court could have referred to the general rule that the interest rate circulars of the SFTA can (only) be deviated from if they do not convincingly specify the applicable legal provisions, which could certainly have been argued in the present case.
It would now be desirable for the SFTA to take the present decision of the Federal Court as an occasion to amend its interest rate circular and, in particular, to define more precisely the scope of application of the safe harbour rules. [12] This would increase legal certainty for taxpayers, and the expected additional workload for the tax authorities could be mitigated. In this context, it should be noted that the credit rating of the borrower and the specific structure of the financing are of considerable importance in determining an arm's length interest rate on a case-by-case basis. For example, the impact of collateral, maturity and prepayment rights (or lack thereof), as well as whether and how implicit group support or a group rating should be taken into account, must be assessed.
Since deviation from the SFTA's interest rate circulars has always led to a de facto obligation to provide evidence of the arm’s length of the interest rates used, it is still recommended - also in light of the discussed decision - that groups prepare a robust transfer pricing analysis and documentation.
Zurich, August 23, 2024
[1] For a more detailed description of the facts, see the ruling of the Administrative Court of the Canton of Zurich SB.2021.00056 of May 25,2022..
[2] Judgment FSC 9C_690/2022 of July 17, 2024, E. 6.1.
[3] Judgment FSC 9C_690/2022 of July 17, 2024, E. 4.1.
[4] Judgment FSC 9C_690/2022 of July 17, 2024, E. 4.2.
[5] Judgment FSC 9C_690/2022 of July 17, 2024, E. 6.2.
[6] Judgment FSC 9C_690/2022 of July 17, 2024 E. 6.2. in fine
[7] Cf. GRETER, Der Beteiligungsabzug im harmonisierten Gewinnsteuerrecht, Diss., Zurich 2000, p. 142.
[8] Cf. Attenhofer, in: Klöti-Weber/Schudel/Schwarb, Kommentar zum Aargauer Steuergesetz, 5th edition, Bern 2023, para 35 to § 27b; Vitali, ibid., para. 86 to § 76,
[9] See https://www.estv.admin.ch/estv/de/home/internationales-steuerrecht/verrechnungspreise.html, question 23.
[10] See https://www.estv.admin.ch/estv/de/home/internationales-steuerrecht/verrechnungspreise.html, question 32.
[11] See Harbeke/Hug/Scherrer, Verrechnungspreisrecht der Schweiz, Grundlagen und Praxis, Zürich, 2022, para. 1188.
[12] See also the criticism of the SFTA interest circulars in Harbeke/Hug/Scherrer, a.a.O., para. 1226.
The partially revised VAT Act has been in force since 1 January 2025. This article provides information on the current status as at mid-January 2025.
A so-called "supply chain fiction" (see illustration below) simulates a supply from the trader to the platform and from the platform to the customer for VAT purposes, see Art. 20a new VAT Act. The platform must therefore account to the FTA for VAT on sales to customers, provided that these are subject to domestic tax. Please note: The so-called mail order regulation for the delivery of low-value consignments of goods from abroad continues to apply, Art. 7 para. 3 let. b VAT Act. In fact, the new regulation should lead to a comprehensive tax liability for foreign trading platforms in Switzerland. However, domestic private sellers who occasionally sell goods via a trading platform, for example, are also affected: The trading platform will undoubtedly pass on the VAT it owes to the sellers.
In practice, numerous questions arise in connection with platform taxation. It is therefore all the more regrettable that at the time of writing this article, the FTA has not yet published any guidance on administrative practice.
Whereas today, in the case of travel abroad, the individual components of the trip must be broken down for VAT purposes and assessed individually according to their service content, in future the so-called place of supply principle will apply to all travel agency services, i.e. the travel agency's services (own and those charged on from third parties) will be deemed to have been uniformly provided at the registered office of the travel agency. Travel agency services are exempt from tax if they are provided abroad or if they would be exempt from tax on the basis of Article 23 of the VAT Act if they were provided by a person who is not a travel agency.
At the time of writing this article, the FTA has not yet published any information on administrative practice.
If a public authority expressly designates the funds it provides to the recipient as a subsidy or other contribution under public law, these funds are deemed to be a subsidy or other contribution under public law, Art. 18 para. 3 new VAT Act. Subsidies are deemed to be non-consideration that are not subject to VAT but require a reduction of the input tax deduction at the level of the subsidy recipient, Art. 18 para. 2 let. a in conjunction with Art. 33 VAT Act. Until the end of the finalisation period, the municipality has the option of designating funds to the recipient as a subsidy or other contribution under public law. Taxpayers who do not agree with the qualification as a subsidy will have to actively defend themselves against this.
