In a recent decision (2C-404/2015, 15 September 2016), the Swiss Federal Supreme Court (SFSC) ruled that a Swiss regulated and tax-exempt pension fund is entitled to reclaim Swiss federal withholding tax deducted from dividends of publicly traded shares of Swiss companies.
The pension fund had invested in these shares only indirectly, via an Irish contractual fund acting as an investment vehicle for several local pension funds of a multinational enterprise. The SFSC reasoned that the Irish investment fund was comparable to a Swiss contractual fund, treated as a fiscally transparent entity for Irish tax purposes and thus had to be treated as fiscally transparent for pur-poses of the Swiss double taxation treaty with Ireland and of the Federal With-holding Tax Act as well. Accordingly, the SFSC concluded that the Swiss pension fund had to be recognized as the ultimate beneficial owner of the dividends de-rived through the transparent Irish fund. Furthermore, the SFSC held that in the case at hand, the Swiss pension fund had sufficiently accounted for the income.
1 On 15 September 2016 the Swiss Federal Supreme Court rendered an interesting decision regarding the entitlement of a Swiss regulated and tax exempt pension fund (Swiss PF) to claim refunds of Swiss withholding taxes deducted from divi-dends paid on Swiss listed shares. The shares were held indirectly by the pension fund through an Irish regulated, fiscally transparent, contractual investment fund (Irish Fund). The Federal Supreme Court dismissed an appeal brought by the Swiss Federal Tax Administration (SFTA) against a ruling by the lower court (the Federal Administrative Court, FAC ) which already had decided in favor of the Swiss PF, confirming the Swiss PF's entitlement to Swiss withholding tax (WHT) refunds on the dividends received via the Irish Fund.
B Relevant Facts
2 The Swiss PF had approached the SFTA in April 2004 with a request for an advanced tax ruling with regard to intended indirect investments in Swiss publicly traded shares through the Irish Fund, which was to be set up as a "Common Contractual Fund". The Irish Fund would act as a special form of contractual investment fund on behalf of international pension institutions. In fact, the Irish Fund would have 5 to 6 investors who were all qualifying pension funds from different jurisdictions, including the Swiss PF, for the personnel of a multinational enter-prise. The Irish Fund would be managed by a separate fund manager and use its own depositary bank. In the tax ruling, the SFTA had agreed that
- the Irish Fund would be treated as a fiscally transparent vehicle for Swiss tax purposes and for the purposes of application of Swiss double taxation treaties (DTTs)
- the Swiss resident investor in the Irish Fund (the Swiss PF) would be treated with regard to the income or distributions, respectively of the Irish Fund, as if it had made the investments in the underlying securities directly (thus, the Swiss PF should not suffer any fiscal disadvantages through the indirect in-vestment via the Irish Fund with regard to Swiss federal WHT or under any applicable DTT)
- foreign resident investors in the Irish Fund are entitled to take the benefits of the DTT between Switzerland and the resident country of the foreign investor in the Irish Fund, as if such foreign investor had invested directly into the underlying Swiss securities.
3 The depository bank of the Irish Fund filed various Swiss WHT reclaims on Form. 25 to the SFTA on behalf of the Swiss PF with respect to dividend WHT suffered from 2006 to 2009. The reclaim forms were signed by the global custodian of the Irish Fund which always indicated the Swiss PF as the 'full beneficial owner'. Initially, the SFTA approved the WHT reclaims for a total amount of close to CHF 22 million.
4 In July 2010, the SFTA carried out an audit of the accounts of the Swiss PF with regard to the Swiss WHT refunded for the years 2007 to 2009. The SFTA deter-mined that the Irish Fund consisted of three sub-funds, which applied the 'look through method'. The tax ruling had specified that, notwithstanding the fact that the Swiss securities in question were immediately held by the sub-funds, Swiss WHT could be reclaimed by the ultimate effective beneficiaries (such as the Swiss PF). The SFTA further determined that the Irish Fund was a regulated investment fund in Ireland, which for purposes of refunds of Swiss withholding tax and Swiss stamp duties on the transfer of securities could not be considered as fiscally transparent. Therefore, the SFTA held that the WHT refunds made to the Swiss PF were not justified and had to be returned. In the course of the further admin-istrative proceeding, the Swiss PF repaid some CHF 1.2 million in WHT refunds already received without prejudice, in order to prevent possible late payment interest charges.
