Judgment of 7 March 2012 - Walder Wyss Ltd.

Federal Administrative Tribunal
BundesverwaItungsgericht
Tribunal administratif fédéral
Tribunale amministrativo federale
Tribunal administrativ federal
Division l
A-6537/2010
_
Judgment of 7 March 2012
Constitution
Judge Michael Beusch (presiding),
Judges Daniel Riedo, Salome Zimmermann,
Secretary of the Tribunal Jürg Steiger.
Parties
A.____________A/S,
represented by Dr. iur. Marcus Desax, attorney at law, a nd
lic. iur. Martin Busenhart, Walder Wyss & Partner AG,
Seefeldstrasse 123, P.O. Box 1236, 8034 Zurich,
Complainant,
v.
Federal Tax Administration (SFTA), Direct Federal Tax,
Withholding Tax and Stamp Duties, Eigerstrasse 65, 3003
Berne,
Lower Instance
Withholding tax (refund under DTC-DK)
Object
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The facts:
A.
On 2 August 2007 A.____________A/S submitted applications no 13855, no 13856 and no
13857 (form 89) for refund of withholding tax in respect of dividends falling due in 2007 in the
total amount of CHF (…). By letter dated 16 October 2007 the Federal Tax Administration
(SFTA) requested information on various securities positions.
B.
On 27 November 2007 A.____________A/S submitted in particular a list of its holdings of Swiss
equities in the past two years. Further, it stated that it effected sales and purchases of the
securities concerned only via recognised market participants. By letter dated 13 December
2007 the SFTA requested further information. In particular, it called on A.____________A/S to
furnish details of transactions that had been hedged by means of derivatives and had had a
duration of less than one month.
C.
A.____________A/S complied with this request on 21 December 2007. It stated in particular
that the hedged transactions had had an average holding period of six months. There had been
no case in 2007 in which the holding period was less than one month. By e-mail dated
21 December 2007 the SFTA asked for additional details on three selected transactions.
A.____________A/S replied by e-mail on 29 January 2008 that the three transactions were
swap transactions and gave further information on them, but that under Danish law it was not
permitted to disclose the names of its clients.
D.
By e-mail dated 14 February 2008 the SFTA asked A.____________A/S in particular to furnish
a list of all its swap transactions (with anonymised counterparties). Following further e-mail
correspondence A.____________A/S replied on 17 June 2008 that all the securities relating to
the applications for refunds dated 2 August 2007 had been purchased in order to hedge swap
transactions. It submitted a sample swap agreement for the attention of the SFTA.
E.
Following a further exchange of e-mails and letters, on 3 October 2008 A.____________A/S
stated that conducting swap transactions formed part of its core business, that the equity
baskets in the swap agreements were not always fully hedged, and that the swap agreements
were concluded for the entire year. By e-mail dated 6 November 2008 the SFTA announced
that the information supplied was insufficient and that the SFTA required in particular the
original agreements. Consequently, on 10 December 2008 A.____________A/S submitted
anonymised swap agreements and the relevant share purchase and sale settlements.
F.
By letter dated 11 March 2009 the SFTA rejected the refund applications no 13855, 13856 and
13857 in the total amount of CHF (…) in their entirety. It further rejected the application for
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refund of withholding tax levied on dividends falling due in 2008 in the amount of CHF (…). In
addition, the SFTA demanded repayment of refunds it claimed had been unjustifiably made in
respect of dividends falling due in 2006 in the total amount of CHF (…).
G.
On 26 June 2009, after several time limit extensions, A.____________A/S gave its response to
the SFTA letter dated 11 March 2009. It moved that its applications for refunds be granted,
arguing in particular that there were numerous non-fiscal reasons for the equity swaps that had
been carried out. Furthermore, it had borne a substantial portion of the risks associated with the
shares acquired for hedging purposes (underlyings). It argued that it was the beneficial owner of
the dividends concerned, and that the conditions of treaty abuse of the DTC were not fulfilled.
H.
By e-mail dated 29 September 2009 the SFTA, referring to a discussion held earlier that same
day, asked A.____________A/S in particular to indicate all the financial flows involved in three
swap contracts chosen by the SFTA. It also demanded that the respective counterparties to
those transactions be disclosed. On 20 January 2010 A.____________A/S complied with this
request to the extent that it indicated the payment streams involved in the swap agreements in
question. However, it reiterated its view that Danish banking law did not permit disclosure of the
identity of its banking clients. On 18 February 2010 a telephone conference took place between
A.____________A/S and the SFTA.
I.
By letters dated 15 March and 8 July 2010 A.____________A/S demanded a challengeable
decision. On 29 July 2010 the SFTA duly took such a decision, whereby it rejected the refund
applications no 13855 of 2 August 2007 in the amount of CHF (…), no 13856 of 2 August 2007
in the amount of CHF (…) and no 13857 of 2 August 2007 in the amount of CHF (…). Further, it
ordered that A.____________A/S repay the amount of CHF (…) for unjustifiably granted
refunds within 30 days (this referring to refund applications no 13964 of 2 August 2006 in the
amount of CHF […] and no 13965 of 2 August 2006 in the amount of CHF […]). Compensatory
interest would be due on these amounts at a rate of 5%. In addition the SFTA rejected the
refund application no 279535 of 29 July 2008 in the amount of CHF (…).
