Switzerland: Court Rulings On Dividend Stripping And Denial Of Swiss Tax Treaty Benefits

Last Updated: 11 November 2016
Article by Peter Reinarz and Francesco Carelli

Most Read Contributor in Switzerland, September 2017

Two recent judgments by the Swiss Federal Supreme Court concerned Danish resident banks that were denied refunds of Swiss withholding taxes on dividends derived from Swiss publicly traded shares on grounds of lacking beneficial ownership, even though the applicable former Denmark-Switzerland Income and Capital Tax Treaty (1973)1 did not explicitly mention such a requirement. The Supreme Court overruled the decisions of a lower court granting treaty benefits to the banks.

1. Introduction

In judgments rendered by the Swiss Federal Supreme Court on 5 May 2015,2 two Danish resident banks were denied refunds of Swiss withholding taxes suffered on dividends derived from Swiss publicly traded shares on grounds of lacking beneficial ownership, even though the former Denmark-Switzerland Income and Capital Tax Treaty (1973), which was applicable to the two cases, did not explicitly mention such a requirement. The Supreme Court overruled the Federal Administrative Court (FAC),3 which had previously found that, under the factual circumstances, tax treaty benefits had to be granted to the Danish banks.

In contrast to the FAC, the Supreme Court concluded that the claimant Danish banks had engaged in abusive "dividend stripping" schemes and were thus not to be regarded as the beneficial owners of the dividends in question. In both cases, the Danish banks had carried out so-called arbitrage trading or securities financing strategies with regard to the Swiss shares, involving hedging strategies based on equity derivatives. The Supreme Court not only rejected the pending withholding tax reclaims of the Danish banks, but also upheld the claims raised by the Swiss Federal Tax Administration (SFTA) for repayment of withholding taxes already refunded in the past.

2. The Swaps Case

2.1 Factual background

The claimant, a Danish bank, sold total return swaps on baskets of Swiss listed shares via a broker to other banks residing in five different third countries (short derivative position). Dividends would generally fall due on the underlying basket shares during the swap contract period. The Swiss tax treaties with the counterparties' home countries generally provided for a 15% non-refundable dividend withholding tax.

Under the terms of the swaps, the Danish bank made a notional payment to the counterparty on maturity, reflecting the performance of the share price and the entire dividend return, which were to be exchanged for a payment by the counterparty comprised of interest on the notional invested amount at the LIBOR rate, plus a margin and compensation for any negative performance of the share price over the contract period. The two payments were then netted against each other.

In order to cover (hedge) its financial exposure under the swaps, the Danish bank purchased an equivalent amount of the underlying Swiss shares in the market via a broker (equity long position). Upon maturity, the swaps would normally be cash settled and the Danish bank would sell the Swiss shares on the market, again via a specialized broker. The identities of the ultimate sellers and buyers of the Swiss shares were unknown. The arrangements typically lasted for approximately six months, generally with dividends falling due during the contract terms. As a shareholder of record, the Danish bank received the dividends net of the 35% applicable Swiss withholding tax and subsequently filed for a full refund of the Swiss tax withheld, relying on the terms of the then applicable Denmark-Switzerland income tax treaty.

In 2006, the Danish bank received refunds of initially deducted Swiss withholding taxes to the tune of CHF 37.9 million. The aggregate tax reclaims raised by the Danish bank for 2007 and 2008 of CHF 53.6 million were denied by the SFTA. In that context, the SFTA also demanded repayment of the already refunded taxes for 2006. The SFTA essentially took the position that the transactions had no business substance other than the objective to secure the full refund of the Swiss withholding taxes. According to the SFTA, the Danish bank had transferred the entire dividend benefits without any withholding tax burden to the swap counterparties, for which the bank received a merely nominal compensation in the form of a small profit margin. The combination of the swaps with the equity long positions served to transfer all risks and benefits pertaining to the shares and the dividends to the swap counterparties. The SFTA determined a causal nexus between the swaps and the temporary holding of the shares, as the acquisition of the shares would not have been required but for the entry into the swaps. In addition, the SFTA assumed that the shares had ultimately been acquired from the swap counterparties and sold back to those parties after the cash settlement of the swaps.

Considerations of the Federal Administrative Court4

Upon appeal by the Danish bank, the FAC essentially established that, under the given circumstances, the Danish bank held the beneficial ownership to the shares and the dividends. Thus, the Court held that it was not necessary to address the fundamental issue of whether beneficial ownership was a prerequisite for tax treaty benefits under the former applicable Swiss tax treaty with Denmark, which did not include any express "beneficial owner" language.5 Furthermore, the Court found that there was no issue of tax treaty abuse, as the Danish bank had business substance in Denmark. The FAC referred to the jurisprudence of the Supreme Court,6 according to which – in the absence of a specific anti-abuse provision in the tax treaty in question – abuse of a treaty will be assumed only when the corporate claimant of tax treaty benefits does not carry on any genuine, active business in the country of its tax residence; an eligible business activity generally requires the presence of personnel and physical premises and equipment in accordance with the nature of the activities.