5 Eventually, the SFTA rendered a formal decision in August 2011, rejecting the WHT reclaims of the Swiss PF for the years 2006 to 2010 for about CHF 1.6 mil-lion and further demanded payment of late payment interest of 5% p.a. for the period between the 'unjustified' WHT refunds and the day of repayment by the Swiss PF. The essential reasons stated by the SFTA included lacking 'ordinary accounting' for the dividend revenues in question. The SFTA maintained that the tax ruling stated only the person that could claim refunds of WHT in principle; however, the ruling did not say anything about the actual entitlement to such WHT refunds. The SFTA maintained that all conditions precedent for refunds of WHT, in particular the requirement of 'ordinary accounting' in accordance with art. 25 of the Swiss Withholding Tax Act (WHT Act) would have to be met for a refund. The Swiss PF filed a written objection against the SFTA's decision, which the SFTA rejected by decision of 11 January 2013. In that second decision, the SFTA held that the Swiss PF was not the beneficial owner and did not 'ordinarily account' for the Swiss dividends in question, and hence failed to meet art. 25 WHT Act; moreover, the tax ruling could not be relied upon, as it only included statements about the identity of the person entitled to claim WHT refunds, but not with respect to the other conditions for such refunds.
6 The Swiss PF appealed to the FAC, which upheld the appeal by judgment of 26 March 2015. The FAC confirmed the beneficial ownership of the Swiss PF and considered the accounting for the dividends in question as being in line with the requirements posed by art. 25 WHT Act.
7 The SFTA formed an appeal in public law to the Federal Supreme Court against the FAC's decision, requesting the confirmation of its own decision to reject the WHT reclaims by the Swiss PF. The SFTA specifically took the position that art. 26 WHT Act allocated beneficial ownership to the collective investment fund 'for tax technical reasons', wherefore the Swiss PF was not beneficially entitled to the revenues e contrario. However, as in the case at hand, a tax ruling existed which in principle allocated an entitlement to WHT refunds to the Swiss PF. A review had to be undertaken into the question whether the dividend revenues in question had been 'ordinarily accounted for'. The SFTA held that this was not the case and accordingly the judgment of the FAC violated art. 25 and 26 WHT Act and had to be reversed.
C Considerations of the Supreme Court (Extract)
8 The Supreme Court reiterated the general conditions applicable to WHT reclaims made by Swiss resident legal entities, namely
- the legal seat being in Switzerland,
- the ordinary accounting for the revenues that suffered deduction of WHT as income (art. 25 para 1 WHT Act e contrario)
- the beneficial ownership of the assets that gave rise to the taxable income as of the due date of such income (art. 21 para. 1 letter a) WHT Act)
- the WHT refund request must be filed within three years after the end of the calendar year in which the relevant revenues fell due (art. 32 para. 1 WHT Act e contrario)
- refunds of WHT shall be excluded in any case that would allow for a tax avoidance to occur (art. 21 para. 2 WHT Act).
The Supreme Court pointed to the special rule of art. 26 WHT Act, which applies only to Swiss collective investment schemes (funds) that deduct and pay Swiss WHT from the taxable returns distributed on their own shares. Such Swiss collective investment schemes shall be entitled to refunds of WHT deducted from re-turns on behalf of the collective investment scheme. Art. 24 WHT Act shall apply by analogy. This means essentially that a transparent Swiss investment fund that pays and deducts 35% WHT from its income distributions made to the fund investors is entitled to claim WHT refunds in its own name for WHT charged to the fund on the Swiss investments made by the fund on behalf of the investors.
9 The Supreme Court pointed to the predominant purpose of Swiss WHT to secure compliance with income tax obligations by Swiss resident beneficiaries, whereas WHT deducted from Swiss revenues of non-Swiss resident beneficiaries has a direct fiscal purpose.
10 The Supreme Court classified the Irish Fund as an open-ended foreign collective investment scheme, which is characterized by the fact that the investors do not have any entitlement towards the fund to have their fund shares redeemed at their net asset value (art. 119 para. 2 Collective Investment Scheme Act, CISA). The classification was not under dispute; however, disputed was the fulfillment of further conditions precedent for WHT refunds, in particular, whether the revenues in question were "properly accounted for", and whether the Swiss PF was the beneficial owner of the underlying Swiss shares.