By way of justification the SFTA argued essentially that it considered the transactions carried
out by A.____________A/S to be highly unusual not only by dint of their size but also because
of their structure. The SFTA held that concluding the swap agreement and simultaneously
acquiring the shares meant that all the associated opportunities and risks had been transferred
from A.____________A/S to the counterparty. As valuable consideration for this transaction,
A.____________A/S had received a margin (or spread). According to the SFTA, this approach
could not be justified economically and had been motivated by purely fiscal considerations. By
means of the swap agreement, it argued, the entire change in value, and in particular the entire
dividends, had been contractually passed on to an unknown counterparty. The SFTA held that
A.____________A/S had systematically acquired securities just before the dividends due dates
with a view to passing on the entire dividend amount under the terms of the swap agreement to
unknown third parties without the residual withholding tax or, as applicable, basic tax. After the
dividends due dates, the swap agreements had been terminated and at the same time the
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securities were sold. The SFTA contended that the sole purpose of these transactions was to
obtain a fiscal advantage. In the opinion of the SFTA, not only was A.____________A/S not the
beneficial owner of the dividends in question, but its actions also constitute an abuse of the
Convention of 23 November 1973 between the Swiss Confederation and the Kingdom of
Denmark on the Avoidance of Double Taxation in respect of Taxes on Income and Wealth
(DTC-DK, SR 0.672.931.41).
J.
On 13 September 2010 A.____________A/S (the complainant) lodged a complaint with the
Federal Administrative Tribunal with the following motions:
‘(1) That the tribunal enter into the complaint; in the alternative, that it be referred back to the SFTA
to be handled as an opposition.
(2) That sections 1 and 2 paragraph 2 of the contested order be set aside and the SFTA ordered to
effect the refund of withholding tax as per the applications made using form 89 no 13855 of 2
August 2007 in the amount of CHF (…), no 13856 of 2 August 2007 in the amount of CHF (…),
no 13857 of 2 August 2007 in the amount of CHF (…) and no 279535 of 29 July 2008 in the
amount of CHF (…) together with interest at the rate of 5% pa since 29 July 2010, in the alternative
since 13 September 2010.
(3) That section 2 paragraph 1 of the contested decree be set aside.
(4) That the Federal Tax Administration be ordered to pay the costs of the proceedings to the
complainant and to indemnify the complainant in respect of all legal costs incurred.’
Further, the complainant submitted the following procedural motion:
‘That a preliminary partial decision be handed down on prayer for relief 3 and be notified to the
Parties in its operative language.’
By way of justification the complainant argued essentially that there is now a very substantial
market for swaps. According to a survey by the Bank for International Settlements, in 2008 the
volume of equity-based over-the-counter derivatives exceeded USD 10,177bn. There were
many sound reasons for investing in an equity swap as opposed to taking a direct investment in
the underlying asset. In addition to avoiding stock market duties and disclosure obligations,
economic commentators stressed the leverage this allowed. In any event the counterparties to
the swap agreements had been residents of DTC countries. With regard to the possibility of
making allowance for the Swiss withholding tax against their profit taxes, the counterparties had
made no tax savings at all from the total return swap.
Furthermore, in terms of their timing the swap transactions were concentrated around the dates
of annual general meetings. Given the Swiss companies’ lower public reporting obligations, this
was largely due to the fact that the information investors needed could be found in the annual
business reports. According to the complainant, equity swaps are internationally common
derivatives that cannot on any account be described as unusual, inappropriate or abnormal.
The complainant alone was responsible for the decision to hedge the transactions by acquiring
the underlyings. Under the terms of the contract between it and the counterparty, payment of
the amount equivalent to the dividends had been independent of whether the corresponding
dividend income was in fact received. Regardless of whether it had hedged the swap, at the
time of the corresponding dividend decision the company had come under an obligation to pay
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the dividend amount. It had had the greatest possible freedom to dispose of the dividend
revenues however it chose. Moreover, the complainant argued that the duration of the swap
contracts had never been less than three months. The DTC-DK, concluded prior to the 1977
revision of the Model Convention of the Organisation for Economic Co-operation and
Development (OECD-MC, current version published inter alia in: Pascal Hinny, Steuerrecht
2012, annotated edition, Zurich 2012, pp 791 et seq), did not stipulate in its dividend article
(art 10) that beneficial ownership was a precondition for the right to invoke the DTC. In any
event, the complainant claimed that it had been the beneficial owner.
The DTC-DK implementing ordinance of 18 December 1974 (O-DTC-DK, SR 672.931.41) did
not envisage any possibility of an opposition procedure. Therefore the complaint to the Federal
Administrative Tribunal was the correct form of remedy against the SFTA decision of 29 July
2010. Furthermore, the SFTA’s informal refund decisions of 29 September 2006 were still in
force. In paying the requested tax refunds (value date 29 September 2006) the SFTA had
informally decided that these were due and thus had concluded the proceeding begun with
submission of the two forms no 89. A demand for repayment of a withholding tax refund already
made would fail at the outset by virtue of the fact that the SFTA is not the competent body for
issuing a corresponding order. The complainant maintained that there is no legal basis for
ordering the return of a withholding tax refund already made, and that there are no reasons to
review the refund decrees of 29 July 2010, which have now entered into force. It contends that
these are issues of law which could be quickly clarified. It therefore moves that a preliminary
partial decision be handed down on its own prayer for relief no 3.
Moreover, the complainant claimed, the SFTA decision of 29 July 2010 on its refund application
lacked any foundation in fact or in law. Therefore the complainant’s right to be heard had been
infringed and in that respect alone the decision must be set aside.
K.
On 14 September 2010 the complainant submitted the original of a notary’s certificate dated
13 September 2010, which states that, according to the swap agreements and/or confirmations,
the counterparties were domiciled in the United Kingdom, Germany, the USA and France, and
further that according to the documentation examined these were not the same as the buyers or
sellers of the shares.
L.