The decision of the FAC in favour of the Danish bank was fundamentally based on its determination that the claimant held beneficial ownership and was not abusing the tax treaty. Focusing on the beneficial ownership analysis, the Court essentially referred to the Commentary on the OECD Model Convention (OECD Model) and various Swiss and international scholars, in particular, the Swiss dissertation by Baumgartner.7 The Court emphasized that the beneficial owner concept serves as a condition precedent for tax treaty benefits with regard to dividends, interest and royalties (similar to the residence requirement); it does not constitute an anti-abuse rule. The Court confirmed the general doctrine that the beneficial ownership concept examines the intensity of the relation between a taxpayer and a taxable object (income) from an economic perspective, thereby adopting a substance-over-form approach.

According to the FAC, the beneficial owner quality is essentially determined by the degree of the decision power and control of the income recipient over the application of the dividends received. The Court rejected the conclusion of the SFTA that the Danish bank was obliged under the swaps to fully transmit the dividend return to the swap counterparties. The Court held that the swap agreements did not stipulate any such obligation; the agreements rather required the swap seller to make a payment to the buyer reflecting the entire performance of the underlying shares, including any dividends, over the contract period. The Court further held that the swap agreements did not stipulate any legal obligation of the swap seller to hedge its payment obligations arising under the contracts, or to buy the underlying shares.

Moreover, the FAC examined whether there was any de facto obligation to transfer the dividends. For this test, the Court, applying the criteria developed by Baumgartner,8 questioned whether the transactions were "mutually dependent" on each other. On the one hand, it had to be tested whether the Danish bank's payment obligation under the swaps would also have persisted in the absence of the actual receipt of the original dividends. On the other hand, it had to be determined whether the Danish bank would have earned the dividends even in the absence of the swap obligations. The Court concluded that both questions had to be affirmed and that there was no mutual dependence. Finally, the Court rejected the argument of the SFTA that the Danish bank's beneficial owner quality had to be denied, as it retained only a very small fraction of the dividends for itself. For the Court, that sort of ex post analysis was not appropriate; the beneficial ownership must rather be determined at the time the income arises. The Court recognized that as a result of the swap arrangements, the swap counterparties had effectively assumed the economic risks with regard to the dividends; however, the Court emphasized that the decision to actually purchase the underlying shares and to hedge the swap obligations was at the full discretion of the Danish bank. A further contentious issue the FAC had to address – which was apparently at the heart of the entire case – was the extent of the Danish bank's procedural duty to cooperate with the SFTA in assessing the relevant facts. The SFTA generally assumed that the Danish bank

had purchased the shares from the swap counterparties and eventually sold the shares back to those parties, hinting at an abusive, bilateral and circular dividend-stripping scheme. To support that assumption, the SFTA pointed to the simultaneous entry into the swaps and purchase of the underlying shares, and the simultaneous dissolution of the swaps and sale of the underlying shares, whereby the positions were entered into shortly before the dividend dates and were held only for three to six months. Against that background, the SFTA had asked the Danish bank to disclose the identity of the ultimate swap counterparties. However, the Danish bank refused to do so, pointing to Danish banking laws prohibiting the disclosure of bank client names; instead the Danish bank provided a certificate issued by a Swiss notary, according to which the swap counterparties were resident in five different jurisdictions and were not identical with the buyers or sellers of the underlying shares.

The Court pointed to the legal doctrine according to which the cooperation duty of the claimant is limited by factors of necessity and sustainability. The Court emphasized that the Danish bank must not be expected to breach its customer confidentiality requirements and expose itself to criminal law sanctions. The Court deemed the notarial certificate to be sufficient proof of the Danish bank's assertion that the swap counterparties were not identical with the sellers and buyers of the underlying Swiss shares.