11 The Supreme Court then addressed the fiscal transparency of collective investment schemes, which is given when the scheme is not treated as a separate tax-payer and the taxable revenue items are directly attributed to the fund investors, for income tax purposes. Contractual funds are generally treated as transparent. However, as regards the collection of WHT, such (Swiss) funds are opaque: the fund or its management has to apply WHT to its income distributions to the investors. This led the Supreme Court to examine whether such foreign funds
should also be treated as opaque vehicles with regard to Swiss WHT refunds. The court determined that the fund in question was an Irish fund vehicle. The court proposed a 'pragmatic mix of approaches', where the applicable foreign civil/commercial law does not recognize a separate corporate legal personality of the entity in question: the foreign entity shall be compared with similar Swiss enti-ties, and the foreign tax treatment shall be considered as well. The court deter-mined that the Irish fund was treated as a look-through entity for Irish tax pur-poses and that the tax ruling also provided for a transparent tax treatment for purposes of the Ireland-Switzerland DTT.
12 Further, the Supreme Court considered that art. 26 WHT Act (providing for a separate entitlement of Swiss funds to reclaim WHT charged to the fund on its Swiss investments) only applies to Swiss funds in order to prevent dual charges with WHT and does not alter the fact that the (Swiss or foreign) fund does not have separate legal personality and hence is not a separate taxpayer. Finally, the Supreme Court referred to the previous practice of the SFTA, according to which foreign investment funds were to be considered transparent vehicles for purposes of reclaiming Swiss WHT. Swiss DTTs would hence not be applicable to the foreign fund vehicle. Rather, the beneficial ownership of the Swiss revenues in question (derived immediately by the foreign fund vehicle) would be allocated directly to the (domestic) investors in the foreign fund. The court pointed once again to the protection of the taxpayer's good faith under the tax ruling, the transparent tax treatment of the Irish Fund in Ireland and to the general Swiss tax approach towards contractual investment funds (i.e. fiscal transparency). It concluded that for purposes of reclaiming Swiss WHT on the Swiss investment income arising in the Irish Fund, the principle of transparency shall prevail.
13 Therefore, the Supreme Court had to determine whether the Swiss PF (as investor in the transparent Irish Fund) fulfilled the WHT reclaim conditions under applicable Swiss law, first of all, beneficial ownership of the assets that generated the taxable income in question (art. 21 para. 1 letter (a) WHT Act). The court briefly discussed the general features of beneficial ownership (in German terminology: the 'right to use' the asset and to enjoy the income generated by the asset) and went on to dismiss the SFTA's theory, according to which the special rule of the aforementioned art. 26 WHT Act also extended to beneficial ownership (of the collective investment vehicle, instead of the fund investors). The Supreme Court held that art. 26 was not relevant to the case at hand: the provision only deals with Swiss investment funds and their particular entitlement to WHT re-claims, while WHT refunds in a cross-border context are exclusively regulated by the applicable Swiss DTTs. Even though Switzerland has agreed with a few countries on a special entitlement to treaty benefits of collective investment schemes established in the other DTT jurisdiction on behalf of their investors who reside in the same jurisdiction, Ireland is not among those treaty jurisdictions. The court considered the transparent tax treatment of the Irish Fund in Ireland to be decisive for the transparent treatment for Swiss WHT reclaiming purposes as well. The Irish Fund had to be 'looked through' with regard to the Swiss dividends indirectly derived by the Swiss PF via the Irish Fund. From that point of view, the court directly acknowledged the beneficial ownership of the Swiss PF, as the Swiss PF hat the right to ultimately receive and enjoy those revenues. The court held the theory that art. 26 WHT Act extended to the beneficial owner aspect to be incompatible with the transparency principle.