On 15 November 2010 the SFTA submitted within the extended time limit a response with the
following motions:
‘(1) That the tribunal dismiss the complaint of A.____________A/S of 14 September 2010 without
entering into its substance, and that the matter be referred to the SFTA for adjudication as an
opposition).
(2) In the alternative, that the Federal Administrative Tribunal issue an interim order regarding its
jurisdiction in the matter. Thereafter in a second exchange of submissions the tribunal
subsequently give the SFTA the opportunity to state its opinion on the substantive issues, propose
motions and submit the case file to the Federal Administrative Tribunal. This second exchange of
submissions be ordered only once the order regarding jurisdiction has entered into force.’
By way of justification the SFTA argued essentially that its interpretation of the DTC-DK and the
O-DTC-DK suggested that any initial challenge to the SFTA decision of 29 July 2010 must be
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by way of an opposition before the same lower instance. For that reason the tribunal must reject
the complaint without entering into it.
M.
On 26 November 2010 the complainant submitted its reply. In particular it entered the
procedural motion that the SFTA’s prayer in the alternative be rejected, that the tribunal refrain
from issuing an interim order and instead rule on the matter itself. On 10 December 2010 the
SFTA submitted its rejoinder, in which it essentially reiterated the motions it had entered in its
response of 15 November 2010. Further, it entered the contingent motion in the alternative that,
should the Federal Administrative Tribunal adjudicate the issue of jurisdiction as part of the
concluding decision in the matter itself, a brief additional time limit be set in which the SFTA be
given the opportunity to make further submissions on the substantive issues and to enter further
motions. In its surrejoinder of 28 December 2010 the complainant moved that the contingent
motion in the alternative entered in the rejoinder be dismissed.
N.
By interim order of 11 January 2011 the Federal Administrative Tribunal ruled that the
proceeding be initially limited to the issue of the functional jurisdiction of the tribunal to consider
the complainant’s submission of 13 September 2010. It further ruled that the tribunal is indeed
competent to consider the complainant’s submission of 13 September 2010. As the principal
reasons for its decision the Federal Administrative Tribunal argued that considerations of
procedural economy justified limiting the proceeding in an initial phase to the issue of
jurisdiction and handing down a separate order dealing with this issue. The grammatical as well
as the historical, systematic and teleological interpretations of art 3(4) O-DTC-DK suggested
that the correct legal remedy against the SFTA decision of 29 July 2010 is a complaint to the
Federal Administrative Tribunal. This interim order was not challenged.
O.
By order of 23 February 2011 the Federal Administrative Tribunal ordered the SFTA to submit a
response on the substantive issues. In a letter dated 7 March 2011 the complainant objected to
this procedural order. The SFTA complied with the aforementioned order by submission dated
28 March 2011. It reiterated its position and accordingly moved that the complaint be dismissed
and the complainant ordered to bear the costs. In particular, it argued that the complainant was
obliged under the terms of the total return swap contracts to pass on 100% of the income
generated on the shares to the counterparty. Accordingly, it claimed, it was not the complainant
but the respective counterparties to the total return swaps who had been entitled to receive the
dividend revenues. Thus the counterparty had been the beneficial owner of both the shares and
the income generated on those shares. Hence the complainant was not entitled to any refund of
withholding tax.
P.
In its response of 23 May 2011 the complainant in particular repeated its request that a
preliminary partial decision be handed down on the obligation to repay the 2006 refund and
notified to the parties in its operative language. In support the complainant argued in particular
that the dividends distributed on the underlyings were rightfully due to the complainant and not
to the respective counterparties of the total return swaps. To assign beneficial ownership to the
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counterparty would be an incongruous outcome that flew in the face of established judicial and
administrative practice in domestic tax refund cases.
Q.
On 24 June 2011 the SFTA responded to the complainant’s submission of 23 May 2011. In
essence the SFTA asserted that any adjudication of refund entitlements must be based on an
economic assessment and hence on the situation as a whole. Although the SFTA recognised
that, in strictly formal terms, two legal transactions were involved (ie the total return swap and
the share purchase), it contended that the two were linked by a causal connection. Without the
underlying transaction, the hedge transaction would not have been necessary. The SFTA did
not dispute that it might also have been possible for the complainant to conclude only one of
these legal transactions; in the instant case, however, this was not what had happened. An
economic assessment of the situation was vital when determining beneficial ownership. Since
the dividend revenues did not remain with the complainant, the latter could not be considered
their beneficial owner. It was therefore only logical to treat the total return swap counterparty as
the beneficial owner. Moreover, the SFTA assumed that the complainant had bought the shares
in question from the swap counterparties and had sold them back to those counterparties upon
expiry of the total return swap.
R.
On 11 July 2011 the complainant lodged its response to the SFTA’s submission of 24 June
2011. It argued in particular that, contrary to the view taken by the SFTA, the key to determining
the beneficial owner is not whether a causal connection existed between the total return swap
and the hedge, but rather whether the obligation to pay an amount equivalent to the dividend
was triggered by receipt of the dividend. Further, the suspicion harboured by the SFTA that the
complainant had bought the shares from the total return swap counterparties and then sold
them back to the same counterparties upon expiry of the swaps was contrary to experience of
life and to the documents on file. Further, the complainant stated that rather than compensatory
interest it would be claiming default interest as of the date of the contested decree (29 July
2010) or, in the alternative, as of the date of the complaint (13 September 2010). The reason for
doing so was that, were the tribunal to uphold the complaint, the SFTA ought to have granted
the refund applications rather than rejecting them and hence should have made the refunds.