VAT Info 05 "Subsidies and donations" has been revised accordingly, whereby the amendments are currently limited to editorial additions to the new provisions without providing further practical information.
The transfer of emission rights, certificates and attestations for emission reductions, etc. (separate from the supply of energy) are now generally subject to acquisition tax - regardless of the domicile of the seller. A letter (e) has been added to Art. 45 para. 1 VAT Act. The provision does not apply if the traded rights etc. fall under the tax exemption pursuant to Art. 21 para. 2 no. 19 let. e VAT Act. In particular, trading in derivatives on such rights, certificates and attestations is exempt from the tax.
Incorrectly invoiced domestic VAT is only deductible as input VAT if the recipient of the service can prove that the service provider has also invoiced and paid this domestic VAT.
Section 2.5 of VAT Info 14 "Supply tax" contains a list of the rights, certificates and attestations that fall within the scope of the amendment. These include in particular
Accounting period
In future, taxable persons whose annual turnover from taxable supplies does not exceed CHF 5,005,000 will have the option of settling VAT annually. The application of this method has no influence on the invoicing method. Authorisation for annual invoicing is granted on request and can be refused or revoked if the taxable person does not meet their invoicing and payment obligations or does so insufficiently, Art. 35 and 35a new VAT Act.
Taxpayers must make advance payments on their tax liability during the year (quarterly or half-yearly for taxpayers with a net tax rate). The instalments are determined and invoiced by the FTA, Art. 86 new VAT Act. The tax claim for the last tax period is decisive for determining the instalments. If it is not yet known, it will be estimated by the FTA. In the case of new taxpayers, the tax claim expected by the end of the first tax period is decisive. If the taxable person considers the instalments to be too high or too low, they can apply to the FTA for an adjustment of the instalments.
At the time of writing this article, the FTA has not yet published any information on administrative practice.
Fiscal representation
Taxable persons without a place of residence or business in Switzerland generally require a tax representative in Switzerland ("fiscal representative"). Administrative simplifications and cost savings are to be created here by dispensing with the requirement for a tax representative under certain conditions. The FTA may waive the requirement to appoint a representative in accordance with paragraph 1 if the fulfilment of procedural obligations by the taxable person and the swift implementation of this Act are guaranteed in another way, see Art. 67 para. 1 bis new VAT Act.
There is no indication in the law, ordinance or the corresponding messages as to how "the fulfilment of procedural obligations by the taxable person and the rapid implementation of this law can be ensured in other ways". In this respect, it remains to be seen whether the administration will comment in more detail. At the time of writing this article, the FTA has not yet published any information on administrative practice.
Even after the entry into force of the partially revised VAT Act, questions regarding its implementation by taxable persons remain unanswered. We are monitoring the development of administrative practice and will keep you informed of any developments here.
A AG is active in the procurement, holding, financing, operation, rental and leasing of aircraft. A AG is held by the company B. The owner of B is the C family.
In 2012, A AG acquired an aircraft and concluded an "Aircraft Management and Charter" agreement with D. In the agreement, A AG transferred the exclusive right to manage the aircraft and operate it vis-à-vis third parties to D.
All flights carried out with the aircraft were invoiced by the D. company. D retained a certain amount of the fees received as commission. D reimbursed the remaining amount to A AG as a rental payment. In detail, the agreement provided for the following:
The contract also stipulated that D had to obtain the prior consent of A AG for each charter flight. In addition, it would inform A AG of all flight enquiries from potential charter customers at A AG's request. A AG reserved the right to approve or reject any charter flight offered by D at its own discretion.
In 2012, the FTA confirmed A AG's input tax deduction with regard to import tax on the aircraft and domestic tax invoiced by D. The decision was based on a ruling request, which was based on the following utilisation forecast:
It later transpired that more than 50% of the actual use was for the private needs of A AG and related parties. As a result, the FTA denied the input tax deduction to the extent of the use for non-commercial purposes and qualified the structure in relation to the aircraft as abusive.
The main issue in dispute is whether input tax deduction is excluded if the aircraft is used for the private use of the beneficial owners (A AG and related parties).
9C_775/2023
In its earlier judgement (BGE 149 II 53), the Federal Supreme Court was guided by the practice of the FTA when determining the threshold above which private use of an aircraft is no longer considered part of a business activity. Accordingly, private use of up to 20 % is not harmful. If this value is exceeded, the entire private use of the aircraft by the beneficial owner and related parties falls outside the scope of VAT and does not entitle the beneficial owner to deduct input tax.
