SWISS JURISPRUDENCE HAS always held that the legal form of relations from which the taxable revenue is derived is not necessarily decisive from a fiscal point of view. Under certain conditions, the authority may confine itself to economic reality and consider in particular that a legal entity is transparent and allocate its revenue to the economic owner. However, in the past the federal court only allowed this means of proceeding when faced with a case of tax evasion. With all the conditions for tax evasion combined, the notified authority could disregard the legal form of an offshore company (C Inc) and allocate to a purportedly related Swiss company (SA) the taxable elements of C Inc. By diverting a large part of its profi ts to an offshore company, omitting to declare certain receipts and incorrectly recording non-existent charges in the accounts, the plaintiff in a recent case in Geneva has unjustifiably reduced his taxable profits. He has been taxed on amounts which are too low and has breached the obligation to declare all his revenue. The objective condition of fraudulent income removal is thus realised.
To ascertain that C Inc had no real economic substance, the administrative tribunal used the following elements as a basis.
- C Inc was formed in Switzerland by three natural persons including the shareholder of SA.
- Since the formation of A SA in 1977 the effective administration of C Inc has taken place in the offi ces of A SA.
- In the offices of SA, documents pertaining to SA and those concerning C Inc were not kept separate from each other.
- An auditor repor t for SA had recommended that the files of A SA and C Inc be clearly separated.
- Staff on the payroll of SA were involved in both companies indiscriminately.
- The accounting system for C Inc was held on the same IT system as that of SA and was in Swiss Francs.
- Operations recorded in the accounts of C Inc also correspond to the objective described in the SA’s entry in the trade register.
- A SA and C Inc each have a bank account with the same bank. These accounts are subject to mutual deeds of pledges. Consequently, the bank deposits of SA guarantee those of C Inc and vice-versa.
- Invoices from a given supplier were raised in respect of SA but the documentary credits were established and debited against the bank account of C Inc.
- Invoices sent to the supplier were established SA. Payments were however credited to the bank account of C Inc.
As for the jurisprudence invoked by the plaintiff which, according to the latter would result in taxation of C Inc in Switzerland as a permanent establishment distinct from SA, this is of no assistance to the plaintiff. First of all if, if appropriate, C Inc was taxed as such in Switzerland, it would not be as a stable establishment as the actual administration of this company in Switzerland involves an unlimited tax liability. In the ruling in question, the company situated in Switzerland was a service company and was taxed as such. However, SA is a commercial company and has never been subject to the tax system for service companies. Thus, any argument by the plaintiff regarding the practices of tax authorities relative to this type of company is unfounded. Moreover, representing a company – even if, according to the plaintiff, this forms part of his corporate objective and constitutes a typical activity of service companies – does not involve merging and permeability between two entities such as are found in this case.
With all the conditions for tax evasion combined, the court ruled that the notified authority could disregard the legal form of C Inc and allocate to SA all the taxable elements of C Inc.
Although one may argue that SA was particularly imprudent in how C Inc was operated, the court decision outlines important factors to take into consideration in its determination to qualify C Inc as a sham.
The other signifi cant issue was the ruling of the court that all income of C Inc should retroactively be included in SA’s taxable income, as opposed to be taxed as a branch or service company.
In conclusion, it should be noted that the jurisprudence in Switzerland is becoming stricter with regards to the management of offshore companies from within Switzerland and care should be taken in structuring such vehicles, particularly when they are engaged in commercial activities.
Federal Appeal Court
The Swiss Federal Appeal Court recently came to the conclusion that all double taxation treaties entered into by Switzerland are subject to a proviso concerning abusive exercise of a right. This proviso applies even if the treaty does not include any explicit anti-abuse clause.
Walter Stresemann, Managing Director, Fortis Intertrust,