The complainant argued that art 108(3) of the Swiss Code of Obligations of 30 March 1911
(CO, Obligationenrecht, OR, SR 220)—whereby the debtor is considered in default, without any
time limit being set, from the point in time at which his performance is due—could justifiably be
applied to this case. The complainant also contended that the manner in which the SFTA had
conducted the proceedings could only be described as dawdling.
S.
By letter dated 19 July 2011 the SFTA maintained that, from the withholding tax perspective,
the beneficial ownership of an asset (eg a share) includes the right to use the revenues
generated by that asset (eg. dividends). Therefore the modification of the withholding tax refund
form in 2007, whereby the question put no longer related to beneficial ownership of the shares
but rather to beneficial ownership of the dividends, was merely a supplementary clarification
rendered necessary by an increase in the number of cases of abuse.
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T.
On 21 July 2011 the complainant submitted a supplement to its submission dated 11 July 2011,
arguing in particular that designating the counterparty to the swaps as the beneficial owner
would create the very legal situation against which a number of different industry associations
had warned in their statement of position on the OECD ‘Discussion Draft’.
Where relevant to the tribunal’s decision, all due account is taken of the submissions of the
parties in the following considerations.
The Federal Administrative Tribunal takes into consideration:
1.
1.1. The Federal Administrative Tribunal adjudicates complaints against administrative
decisions pursuant to art 5 of the Federal Act of 20 December 1968 on Administrative
Proceedings (APA, Verwaltungsverfahrensgesetz, VwVG, SR 172.021; cf art 31 of the Federal
Administrative Tribunal Act of 17 June 2005 [ATA, Verwaltungsgerichtsgesetz, VGG, SR
173.32]). SFTA decisions within the meaning of art 3 O-DTC-DK are subject to complaint to the
Federal Administrative Tribunal (art 3(4) O-DTC-DK in conjunction with art 44 APA, art 31 ATA,
art 32(2)(a) ATA e contrario, art 33(d) ATA). The Federal Administrative Tribunal is thus
competent to hear the complaint lodged by the complainant on 13 September 2010 (as already
decided with final legal effect by interim decision of the Federal Administrative Tribunal A-
6537/2010 of 11 January 2011). The complaint, lodged in good time and in the correct formal
manner, is to be entered into.
1.2. The Federal Administrative Tribunal can in principle review the impugned decision in its
entirety. In addition to citing the infringement of Federal law (art 49(a) APA) and incorrect or
incomplete ascertainment of the legally pertinent facts (art 49(b) APA), a complainant may also
object to the decision as being unreasonable (art 49(c) APA; cf André Moser/Michael
Beusch/Lorenz Kneubühler, Prozessieren vor dem Bundesverwaltungsgericht, Basel 2008,
s 2.149). As a matter of principle in complaint proceedings the tribunal applies the law ex officio.
With the co-operation of the parties the Federal Administrative Tribunal therefore has a duty to
apply the correct legal provisions to the facts as established, ie to apply what it regards as the
appropriate legal rule, and to give it the interpretation of which the tribunal is convinced. The
duty to apply the law ex officio means that, as complaint instance, the Federal Administrative
Tribunal is not bound by the arguments advanced by the parties in support of their motions
(art 62(4) APA) and may (partially) uphold an complaint for reasons other than those asserted
or may uphold the impugned decision for reasons other than those put forward by the lower
instance (cf decision of the Federal Administrative Tribunal BVGE 2009/61 cons. 6.1 with
reference to decision of the Federal Administrative Tribunal BVGE 2007/41 cons. 2 with further
refs.).
1.3. Article 29(1) Federal Constitution (Bundesverfassung, BV) states that one of the minimum
requirements of constitutional due process is that decisions should be handed down within an
appropriate time period. Any assessment of whether the duration of a proceeding is in line with
the requirements of due process should be based by analogy on the criteria developed to
adjudicate complaints on the grounds of delay of due process (cf judgment of the Federal
Supreme Court 12T_1/2007 of 29 May 2007 cons. 3). The appropriateness or otherwise of the
duration of a proceeding is not determined in absolute terms but with due regard to the general
circumstances of each individual case (roughly, the nature, scope and complexity of the matter,
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the conduct of the private parties and official bodies, the importance of the matter to those
involved, the adjudication procedures specific to the matter, etc; cf judgments of the Federal
Supreme Court BGE 130 I 312 cons. 5.1–5.2; 2C_872/2008 and 2C_873/2008 of 7 December
2009 cons. 4.1.1; 2C_642/2008 of 12 December 2008 cons. 4.1; 2C_170/2008 of 30 July 2008
cons. 3; also, extensive comments on the requirement to expedite judicial proceedings and/or
delay of due process: decisions of the Federal Administrative Tribunal BVGE 2009/42 cons. 2.2;
A-4683/2010 of 12 May 2011 cons. 2.1). As regards the procedural consequences of
excessively lengthy proceedings, however, once the existence of an infringement of art 29(1)
Federal Constitution on account of excessively lengthy proceedings has been established, there
the matter must rest. For instance, an infringement of the requirement to expedite judicial
proceedings in tax matters cannot result in an annulment of the tax liability, even if the length of
the proceedings might seem ‘highly shocking’ (judgment of the Federal Supreme Court
2C_356/2008 of 21 November 2008 cons. 7; cf. also judgment of the Federal Supreme Court
2C_814/2010 of 23 September 2011 cons. 9 with further refs. and decisions of the Federal
Administrative Tribunal A-8017/2009 of 2 September 2010 cons. 4.4, A-4072/2007 of 11 March
2009 cons. 6.2).