Both the lower court and the appellant are correct in assuming that A AG forms an entrepreneurial unit (in accordance with the principle of the unity of the company in BGE 142 II 488), which is also confirmed by the Federal Supreme Court in the present case. However, even if a business unit exists, input tax deduction is only possible to the extent of the business activity.
The appellant's activity raises the question of whether an input tax adjustment is necessary, even though the structure provides for the aircraft to be used exclusively for business purposes. The Federal Supreme Court answered in the affirmative, as the private use accounts for more than 20% of the total use and therefore does not fall within the scope of VAT. In this respect, in the court's opinion, there was never a right to claim input tax.
Aircraft holding structures are regularly the focus of VAT auditors. The judgement essentially confirms the practice of the FTA and its restrictive approach. The judgement goes beyond aircraft holding structures and taxable persons should always keep an eye on the proportion of "de facto" private use of these items in relevant constellations (e.g. holiday homes, vehicles, boats).
Completing the customs formalities causes a storm of enthusiasm for very few people. Too formalistic, too time-consuming - and especially if the goods are only brought to the country in question for a short time (e.g. as part of a trade fair), the temptation to dispense with the tedious formalities is great. However, it has been shown time and again that the proper completion of customs formalities can save the declarant a lot of trouble - and money. As in the case recently decided by the Federal Administrative Court (judgement of 19 November 2024, A-4028/2022). The subject of this judgement was the failure to open the temporary admission customs procedure for exhibits at a trade fair in Switzerland.
In accordance with the self-declaration principle, the customs declaration forms the basis of the customs assessment. High demands are placed on the diligence of the person obliged to declare. Persons subject to customs duties must inform themselves in advance about the customs obligation and the respective clearance procedures. They are responsible for the lawful and correct declaration of their goods movements and must declare the assessment.
If the goods are brought into the customs territory for temporary admission, the customs declaration for temporary admission (“ZAVV”) must be issued. This is a Swiss customs document that has no effect on customs formalities abroad. The customs office requires a security deposit for the ZAVV procedure. This is the amount that would have to be paid for definitive customs clearance.
The following basic requirements must be met for the temporary admission procedure to be utilised:
The intended use of the goods determines the admissibility of the temporary admission procedure and the required formalities. Common uses are, for example, exhibitions, tests, trials, sporting events or business materials. If the intended use, the user or the owner of the goods changes during the temporary admission, a new customs declaration is required.
As part of this procedure, import and export customs duties are assessed with a conditional payment obligation. If the temporary admission procedure is not completed correctly, the assessed duties become due unless the goods have been removed from the customs territory within the specified period and their identity can be proven.
The complainant had brought two self-designed and assembled motorhomes into Switzerland without a customs declaration in order to exhibit them at a trade fair. The Federal Customs Administration (now and hereinafter referred to as the Federal Office for Customs and Border Security, FOCBS) confiscated the vehicles and opened a criminal customs investigation against the complainant for failure to declare. The complainant argued, among other things, that the motorhomes were covered by the Istanbul Convention and could therefore be imported temporarily and informally duty-free. In any case, the conditions for duty exemption within the meaning of Art. 56 para. 3 of the Customs Act were fulfilled, as the motorhomes in question had left the country again.
The court points out that the relevant provisions of the Istanbul Convention are not only based on the object of the import itself ("means of transport"), but also on its intended use in the specific case ("for commercial or personal use"). In this context, "commercial use" exclusively includes means of "transport of persons for remuneration or for the commercial transport of goods for or without remuneration". This requirement is not met if the intended use is to exhibit at a trade fair. The motorhomes therefore fall under a different provision of the Istanbul Convention - which, however, does not provide for informal registration.
The opening of the scope of application of the duty exemption provisions asserted by the appellant was also not fulfilled. The prerequisite for this is that a customs procedure has been duly opened. This was not the case in the present case.
As a result, the Federal Administrative Court found that the customs and import tax debt was lawfully assessed against the taxpayer.
Failure to submit a customs declaration ultimately cost the complainant dearly. The conditions for temporary admission were probably met in the case in question. With little effort, the visit to the trade fair in Switzerland could have been processed under customs law without effectively incurring VAT and customs duties.
Influencers have established themselves as important players in digital marketing. Companies use them to communicate products and services to potential customers in a targeted manner. This raises important VAT issues for influencers as well as for their clients and cooperation partners. This article examines the key aspects from the perspective of influencers and the companies that use their services.
Influencers often receive monetary remuneration or benefits in kind in the form of products or services for their advertising activities. As soon as their taxable turnover (worldwide!) exceeds the threshold of CHF 100,000 per year, they are subject to VAT and must register with the Swiss Federal Tax Administration. This applies to remuneration for advertising services as well as the sale of own products.
