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.
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
In our blog post from May (on the ruling of the Federal Administrative Court of 7 December 2023, A-1573/2022), we looked at the function of an online platform in the area of delivery services. The case was referred to the Federal Supreme Court (FSC). In its decision, the Federal Supreme Court did not follow the lower court and qualified the platform as a mere intermediary for food deliveries.
Refresher: The taxable person operated an online platform via which customers could order food and have it delivered to them. Various restaurants offered their dishes on the platform. The platform took the view that it itself was the supplier of the meals (and did not merely mediate between customers and restaurants). Accordingly, it invoiced "its" services (delivery of the dishes including delivery service fees) to the customers at the reduced tax rate. The FTA, on the other hand, took the view that the platform was merely an intermediary between restaurants and customers. Accordingly, only the restaurants were allowed to invoice their services at the reduced rate. The services provided by the platform itself were to be taxed at the standard rate. The Federal Administrative Court (FAC) agreed with the taxpayer's view. It based its decision essentially on the presumed perception of the customers when using the platform (selection of meals, ordering, payment and delivery). However, the FAC did not consider the fact that, for example, the general terms and conditions (GTC) expressly identified the platform as an intermediary to be of such importance as to override the overall perception.
The Federal Administrative Court (FAC) agreed with the taxpayer's view. It based its decision essentially on the presumed perception of the customers when using the platform (selection of meals, ordering, payment and delivery). However, the FAC did not consider the fact that, for example, the general terms and conditions (GTC) expressly identified the platform as an intermediary to be of such importance as to override the overall perception.
From 8 August (9C_67/2024)
In its decision, the FSC focuses on objective criteria such as general terms and conditions and invoice documents when analysing the presumed customer perception. In particular, the platform had named the partner restaurants and these were known to the customers when using the platform and, from the FSC's point of view, it was always recognisable to the users that they obtained the food directly from the partner restaurants and not from the platform (through corresponding information during the ordering process and in the GTC).
The judgement of the FSC should provide more legal certainty for taxpayers, as it gives greater weight to written documentation in the form of GTCs, for example. As an overall view of the circumstances in the specific case is decisive, the considered design of the external appearance remains of crucial importance.
Unlike in other European countries, in Switzerland the acquisition, holding and sale of participations is considered a business activity that generally entitles the holder to deduct input tax. The law contains a definition of what constitutes a participation in this sense (hereinafter "qualified participation") in Art. 29 Para. 3 of the VAT Act: Participations are shares in the capital of other companies that are held with the intention of permanent investment and which convey a significant influence. Shares of at least 10% of the capital are deemed to be a participation. However, it is unclear how the 10% limit in particular is to be interpreted: does a legal presumption apply above 10%? Or is a participation excluded if less than 10% is held? The Federal Administrative Court has taken a position on this (judgement of 17 July 2024, A-903/2023).
X AG holds a 9% stake in A AG. It has granted a loan to B AG. It requested confirmation from the FTA that its 9% shareholding in A AG and the loan to B AG are deemed to be qualifying holdings. X AG took the view that the provision in the second sentence of the legal definition was a "safe haven rule" in which the existence of a participation was automatically assumed. Below this threshold, the existence of a qualifying holding must be examined on a case-by-case basis. The FTA pointed out that shareholdings of less than 10 % of the capital are not deemed to be a qualified participation and that the granting of a loan does not constitute a participation in this sense either. X AG could therefore not claim an input tax deduction in this context.
In the present case, the question was whether the complainant was entitled to deduct the input tax it had claimed. In order to be able to assess this, it was first necessary to examine whether the appellant is liable for VAT, i.e. whether it holds participations within the meaning of Art. 29 para. 3 of the VAT Act.
The Federal Administrative Court comes to the conclusion that the limit of 10% set out in Art. 29 para. 3 VAT is not an absolute value. The interpretation rather points to a "safe haven rule", according to which a participation of at least 10% is in any case considered a participation within the meaning of this article. For shares of less than 10%, however, the taxpayer can and must provide evidence that a qualified participation nevertheless exists, which in particular "conveys significant influence". The court does not conclusively comment on whether, even in the case of shareholdings of at least 10%, it is open to the tax authorities to prove that the shareholding is not held for business reasons but merely as a financial investment.
The question of how to successfully prove significant influence also remains unanswered. In the present case, the appellant was unable to provide proof of significant influence in the view of the court, which therefore rejected the appellant's view that it was entrepreneurial in this respect within the meaning of Art. 10 para. 1ter VAT Act.