1.4. The right to be heard is established in art 29(2) of the Federal Constitution of the Swiss
Confederation of 18 April 1999 (SR 101). It covers a number of different constitutional
procedural guarantees (on this whole subject cf. also Ulrich Häfelin/Georg Müller/Felix
Uhlmann, Allgemeines Verwaltungsrecht, 6th edn, Zurich/St. Gallen 2010, ss. 1672 et seq.).
Firstly, it subsumes a party’s right to to take position and to be heard in advance and give its
opinion on a matter in advance, ensuring that the parties involved can influence the court’s
findings of the relevant facts. Specifically, a person or entity affected by a judicial proceeding is
entitled in advance of any official ruling to give its opinion on all the important points pertaining
to the determination of the legally relevant facts and to obtain all the requisite information from
the competent authority. Secondly, the principle of the right to be heard means that the
authorities have a duty to examine all legally relevant motions that are submitted (judgment of
the Federal Supreme Court 5A.15/2002 of 27 September 2002 cons. 3.2) and to give reasons
for their rulings and decisions (judgment of the Federal Supreme Court BGE 123 I 31 cons. 2c;
decision of the Federal Administrative Tribunal BVGE 2007/21 cons. 10.2; cf. also art 35(1)
APA). The motivation of a decision a ruling must be drafted in such a manner that the affected
person or entity can contest it appropriately. This is possible only if both the affected person or
entity and the appellate instance can gauge the extent of the scope of the decision. In this
sense there must be at least a summary description of the considerations which the judicial
authority used as guidance and on which it bases its decision. In this the authority may limit
itself to the merits of the case deemed crucial to its decision (judgments of the Federal Supreme
Court 1C_436/2009 of 3 February 2010 cons. 3.2; BGE 133 111 439 cons. 3.3; 129 I 232 cons.
3.2; 126 I 97 cons. 2b; decision of the Federal Administrative Tribunal BVGE 2009/60 cons.
2.2.2; cf. also Lorenz Kneubühler, Die Begründungspflicht, Berne 1998, pp. 22 et seq.). An
infringement of the right to be heard constitutes a procedural denial of due process (judgment of
the Federal Supreme Court BGE 135 I 6 cons. 2.1, 132 I 249 cons. 5). According to established
court practice the right to be heard is a procedural right, such that an infringement of it results in
the procedurally defective decision being quashed, irrespective of the complaint’s prospects of
success (inter alia: judgment of the Federal Supreme Court BGE 126 I 19 cons. 2d/bb).
According to court practice, however, an infringement of the right to be heard may be healed if
the failure to grant that right (ie the omission to hear the party, give it access to case documents
or state the reasons for a ruling) is remedied in complaint proceedings in which the higher
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instance has the same powers of adjudication as the lower instance. However, such rectification
is excluded if the infringement of party rights is especially serious. Nor must it give rise to any
detriment to the complainant, and rectification should be the exception rather than the rule (inter
alia: judgment of the Federal Supreme Court BGE 133 I 201 cons. 2.2; decision of the Federal
Administrative Tribunal BVGE 2009/53 cons. 7.3, 2008/47 cons. 3.3.4; A-2925/2010 of 25
November 2010 cons. 1.2.2.3; Häfelin/Müller/Uhlmann, op. cit., ss. 1710-1711).
2.
2.1. The Swiss Confederation levies withholding tax on income generated by moveable capital
assets (art 132(2) Federal Constitution and art 1(1). 1 WHTA [Federal Act on Withholding Tax,
Verrechnungssteuergesetz, VStG]). This tax applies inter alia to interest, coupon payments,
profit shares and other revenues from shares issued by domestic entities (art 4(1)(b) WHTA).
The tax is payable by the debtor of the taxable payment (art 10(1) WHTA) and hence, in the
case of income from shares, the company distributing the dividends. The taxable payment has
the tax amount deducted from it upon being paid, transferred, credited to an account or offset,
without regard to the identity of the creditor. In the case of capital revenues the deduction is
35% (art 13(1)(a) in conjunction with art 14(1) WHTA).
2.2. Pursuant to art 24(2) WHTA legal entities are entitled to a refund of withholding tax if they
had their seat in Switzerland at the time the taxable payment fell due. Under art 21(1)(a) WHTA,
an entitled entity pursuant to art 22–28 WHTA is entitled to a refund of the withholding tax
deducted by the debtor if that entity was the beneficial owner of the assets generating the
taxable income at the time the taxable payment fell due. Under art 21(2) 2 WHTA a refund is
not permissible in any case in which it might result in tax evasion.
2.3. Whereas domestic entities may reclaim the withholding tax levied on income generated by
moveable capital assets if they were the beneficial owner of those assets at the time the taxable
payment fell due and if refunding the tax does not result in tax evasion (cons. 2.2), different
conditions apply to foreign payment beneficiaries. They are entitled to a refund only if a double
taxation convention (DTC) concluded between Switzerland and their country of residence so
provides (decision of the Federal Administrative Tribunal A-813/2010 of 7 September 2011
cons. 3.1; Maja Bauer-Balmelli, in: Zweifel/Athanas/Bauer-Balmelli [Ed.], Kommentar zum
Schweizerischen Steuerrecht 11/2, Basel 2005 [hereinafter: Kommentar VStG], n. 55 ad art 21
WHTA with refs.; Maja Bauer-Balmelli, Der Sicherungszweck der Verrechnungssteuer, unter
besonderer Berücksichtigung der Erträge aus Beteiligungsrechten, Diss. Zurich 2001
[hereinafter: Sicherungszweck], pp 167 et seq.; judgment of the Federal Supreme Court
2A.239/2005 of 28 November 2005 cons. 2.2 with ref.). The reason for the difference in
treatment is that, for foreign recipients, the withholding tax does not serve the purpose of
providing security but rather a fiscal or debit purpose (Bauer-Balmelli, Sicherungszweck, p 107).