One example: Influencer René from Zurich cooperates with fashion houses and hotels. He receives free overnight stays in return for advertising services on social media. According to Article 24 paragraph 3 of the VAT Act, this is considered a barter transaction: the market value of the hotel accommodation corresponds to the taxable remuneration for his advertising service. If an existing hotel bill is waived instead of a monetary payment, this is a "supply in lieu of payment" in accordance with Article 24 paragraph 5 of the VAT Act, whereby the originally agreed booking amount serves as the assessment basis.
Sponsored posts, affiliate income or subscription fees from followers must also be included in the taxable assessment basis.
Not only influencers themselves, but also their clients must be aware of the VAT consequences, particularly in cross-border business transactions. The place of performance for advertising services is determined in accordance with the recipient location principle. Companies that purchase services from foreign influencers should check whether the reverse charge procedure applies.
An example: A Swiss hotel commissions an influencer based in Germany to promote its resort. As the service is provided to an entrepreneur based in Switzerland, the tax liability is shifted to the Swiss hotel. The hotel must pay the VAT itself as part of the reverse charge procedure and declare it accordingly in the VAT statement.
Influencers who sell their own products via online stores are subject to the rules for deliveries. The place of delivery is determined by the place where the goods are located at the time the power of disposal is obtained. As a rule, this is the place of residence of the influencer. If deliveries are made to foreign customers, the question arises as to whether a tax-exempt export delivery exists or whether the influencer must register for tax purposes in the recipient country. The b2c and OSS or mail order regulations in Switzerland could also be briefly discussed here.
Both influencers and the companies that work with them should carefully examine the VAT consequences of their business models. Compliance with the applicable regulations can minimize tax risks and avoid unexpected additional claims. In any case, it is advisable to seek sound tax advice.
Culture is an essential part of our society - worthy of support, but also in need of support. This area of conflict gives rise to the need for financial support in the form of donations and subsidies. Both are considered non-taxable items within the meaning of the VAT Act, but differ in their tax treatment: while subsidies result in a reduction in input tax (Art. 33 para. 2 VAT Act), donations have no effect in this respect (Art. 33 para. 1 VAT Act). The exact distinction is therefore of considerable practical relevance. A recent ruling by the Federal Administrative Court (A-2765/2022, decision appealed to the Federal Supreme Court) deals with the question of whether funds that a foundation passes on from previously received subsidies are in turn to be qualified as a subsidy or a donation.
A-GmbH is active in film production and receives funding for this from a foundation under private law, which, however, primarily pursues public purposes. In this respect, the foundation has replaced the film promotion program operated by the City and Canton of Zurich itself. For its part, the foundation receives subsidies from the canton and city of Zurich. As part of an audit, the FTA qualified the subsidies paid out by the foundation as subsidies and assessed an additional tax claim due to the failure to reduce input tax. The foundation appealed against this.
Subsidies and donations differ from each other in several respects. In the case of both subsidies and donations, the beneficiary does not provide a specific service in return.
In contrast to a donation, however, a subsidy is accompanied by a "behavioral commitment" that serves a purpose in the public interest.
A donation is made on a voluntary basis, whereas a subsidy is granted on a legal basis. When subsidies are passed on, the intermediate recipient is also obliged to pass them on or the final beneficiary has a legal claim to at least part of the subsidy.
In the present case, the court therefore had to clarify the question of whether the foundation passed on the funds with the mere intention of benefiting the complainant, with the right of the complainant to dispose of the funds as it sees fit (donation) - or with a clear purpose that goes beyond the mere intention of benefiting the complainant, which would mean that a subsidy could be assumed.
A-2765/2022
In its decision, the ruling essentially focuses on the fact that the foundation should continue the former sovereign task of film promotion in a private law form. This means that the earmarking to which the public subsidies to the foundation are subject also extends to the subsidies that the foundation pays to filmmakers. This earmarking for the recipients of the contributions was reflected, on the one hand, in the purpose of the foundation and, on the other hand, in the principles of the contributions granted by the foundation, which were subject to a conditional repayment obligation. As a result, the court deduced that this earmarking for the recipients of the contributions in turn led to a restriction of the independence or freedom of use of the funds by the foundation - which would argue for a qualification as a subsidy (in effect: passed on to the recipients of the contributions) and against the assumption of a donation. This view is supported by the fact that the foundation is free to select the recipients of contributions, but not to decide whether to award grants. On the other hand, it is completely harmless that when the funds are awarded to the foundation, it is completely unknown to which recipients the foundation will ultimately award these funds.