The court also rejected the appellant's view that a loan could constitute a qualified participation. Shares in the capital of other companies are consistently understood as "participations". Receivables do not constitute participations.
It is positive that even in the case of shareholdings of less than 10%, the taxable person is free to prove that they have a qualifying holding within the meaning of Art. 10 para. 1ter MWSTG. It remains unclear how this proof can be provided. It should be viewed critically that the court leaves open whether the FTA reserves the right to negate a qualified participation even in the case of participations of more than 10%.
In the context of this judgement, it is also important to always bear in mind that VAT inspections must not tempt taxable persons to lull themselves into a false sense of security. A failure to raise an objection during a VAT inspection does not provide any protection of confidence that the same facts will not be objected to by the FTA in the future. The situation is similar with rulings, in which the FTA only ever comments on the facts of the case described and within the framework of the questions raised. Incomplete or incorrect facts do not give rise to any protection of legitimate expectations and the protection of legitimate expectations cannot go beyond the questioned treatment.
Caution should be exercised when classifying the remuneration of financial intermediaries for VAT purposes, as even terms that are clearly defined in administrative practice can be interpreted very differently depending on the circumstances.
In the present dispute, the complainant acted as an asset manager. She received two types of compensation for her activities under an asset management agreement: On the one hand, she was paid the brokerage fees paid by the asset management clients plus brokerage fees from the bank; on the other hand, she received a monthly management fee. Under the brokerage agreements with two different banks, the complainant received remuneration or external asset management fees resulting from the activities recorded in the clients' accounts.
The question is how to qualify these fees for VAT purposes. Even if terms are listed and defined in black and white according to administrative practice, these terms (in this case charges) would have to be analysed precisely and placed in the correct context, otherwise the results would be completely different.
In the present case, it is undisputed that the complainant acts as an asset manager and that the monthly management fee is subject to VAT at the standard rate. However, it is disputed whether the brokerage fees and external asset management fees are remuneration for a tax-exempt brokerage service or a taxable asset management service.
In case law and administrative practice, the view is held that the underlying transaction brokered is decisive for the categorisation of an intermediary activity. If the underlying transaction originates from the area exempt from tax, the remuneration for the brokerage is exempt from tax.
As an asset manager, the appellant offers both investment advice and execution for its clients and also receives separate and contractually agreed remuneration for these services. In the opinion of the complainant (based on point 6.1.6 of MBI 14 and on the previous case law of the Federal Supreme Court), brokerage fees (called: Courtagen) for execution are deemed to be exempt fees for trading in securities. Alternatively, the asset management service should be regarded as an exempt ancillary service to the brokerage service, as the European Court of Justice (ECJ) has already ruled in a similar case (C-453/05, 21 June 2007).
The complainant is of the opinion that it provides brokerage services in accordance with administrative practice. Non-application of this administrative practice would violate the constitutionally guaranteed protection of legitimate expectations.
Brokerage is clearly defined in section 5.10.1 of MBI 14 and refers to the activity of an intermediary acting in this capacity, which consists of working towards the conclusion of a contract in the area of money and capital transactions between two parties without being a party to the brokered contract and without having a vested interest in the content of the contract. Brokerage must be carried out as an independent intermediary activity.
The FTA, on the other hand, considered the appellant's performance to be taxable asset management based on section 5.10.3 of MBI 14 and further believes that the financial contributions (retrocessions) represent a self-interest due to the obligation to deliver, which in turn would be contrary to exempt brokerage.
The Federal Supreme Court is of the opinion that the complainant's execution service is to be regarded as ancillary to the main service of investment advice or asset management, as this service would not make sense on its own. It merely serves as an instrument for utilising the complainant's main service under optimal conditions. This type of service has no independent purpose for clients. If there were no asset management mandates, no client would utilise the execution services alone, but would commission a bank to do so.
Although the appellant is convinced that brokerage fees cannot be listed separately as an ancillary service in administrative practice, the Federal Supreme Court finds that the same service may have to be assessed differently depending on the context. In this case, the execution service (ancillary service) only fulfils a purpose in the context of an asset management mandate (main service).
With regard to the protection of legitimate expectations, the Federal Supreme Court points out that Chapter 6.1 of MBI 14 cited by the complainant under the heading "General banking services" refers specifically to services offered by banks. Therefore, the protection of legitimate expectations cannot be invoked in this context.
This judgement illustrates the relevance of a precise determination of the underlying service in the context of an intermediary activity. In this regard, it should be noted that even the explanations and terminology used in administrative practice are only valid in their respective context.
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www.primetax.ch