It follows that, in international situations, art 21(2) WHTA (tax evasion reservation) has no (or no
direct) application (decision of the Federal Administrative Tribunal A-2744/2008 of 23 March
2010 cons. 3.3; cf. more tellingly decisions of the Federal Board of Tax Appeals 2003-159 of 3
March 2005 cons. 3e/bb; leaving this question unresolved: judgment of the Federal Supreme
Court 2A.239/2005 of 28 November 2005 cons. 3.3.3; cf. also Bauer-Balmelli,
Sicherungszweck, p 174, who considers direct recourse to art 21(2) WHTA as completely
inadmissible).
For the reasons just mentioned, with foreign beneficiaries it is never a case of reimbursing the
original withholding tax per se, but rather of quantitatively demarcating the powers of taxation of
the two countries (decision of the Federal Administrative Tribunal A-2744/2008 of 23 March
2010 cons. 3.3, with reference to Maja Bauer-Balmelli, Altreservenpraxis ein rechtliches
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Argumentarium, in: Forum für Steuerrecht [FStR] 2004 [hereinafter: Altreservenpraxis], pp 204
and 208). Because art 21(2) WHTA applies to refunds of withholding tax to persons with seat in
Switzerland (cf. above cons. 2.2), ie to reimbursement of the original withholding tax per se, the
(direct) invocation of this tax evasion clause to deny a refund entitlement provided for in a DTC
is excluded. In addition, because the DTC forms part of international law, in principle it takes
precedence over the WHTA (decision of the Federal Administrative Tribunal A-2744/2008 of
23 March 2010 cons. 1.4; decision of the Federal Board of Tax Appeals 2003-159 of 3 March
2005 cons. 3e/bb; Bauer-Balmelli, Kommentar VStG, n. 58 ad art 21 WHTA; Bauer-Balmelli,
Sicherungszweck, p 281; Georg Lutz, Abkommensmissbrauch Massnahmen zur Bekämpfung
des Missbrauchs von Doppelbesteuerungsabkommen, Zurich 2005, p 98).
2.4. As a capital-exporting state Switzerland pursues the policy of limiting as far as possible the
taxation powers of the source country (decision of the Federal Administrative Tribunal A-
813/2010 of 7 September 2011 cons. 3.1; René Matteotti, ‘Treaty Shopping’ und seine Grenzen
in der schweizerischen Rechtsprechung, in: Zeitschrift für schweizerisches und internationales
Steuerrecht [zsis]) of 24 October 2008, Zurich 2008 [hereinafter: Treaty Shopping 2008], s. 1
[introduction]). Such conventions arise because the contracting states declare themselves
willing on the basis of reciprocity to forego a portion of the assets and income that would be
taxable under domestic law in favour of the other contracting state (Matteotti, Treaty Shopping
2008, s. 4.2; Matteotti, Die Verweigerung der Entlastung von der Verrechnungssteuer wegen
Treaty Shoppings, in: Archiv für Schweizerisches Abgaberecht [ASA] 75 pp 767 et seq.
[hereinafter: Treaty Shopping 2007], p 794; Gerhard Kraft, Die missbräuchliche
Inanspruchnahme von Doppelbesteuerungsabkommen, Heidelberg 1991, p 3).
3.
Under art 1 DTC-DK the Convention applies to persons and entities resident of Denmark, in
Switzerland or in both countries. The term ‘resident’ is defined in art 4(1) DTC-DK. According to
that definition, persons ‘resident of one of the contracting states’ are persons that, under the law
of that state, are liable to tax therein by reason of its domicile, permanent sojourn, place of
management or other similar feature (cf decision of the Federal Board of Tax Appeals of
3 March 2005, 2003-159 cons. 3a).
3.1. Under art 10(1) DTC-DK (in the version relevant to the case at hand of 23 November 1973,
AS 1974 1720) dividends paid by a company which is a resident of a contracting state to a
person or entity resident of the other contracting state may only be taxed in that other state.
Hence dividends paid by a company resident of Switzerland to a person or entity resident of
Denmark may only be taxed in Denmark. In accordance with art 26(1) DTC-DK Switzerland
may initially levy tax on such dividends (at source), but the tax withheld in this manner must be
refunded on application to the extent the levying of such tax is restricted under the terms of the
Convention (art 26(2) DTC-DK). That extent is clarified in art 1 O-DTC-DK to the effect that the
relief of tax on dividends and interest income envisaged in art 10 DTC-DK consists on the Swiss
side in a full refund of the withholding tax retained. Under art 26(4) DTC-DK, applications for tax
refunds must always bear the official certification of the state of which the taxpayer is resident
that the conditions of unlimited tax liability in that state are fulfilled (cf. decision of the Federal
Supreme Court 2A.239/2005 of 28 November 2005 cons. 2.3).