In addition, the court emphasized that, based on the specific circumstances, it was always clear to the recipients that the foundation was merely a vehicle of the canton and city to implement their promotion of filmmaking - and that the foundation therefore passed on subsidies.
Since January 1, 2025, funds provided by public authorities have been considered a subsidy within the meaning of Art. 18 para. 2 of the VAT Act if they are expressly designated as such to the recipients. With the ruling of the Federal Administrative Court, the concept of a subsidy appears to have been extended to payments by private-law organizations - as long as it was only "recognizable" to the recipient that the funds ultimately came from the public sector and otherwise qualified as a subsidy. In future, artists will therefore have to check very carefully from whom they receive funding - and whether this may trigger an input tax correction. It remains to be seen whether the ruling will be upheld by the Federal Supreme Court.
As a general consumption tax, value added tax (VAT) is designed to burden non-business, i.e. private, consumption. Within the business sphere, on the other hand, there is a fundamental right to deduct input tax in order to avoid multiple tax burdens. However, this principle reaches its limits if structures are used solely to obtain a tax advantage that is not provided for by law. Such abusive structures are often the subject of case law, particularly in connection with luxury goods such as private jets, yachts or vacation properties.
A recent ruling by the Federal Administrative Court (FAC) dated January 8, 2025 (A-1146/2023) deals with such a topic. It deals with the misuse of VAT regulations in connection with a vacation property.
A-1146/2023
A._______ AG was acquired by its sole shareholder in 2017 and held a single vacation property. The company was registered as a company subject to VAT, which entitled it to claim input tax deduction for extensive renovation costs. At the same time, it rented out the property exclusively to the sole shareholder, with this rental being subject to VAT at the special rate for accommodation services.
Following a VAT inspection by the Swiss Federal Tax Administration (FTA) in 2021, the company was retroactively deleted from the register of VAT-liable persons. The FTA justified this with the existence of tax avoidance, as the chosen structure was solely aimed at generating an input tax deduction that the sole shareholder could not have claimed privately. The FAC confirmed this assessment.
According to the established practice of the FAC and the Federal Supreme Court, three elements are decisive for the affirmation of tax avoidance:
As all three criteria were met, the tax avoidance was affirmed and the company's tax liability was retroactively revoked.
It is interesting to compare this with the judgments A-4190/2020 and A-4195/2020 of 15 December 2021. In these cases, no tax avoidance was assumed, whereby, in the opinion of the court, the fact that no input tax deductions were claimed played a role. Instead, the companies invoiced using the net VAT rate method, which is why no significant tax savings were made. The third condition, the effective element, which requires a significant tax saving, was therefore missing. In the current case, however, the chosen structure led to a significant input tax surplus, which resulted from the high renovation costs for which the company claimed the input tax deduction. At the same time, the rental income from the exclusive letting to the sole shareholder was only taxed at the reduced special rate for accommodation services. As a result, the input tax claimed significantly exceeded the VAT owed, which the court classified as tax abuse, meaning that tax avoidance was confirmed.
One noteworthy point of the ruling is the distribution of the burden of proof. In principle, it is up to the tax authority to prove the existence of an abusive arrangement. However, the FAC states that there is a natural presumption of a peculiar arrangement as soon as significant elements speak in favour of tax optimization. In practice, this leads to a de facto reversal of the burden of proof, as taxpayers must rebut the natural presumption of tax avoidance.
In the current case, A._______ AG was unable to provide sufficient business reasons for its structure. The court emphasized that economic or business motives of the company itself are decisive - not the entrepreneurial activities of the sole shareholder. This did not invalidate the natural presumption. This approach shows that taxpayers who use similar structures must provide well-documented economic reasons for their choice in order to avoid a tax adjustment.
Das Urteil unterstreicht erneut, dass das Halten von Ferienimmobilien über Gesellschaften zwar nicht per se unzulässig ist, jedoch ein wirtschaftlicher Zweck nachgewiesen werden muss, der über die reine Steuerersparnis hinausgeht. Dabei scheinen Verwaltung und Bundesverwaltungsgericht strenge Massstäbe anzulegen.
In such situations, companies and taxpayers should therefore carefully examine whether the business reason for the chosen structure can be adequately justified. If this is not the case, there is a risk of a tax correction with considerable financial consequences. The decision has been referred to the Federal Supreme Court and it remains to be seen whether it will stand.
If a foreign supplier provides so-called electronic services to consumers (b2c) in Switzerland, this quickly leads to the foreigner having to register for VAT in Switzerland and charge VAT on his services to Swiss customers. Services that are not considered electronic services, on the other hand, generally do not trigger a registration obligation, as the recipient of the service may be liable for the purchase tax (even if he is a consumer and not an entrepreneur). The question remains: When does a service actually qualify as an "electronic service"?