14 The SFTA had argued further that the Irish Fund did not establish any trustee or fiduciary arrangement worthy of recognition for Swiss tax purposes as the relevant conditions pursuant to a published guidance note by the SFTA were not ful-filled (in particular, no written instrument settling a trust or fiduciary arrangement, no purchase and sale documents for the shares in the records of the Swiss PF, no designation of the shares as assets held in trust in the accounts of the Irish Fund). The Supreme Court dismissed that formal argument as well, pointing to the clear beneficial ownership ('effective right to use') of the Swiss PF with regard to the Swiss shares held through the transparent Irish Fund. The court confirmed the rule that the principle of transparency applicable to fiscally trans-parent foreign collective investment schemes dictates the allocation of beneficial ownership to the investors in such an investment scheme. Accordingly, the court concluded that a Swiss resident investor (such as the Swiss PF) in a foreign collective investment scheme has a proportional entitlement to Swiss WHT refunds provided
- the contractual relation between the investors and the fund management is of a fiduciary nature - which is the case for contractual investment funds, and
- the (foreign) fund is not itself in a position to reclaim any Swiss WHT.
It is up to the (Swiss resident) investor to demonstrate how many fund shares were issued as of the end of the fiscal year, at what point in time the investor has acquired or disposed of such fund shares, and at what point in time the income distributions by the fund fell due and were realized. The Court stressed that the same rules also apply to non-Swiss resident investors in a transparent foreign collective investment scheme claiming refunds of Swiss WHT with regard to underlying Swiss revenues based on an applicable Swiss DTT, and that there is no reason for any conceptually different tax treatment of Swiss resident fund investors with regard to their principal entitlement to reclaim Swiss WHT.
15 As a next step, the Supreme Court had to examine whether the Swiss PF could be considered to have 'duly accounted' for the revenues in question in the mean-ing of art. 25 WHT Act. The SFTA had claimed
- that the Swiss PF had not accounted for the actual Swiss dividends (which directly accrued to the Irish Fund), but had only reflected an increase in value of the units held in the Irish Fund
- that such fund units were not equivalent to the underlying Swiss shares, and
- the value increase of the fund units was not identical to the income derived from the underlying Swiss shares.
The Swiss PF, on the other hand, argued that it had complied with relevant Swiss tax accounting regulations by recording the Swiss revenues (as fund distributions) on a net basis and by separately recording the WHT refunds when received in its income statement.
After a lengthy discussion of Swiss accounting standards applicable to Swiss regulated pension funds (Swiss GAAP FER), the Supreme Court concluded that in the case at hand, the Swiss PF had complied with those standards and had sup-plied all necessary information to the SFTA allowing it to control and review and to determining whether there was any case of multiple or abusive reclaim of Swiss WHT. Among such information, a certification by the global custodian of the amount of Swiss WHT deducted on each unit held in the Irish Fund was of particular importance. In the case at hand, it was sufficiently clear that the Swiss PF had comprehensively accounted for all relevant Swiss revenues and for their re-investment in additional shares. Furthermore, the Irish Fund had in fact made frequent distributions of the revenues received from the investments to the fund shareholders. The certifications of the revenues and the deducted Swiss WHT issued by the global custodian proved helpful in proving that everything had been properly and comprehensively been accounted for.
16 Consequently, the Supreme also rejected the SFTA's argument of lack of 'due accounting' for the Swiss revenues in question and confirmed that the Swiss PF had met all conditions for reclaiming Swiss WHT deducted from the underlying Swiss dividends derived through the transparent Irish Fund. This led to the dismissal of the SFTA's appeal.
D Final Remark
The decision is to be welcomed, as it clarifies the Supreme Court's position with regard to Swiss withholding tax reclaims on investments held via a fiscally trans-parent investment vehicle.
We have been informed that the SFTA intends to use this Supreme Court ruling to claim transparent tax treatment also with regard to federal stamp taxes on transfers of securities for consideration. Accordingly, a Swiss corporate investor qualifying itself as a 'securities dealer' for stamp duty purposes would be held liable for transfer stamp duty on the purchase and sale transactions for underly-ing equity and debt securities made by the fund or similar transparent investment vehicle. We consider this approach to be flawed. Stamp duties are indirect taxes imposed on certain legal transactions generally requiring a strictly formal approach. For purposes of stamp duty, Swiss and foreign investment funds are generally treated as exempt investors. As a consequence transactions with or for such entities by a Swiss securities dealer are half exempt from stamp duty. Purchase and sale transactions by such fund entities on behalf of their investors would normally not be attributed back to the investors for stamp duty purposes, regardless of whether the fund is considered fiscally transparent or opaque for direct (income and withholding) tax purposes. This development will require close monitoring and may lead to further tax litigation.
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