3.2. As an international treaty within the meaning of art 2(1)(A) of the Vienna Convention of
23 May 1969 on the Law of Treaties (VCLT, SR 0.111; entered into force for Switzerland on
6 June 1990), the DTC-DK is to be interpreted according to the VCLT interpretation rules,
subject to the application of more specific rules (decision of the Federal Administrative Tribunal
BVGE 2010/7 cons. 3.6.1; BVGE 2010/64 cons. 4.2). Because in its interpretation rules the
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VCLT codified international customary law, those rules may also be applied to conventions
concluded prior to the entry into force of the VCLT (judgment of the Federal Supreme Court
BGE 122 II 234 cons. 4c) and by countries that have not ratified the VCLT. In accordance with
art 31 VCLT, interpretation must be consistent and based on the wording of the treaty provision
seen in the light of its usual meaning, the object and purpose of the treaty, good faith and the
context. The various elements of interpretation have equal status (decision of the Federal
Administrative Tribunal BVGE 2010/7 cons. 3.5 with numerous further references; Jean-Marc
Sorel/Valérie Boré Eveno, in: The Vienna Convention on the Law of Treaties: A Commentary,
edited by Olivier Corten/Pierre Klein, 2 vols, Oxford/New York 2011, n. 8 ad Art. 31 VCLT
1969). Additional means of interpretation are the treaty documentation and the circumstances in
which the treaty was concluded, to which reference may only be made by way of confirmation
or clarification of an initial interpretation that is unclear or contradictory (art 32 VCLT). The
precept of good faith is to be taken as a guiding principle of treaty interpretation throughout the
interpretation process (on this entire subject, cf. also [inter alia] decision of the Federal
Administrative Tribunal A-4911/2010 of 30 November 2010 cons. 4.1 with numerous further
refs; Daniel de Vries Reilingh, Manuel de droit fiscal international, Berne 2012, n. 109 et seq.).
3.2.1. The starting point for interpretation is the wording of the treaty provision. The text of the
treaty provision must be interpreted in and of itself according to its usual meaning. However,
this usual meaning is to be ascertained in accordance with the context, the object and purpose
of the treaty and the principle of good faith. According to art 31(4) VCLT, an exception to this
approach may exist where the treaty parties clearly express their joint intention to use a term
not in its usual meaning but in a very specific sense (decision of the Federal Administrative
Tribunal BVGE 2010/7 cons. 3.5.1; [inter alia] decision of the Federal Administrative Tribunal A-
4013/2010 of 15 July 2010 cons. 4.6.2 with numerous further refs.).
3.2.2. Article 31(2) VCLT defines what is meant by the context of a treaty provision. Article
31(2). 2 VCLT envisages a narrow interpretation of the term ‘context’. In particular, the context
neither includes the circumstances surrounding the conclusion of the treaty (for instance, in the
form of the preparatory work, which according to art 32 VCLT may be drawn upon for
interpretation purposes only as a subsidiary reference tool; decision of the Federal
Administrative Tribunal BVGE 2010/7 cons. 3.5.2) nor elements outside the text itself.
Article 31(3) VCLT then defines those elements constituting the ‘external context’ that may be
taken into consideration for interpretation purposes in the same way as the context. According
to art 31(3)(c) VCLT, any rule of international law applicable to the relations between the
contracting states may be factored into the interpretation. There is thus no hierarchy between
art 31(2) and (3) VCLT (decision of the Federal Administrative Tribunal BVGE 2010/7 cons.
3.5.4 with numerous further refs.).
3.2.3. The object and purpose of a treaty are the objectives which the parties hope to achieve
by concluding the treaty. Article 31 VCLT does not state the sources from which the object and
purpose of a treaty may be ascertained. In this regard legal writers generally emphasize the
importance of the title and preamble to the treaty (decisions of the Federal Administrative
Tribunal BVGE 2010/7 cons. 3.5.2; A-6053/2010 of 10 January 2011 cons. 5.1.3; also, Xavier
Oberson, Précis de droit fiscal international, 3rd edn, Berne 2009 [hereinafter: Précis], n. 93).
3.2.4. Where a DTC contains rules modelled on the OECD-MC, it is undisputed in Swiss
literature and court practice that the OECD-MC and its official commentaries will carry
substantial weight with regard to interpretation of the DTC (Peter Locher, Einführung in das
internationale Steuerrecht der Schweiz, 3rd edn, Berne 2005 [hereinafter: Einführung], p 130;
Oberson, Précis, n. 96–98; Judgment of the Federal Supreme Court 2A.239/2005 of 28
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November 2005 cons. 3.4.5 and 3.6; 2C_276/2007 of 6 May 2008, published in
Steuerentscheid 2008 A 32 No. 10, cons. 5.6). Admittedly, the OECD-MC and its commentaries
are likewise governed by the interpretation rules set out in art 31 et seq. VCLT (Jacques
Sasseville, Court Decisions and the Commentary to the OECD Model Convention, in: Courts
and Tax Treaty Law, pp 189 et seq., 194; Klaus Vogel, in: Vogel/Lehner,
Doppelbesteuerungsabkommen, 5th edn, Munich 2008, introduction to n. 125). Accordingly, a
term defined in a DTC itself may if necessary be interpreted in a treaty-specific manner as per
the rules set out in art 1 et seq. VCLT, with the OECD-MC and its commentaries being taken
into consideration as part of the interpretation. Where this is the case, it should be noted that
such consideration of the OECD-MC and its commentaries as a supplementary tool within the
meaning of art 32 VCLT is, like the other aforementioned interpretation tools, of only subsidiary
importance. Given the intended recipients of the OECD-MC and its commentary, ie the
government of the OECD member states, are not binding—even in diluted form—on the courts
or taxpayers of the member states (decision of the Federal Administrative Tribunal BVGE
2011/6 cons. 7.3.1; 2010/7 cons. 3.6.2; Vogel, op.cit., introduction to n. 124b; Sasseville, op.cit.,
pp 192–193; Markus Reich/Robert Waldburger, Rechtsprechung im Jahr 2005 [Part 1],
published in IFF Forum für Steuerrecht [FStR] 2006, pp 222 et seq., 233-234).
3.3.