Electronic services follow the general rules for determining the place of supply for VAT purposes. This means that, as a rule, they are taxable where the recipient of the service is resident or domiciled ("recipient location principle"). What distinguishes electronic services from other services is primarily that they lead to a registration obligation for the foreign service provider if customers are domestic consumers (b2c). If a foreign supplier who is not VAT-registered in Switzerland provides a "normal" service to a domestic recipient and this service is subject to the recipient location principle, the domestic recipient is liable for acquisition tax if he is either liable for tax (b2b) or receives such services for more than CHF 10,000 per year (b2c). Due to this situation, the foreign supplier is not liable for VAT in Switzerland.
The situation is different if the foreign supplier provides a so-called electronic service. In this case, the foreign supplier remains liable for tax and must register in Switzerland for VAT purposes in order to settle the VAT with the FTA.
According to FTA practice, a service is deemed to be an electronic service if the following conditions are cumulatively met:
In individual cases, questions of demarcation arise as to whether a service qualifies as an electronic service in a specific case. The Federal Supreme Court recently had to deal with such a demarcation question (judgement of 25 October 2024, 9C_482/2024). The main focus was on the question of "minimal human involvement on the part of the service provider".
9C_482/2024 BG
A is domiciled abroad and operates online sports betting. The FTA retroactively entered A in the VAT register and assessed an additional tax claim, as A provides electronic services to non-taxable persons in Switzerland, reaches the turnover limit and is therefore liable to pay tax. A disputed both the provision of electronic services and the tax liability.
The disputed question in this case was whether the service provided by A was automated and only performed with a minimum of human involvement.
The FTA and the Federal Administrative Court assumed that the disputed service consisted of the granting of a conditional opportunity to realise an agreed profit. The human influence in A's offer was limited to the determination of the betting odds and other preparatory acts aimed at the conclusion of future bets, but was not itself part of the service relevant for VAT purposes. A countered this by arguing that significant activities of the employees took place as part of the provision of the service: In the case of live betting, the betting odds had to be constantly processed manually. Customers also have access to a support team that they can contact if they have any questions or problems.
In its decision, the Federal Supreme Court referred to the essential core of the service relationship and followed the reasoning of the lower court. Although the human interventions claimed by A were of considerable importance, they were limited to the design of a product that was the subject of the offer (and not the service itself). According to the administrative practice of the FTA, human intervention in the context of preparation, development and maintenance work is not taken into account
In the context of the provision of the service itself, human intervention is always to be considered "minimal" if it does not serve to respond to individual customer requests. The court refers to the human croupier in an online casino or the lecturer in an online course who does not offer participants the opportunity to interact before, during or after the seminar. Although service and support are indispensable for A's offering, they are not an integral part of the actual electronic service. Rather, they are services that merely fulfil an assigned function. This distinguishes them from activities with more than minimal human involvement, such as counselling, evaluating, providing individual feedback or answering questions.
The judgement makes it clear that, from a Swiss perspective, services can be assessed as electronic services more quickly than some entrepreneurs may realise. The fact that a real person is involved before, during or after the provision of the service is sometimes of little help here. It should also be noted that electronic services in the b2c sector are also subject to special regulations in other (European) countries, which may make it necessary for Swiss companies to charge foreign VAT. Anyone who no longer makes their services available to foreign customers only by letter is therefore well advised to have their services qualified by a VAT expert. Failure to do so may result in considerable VAT risks.
Effective 1 January 2025, various tax provisions came into force. These range from the introduction of the International Income Inclusion Rule (IIR) to the partial re.vision of VAT legislation concerning platform taxation, and the reduction of the import exemption threshold for travelers to CHF 150. In the following, the most important points of the new regulations coming into force are briefly summarized
On 4 September 2024, the Federal Council decided to implement the International Income Inclusion Rule (IIR), effective 1 January 2025. The IIR ensures that profits of foreign subsidiaries of Swiss corporate groups and intermediary holding companies of foreign corporate groups are taxed at a minimum rate of 15%. This applies to corporate groups with a global turnover of at least EUR 750 million.
Without the IIR, other countries would, under the OECD/G20 minimum taxation rules, have the right to tax these foreign profits through the so-called Undertaxed Profits Rule (UTPR). Switzerland has decided not to implement the UTPR for the time being.