Decision of the Supreme Court9

The Supreme Court reversed the decision of the FAC and ruled wholly in favour of the SFTA. First, the Supreme Court confirmed its practice, according to which beneficial ownership is a general prerequisite for tax treaty benefits, even under older tax treaties which do not include any express beneficial owner language. However, the Court left open the question of the relation between the beneficial owner requirement and the reservation of tax treaty abuse. The Court confirmed the general analysis of the beneficial owner concept made by the FAC in that the beneficial owner capacity is to be measured by the degree of the taxpayer's decision power over the application of an item of income from an economic perspective (substance over form). In particular, the Supreme Court held that a person cannot be regarded as the beneficial owner, if, based on contractual or merely "factual obligations or similar restrictions" that already exist at the time of the payment or receipt of the income in question, it is bound to transfer the income to someone else. Basically, the Supreme Court applied the criteria developed by Baumgartner to assess whether a person is effectively under a "legal or merely factual obligation or similar restriction" to transfer the income in question. According to Baumgartner, two criteria must be cumulatively met, namely (i) the realization of the income must be dependent upon the obligation to transfer the income and (ii) the obligation to transfer the income must be dependent upon the actual receipt of the income.

The Supreme Court interpreted and applied these tests in light of the total return swaps of the Danish bank, covered (hedged) by the underlying shares, as follows: The first dependency concerns the question as to whether the Danish bank was obliged to hedge its swap obligations by purchasing the underlying Swiss shares. The second dependency relates to the question as to whether the Danish bank was obliged to transfer the dividends arising on the purchased shares to the swap counterparties.

With regard to the first test, the Supreme Court held that, although the Danish bank was neither legally nor factually obliged to hedge its swap positions through the purchase of the underlying shares, it had, in fact, a number of "compelling reasons" to completely hedge all of its total return swap positions without any exceptions and simultaneously with the existence of the positions. "The same coincidence existed in each case with regard to the dissolution of the swaps and the resales of the shares."10 The Supreme Court held that, because the Danish bank had undertaken to pass on the entire performance of the underlying shares, including the entire dividend, to the swap counterparties, it had to safeguard its own interests through the purchase of the relevant underlying shares, thus enabling it to effectively meet its payment obligations under the swaps using the dividends collected. The Supreme Court found that the interest earned under the swaps effectively enabled the Danish bank to debt-finance the purchase of the underlying shares. The Court thus found an apparent interdependence between the acquisition and the financing of the underlying shares.

Moreover, the Supreme Court saw a nexus between the fact that the swap arrangements effectively transferred the entire economic exposure to the underlying shares, including the share price development and the risk and benefit of the dividends, to the swap counterparties (while the Danish bank was fully hedged against those risks and benefits) and the small net profit margin earned by the Danish bank. The Court found that, in the absence of such a full hedge of the risks, the swaps could not have been entered into with comparable terms. In essence, the Supreme Court concluded that the swaps and the long stock positions were mutually dependent on each other.

With regard to the second test, the Supreme Court conceded that the swaps as such did not require the Danish bank to transfer the (original) dividends on the underlying shares to the swap counterparty, but only to make economically equivalent payments. However, the Court determined an apparent economic nexus between the different cash flows in question (i.e. the receipt of the original dividends including the refund of the withholding tax on the long share positions and the payments made under the swaps). Further, the Court pointed to the fact that the payments to be made under the swaps exactly matched the actual performance (whether positive or negative) of the underlying shares as a matter of concrete legal agreements. This led the Supreme Court to conclude that the Danish bank had "compelling reasons" to actually hedge itself by acquiring the underlying shares and receiving the dividends pertaining thereto.

Overall, the Supreme Court concluded that the Danish bank was under a de facto obligation to pass on the entire dividend benefits to the swap counterparties, in direct analogy to the "stepping-stone" theory:

The nexus between the dividend collection and the contractual obligation to pass on the dividends must be assumed [...] The shares were systematically purchased prior to the dividend maturity and for the purpose of passing-on the collected dividends fully and free of any withholding tax to the swap counterparties, which were neither Swiss nor Danish resident [...] and such passing on to non-resident parties had been planned well before the dividend maturity [...] All those counterparties had their domiciles in states whose the tax treaties provided only for a residual withholding tax burden of 15%.11

To read the full article click here.


1 SR 0-672.931.41.

2 CH: Federal Supreme Court decisions 2C_364 and 377/2012 and 2C_895/2012.

3 CH: FAC rulings A-6537/2010 (7 Mar. 2012) and A-1246/2011 (23 July 2012). 4 FAC ruling A-6537/2010 (7 Mar. 2012).

5 Considerations 3.3.2, 3.4 and 6.

6 Supreme Court decision 2A_239/2005 (28 Nov. 2005), consideration 3.6.3.

7 B. Baumgartner, Das Konzept des beneficial owner im internationalen Steuerrecht der Schweiz (Schulthess Verlag 2010).

8 Baumgartner, supra n. 7. 9. Decision 2C_364 and 377/2012 (5 May 2015).

10. Consideration 6.3.1.

11. Consideration 6.4.2.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.