Further information can be found under this LINK
Also, the partially revised VAT Act and the partially revised VAT Ordinance will come into force on 1 January 2025. In particular, the changes in connection with platform taxation should be emphasized. Operators of electronic platforms that facilitate a delivery as an intermediary between buyer and seller and the conclusion of a corresponding contract on their platform are now expressly deemed to be service providers vis-à-vis the buyer. Specifically, the supply is divided into two fictitious deliveries, whereby the first delivery between the seller and the platform operator is exempt from tax and the second delivery between the platform operator and the buyer is taxed.
Further details, including other VAT-related changes, are available under this LINK
The introduction of the Federal Act on Combating Abusive Bankruptcy is accompanied, among other things, by the implementation of Art. 112 para. 4 of the Federal Act on Direct Federal Taxation. According to this provision, the tax authorities are required to report to the commercial register office if no signed annual financial statements were filed by the company within three months of the expiry of the relevant deadlines. In addition, creditors under public law, such as the tax authorities, must file for bankruptcy if the debtor is entered in the commercial register.
Further information can be found under this LINK
From 2025, in fulfilment of the motion ‘Stop the tax penalty in Pillar 3b’, the taxation of life annuities in Pillar 3b will be flexibly adapted to the respective investment conditions. This will eliminate the previous systematic over-taxation of pension benefits and significantly mitigate the tax on redemption and buyback of life annuity insurance policies. Until now, a flat-rate income component of 40 per cent of pension benefits was taxed and the remaining 60 per cent was treated as a tax-free capital repayment. From 1 January 2025, the taxable income portion of the guaranteed pension benefit for life annuity insurance policies within the meaning of the Insurance Contract Act will be based on FINMA's maximum interest rate. Surplus benefits that exceed the guaranteed annuities will be taxed at 70 per cent. The taxable income portion of current life annuities is subject to withholding tax and must be reported annually by the insurance companies to the FTA. These reports are forwarded to the cantonal tax authorities for control purposes.
Further information can be found under this LINK
From 1 January 2025, it will also be possible to pay missed contributions into Pillar 3a retrospectively on a tax-privileged basis. From 1 January 2025, anyone who has made no or only partial contributions to a tied pension plan (‘Pillar 3a’) will be able to retroactively make up for these contributions for up to ten years and deduct them in full from their taxable income. Specifically, in addition to the regular contributions per year, it will be possible to make a purchase up to a maximum of the so-called ‘small contribution’. The following conditions apply to a retroactive purchase:
It should be noted that the aforementioned changes only apply to contribution gaps from 2025 onwards, which means that purchases can be made retroactively for 2025 for the first time in the 2026 tax year. Payments for missed purchases before 2025 are therefore not possible.
Further information can be found under this LINK
In principle, the right to tax income from employment according to double taxation agreements is determined by the place where the work is physically carried out. In the case of teleworking, the right of taxation would therefore change from the employer's country of domicile to the employee's country of residence.
The amendment to the law now creates an internal legal basis for the taxation at source of employees who are not resident in Switzerland for tax purposes and who work for a Swiss employer from a neighboring country in a home office.
This regulation is closely linked to the international agreements on the allocation of taxation rights between Switzerland and its neighboring countries. The supplementary agreements with France and Italy create the possibility for teleworking for a Swiss employer to continue to be taxed in Switzerland up to a certain level, even if the work is not carried out locally. Specifically, the supplementary agreement with France allows taxation by Switzerland if up to 40 per cent of working hours are performed outside Switzerland. Under the protocol with Italy, an upper limit of 25 per cent of working time applies.
The new taxation basis is aimed at implementing the above-mentioned international treaty provisions and ensures that Switzerland can exercise its right of taxation accordingly.
Further information can be found under this LINK
With the amendment to the Federal Department of Finance ordinance on the tax-exempt importation of goods in small quantities, of insignificant value or of a negligible tax amount, goods for the private use of travelers may only be imported tax-free up to a total value of CHF 150 (previously: CHF 300) per person and day. If the total value exceeds this limit, Swiss VAT must be paid on the imported goods.
Further information can be found under this LINK
The UK non-dom regime will be definitively abolished and will no longer be available from 6 April 2025, which will bring alternative locations into focus for affected individuals. With its lump-sum taxation, Switzerland offers an attractive alternative that can provide significant tax advantages with careful planning. In addition, Switzerland currently has an attractive inheritance tax system with partial or full tax exemption for spouses and direct descendants.
As announced, the UK will definitively abolish the so-called "non-dom regime" with the 2025 Budget. This regime will no longer be available from 6 April 2025 and will be replaced by a residence-based regime, whereby UK residents will be taxed on their worldwide income. In addition, in future assets held outside the UK will also be subject to UK inheritance tax.
A short transitional period is planned for persons who have previously made use of the non-dom regime, which will gradually increase the tax burden when repatriating foreign sourced income to the UK. In addition, new residents in the UK can elect not to pay UK tax on foreign income and gains in their first four years of UK tax residence. This provision, however, will only be available for a limited number of persons previously taxed under the non-dom regime since this option is only applicable for first time UK residents or new residents who return to the UK after a ten-year absence of residency in the UK.
The abolition of the non-dom regime will make it necessary for affected persons to examine alternatives and adapt their current tax strategy. In this respect, Switzerland can offer an attractive alternative with its lump-sum taxation and advantageous inheritance tax system, which is characterized by a low tax burden and a high degree of stability.
The lump-sum taxation or taxation based on living expenditure in Switzerland or the cantons which apply this tax regime is aimed at foreign nationals who wish to relocate to Switzerland for the first time or after an absence of ten years and who do not pursue any gainful activity in Switzerland. In case of a married couple, these conditions currently have to be met by both spouses.
A major advantage of lump-sum taxation in Switzerland is of course that considerable tax advantages can be achieved through a well-coordinated structuring of income-generating assets, while at the same time achieving a high degree of stability in the annual tax burden. In addition, under lump-sum taxation or taxation according to living expenditure, income from foreign sources and foreign assets generally do not have to be declared.
Specifically, lump-sum taxation replaces ordinary income tax by determining the taxable income of the person concerned on the basis of their annual worldwide living expenses. In addition, the wealth tax payable at cantonal level is also replaced by the lump sum taxation. Taxable assets are generally calculated using a mid-single-digit multiplier of the income tax base. This means that the basis for the lump-sum settlement of wealth tax is often considerably lower than the assets actually held.
As lump-sum taxation is in tension with ordinary taxation, guidelines have been defined to ensure a minimum level of taxation and a certain degree of control over the basis of taxation. For example, the lump-sum income tax must in any case at least correspond to the gross income from Swiss sources (so-called control calculation). In addition, the following minimum figures must be observed for the taxable income to be determined as a lump sum at federal level:
In principle, the same thresholds apply at cantonal level, although the level of these thresholds varies from canton to canton. For example, the canton of Valais has a minimum income of CHF 250,000, while the canton of Schwyz has a minimum income of CHF 600,000. In addition to the different minimum income thresholds, it is also important to consider the cantonal tax rates, which can vary considerably. Taking into account the flat-rate taxable assets, the tax burden calculated on the statutory minimum income, for example, in Verbier in the canton of Valais and that, for example, in Freienbach in the canton of Schwyz are roughly the same at just over CHF 100,000 (including federal tax in each case). In addition, social security contributions for non-employed persons who have not yet reached retirement age is levied in all Swiss cantons, which amount to a maximum of CHF 25,700 per person with assets of CHF 8.74 million or more.
Assumptions: A married couple with UK citizenship move to Verbier, Canton Valais, with their own household. The annual worldwide living expenses amount to CHF 300,000, with gross income from foreign sources totaling CHF 750,000 and gross income from domestic sources totaling CHF 100,000. The couple's assets amount to CHF 30,000,000.
As the living costs of CHF 300,000 are higher than the minimum income applicable in the canton of Valais (CHF 250,000) and the extrapolated rental costs do not exceed the actual living costs, the living costs of CHF 300’000 represent the taxable income. At federal level, the minimum income of CHF 429,100 is to be considered, since the living costs are lower than this threshold. In the canton of Valais, wealth tax is set at four times the assessment basis for income tax, in this case CHF 1,200,000. This results in an effective tax burden of around CHF 108,000. In comparison, applying ordinary income and wealth tax would result in a tax burden of around CHF 215,000.
In addition to lump-sum taxation, Switzerland is also characterized by an attractive inheritance tax system, which – depending on the canton – provides for full tax exemption for spouses and direct descendants. Some cantons have abolished inheritance tax altogether. It should be noted that an initiative to introduce a new inheritance tax is currently pending a vote by the Swiss population. However, it is generally agreed that this initiative will almost certainly not be accepted.
With lump-sum taxation, Switzerland offers an attractive and stable taxation system for people who are gainfully employed outside Switzerland or who do not pursue any gainful employment. In combination with the favorable structure of the inheritance tax system, Switzerland is not only suitable for short- to medium-term tax planning, but also for long-term, intergenerational wealth planning.
T +41 58 252 22 00
info@primetax.ch
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8055 Zürich
www.primetax.ch
T +41 58 252 22 00
info@primetax.ch
Friesenbergstrasse 75
8055 Zürich
www.primetax.ch