3.3.1. From the wording of art 10(1) DTC-DK, whereby dividends paid by a company resident of
one contracting state to a person resident of the other contracting state may be taxed only in
that other state, it is not clear what exactly is meant by the statement that the payment goes to
a person resident of the other contracting state. In particular, the provision gives no clue as to
what characteristics that person must have. Nor does the background history to the DTC-DK,
which might potentially be taken into subsidiary consideration pursuant to art 32 VCLT (cons.
3.2.2), provide any further relevant indications (cf. decision of the Federal Board of Tax Appeals
of 3 March 2005, SRK 2003-159, cons. 3d/aa). The DTC-DK of 1973 follows the same wording
as used in art 10(1) of the OECD-MC in its 1963 version. As the complainant rightly points out,
this does not contain any mention of the concept of the beneficial owner. This was inserted only
in the OECD-MC version of 1977 in art 10(2) OECD-MC (cf. decision of the Federal
Administrative Tribunal 2011/6 cons. 7.3.1; cf. also [inter alia] Jessica Salom, L’attribution du
revenu en droit fiscal suisse et international, Geneva, etc, 2010, p. 185).
3.3.2. The legal writers’ overriding majority view is that the criterion of beneficial ownership is
implicit in every DTC (for this view, see in particular Locher, Einführung, p 152; Robert Danon,
Le concept de bénéficiaire effectif dans le cadre du MC OCDE, FStR 2007, p 40). With regard
to the DTC-DK the corresponding view can be inferred from the aforementioned decision of the
Federal Board of Tax Appeal 3 March 2005, SRK 2003-159, cons. 3d, esp. 3d/cc+dd+ee). This
view is largely based on the OECD-MC and its commentaries, the claim being made that the
relevant passages in the commentary have merely been supplemented in order to clarify this
point, which itself corresponds to the view consistently taken by all OECD member states.
There is a dispute amongst the legal writers on the extent to which reference to elements of the
OECD-MC or the associated passages in the commentaries that post-date the pertinent DTC
text may legitimately be made in order to interpret that pre-existing specific DTC text (Beat
Baumgartner, Das Konzept des beneficial owner im internationalen Steuerrecht der Schweiz,
Zurich 2010, pp 25 et seq.; de Vries Reilingh, op.cit., n. 159 et seq.; Michael Lang, lntroduction
to the Law of Double Taxation Conventions, Vienna 2010, n. 92 et seq.; Stefan Oesterhelt,
Bedeutung des OECD-Kommentars für die Auslegung von Doppelbesteuerungsabkommen,
ASA 80, pp 380 et seq.; Steffen Lampert, Doppelbesteuerungsrecht und Lastengleichheit,
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Baden Baden 2010, pp 82 et seq. with numerous further refs.; Harald Schaumburg,
Internationales Steuerrecht, 3rd edn, Cologne 2011, s. 16.77 with fn 9). As will be shown below
(cons. 3.4 and cons. 6), in the instant case there is no need to answer the question of whether
the criterion of beneficial ownership is also present in the DTC-DK despite not being explicitly
mentioned there, just as there is no need to answer the question as to which of the conflicting
views on this matter the tribunal wishes to side with. Thus there is no need for the tribunal to
address the complainant’s assertions on these issues and in particular on the latest OECD
‘Discussion Draft’ on beneficial ownership published on 29 April 2011 (on this point cf.
nonetheless de Vries Reilingh, op.cit., n. 208 et seq.).
3.4.
3.4.1. In the OECD-MC provisions regarding the attribution of dividends, interest income and
royalties the concept of beneficial ownership is a prerequisite of the entitlement to assert
advantages under a convention with a view to avoiding potential double taxation (Baumgartner,
op.cit., pp 222 et seq., esp. p 223). The term serves to determine the intensity of the
relationship between a taxpayer and the taxable object from an economic perspective.
Beneficial ownership is a ‘substance over form’ [in English in the judgment] approach based on
the underlying economic reality rather than the (civil law) form (decision of the Federal
Administrative Tribunal BVGE 2011/6 con. 7.3.2; Baumgartner, op.cit., p 102). As a prerequisite
for entitlement it focuses on the scope of the taxpayer’s powers to decide on the use of
investment income as the key taxable object. The aim is to ensure that a fiduciary or manager
acting purely on behalf of the beneficial owner is excluded from the advantages of the
Convention (cf. decision of the Federal Administrative Tribunal BVGE 2011/6 cons. 7.3.2;
Baumgartner, op.cit., pp 115 et seq., esp. p 117 and the literature referred to there). A
distinction needs to be drawn between the aim of the beneficial ownership concept and its
implementation. The party who is to be considered the real ‘recipient’ of the ‘payment’ and
therefore entitled to the Convention benefits within the meaning of art 10(2) OECD-MC (as per
Tischbirek, in: Vogel / Lehner, Doppelbesteuerungsabkommen, 5th edn, Munich 2008, n. 42 ad
art 10 and Vogel, op.cit., n. 20 ad prev. art 10-12) is determined not by formal considerations
but according to economic criteria (substance over form approach) [in English in the judgment]
(Vogel, op.cit., n. 17 ad prev. art 10-12). In this respect the concept of beneficial ownership
therefore enshrines an economic perspective (Baumgartner, op. cit., p 93; Vogel, op. cit., n. 17
ad prev. art 10-12; on this whole issue, cf. also Robert Danon, Cession transfrontaliere de droit
de participations. Distinction entre evasion fiscale, treaty et rule shopping, in: Pierre-Marie
Glauser [ed.], Evasion fiscale, Geneva, etc, 2010 [hereinafter: Distinction], pp 140 et seq.).
3.4.2. If one person is obliged to pass on income to another, this shows that the first person’s
power to decide on the use of that income is limited. If the obligation to pass on income is
contractual, this can militate against the qualification as beneficial owner (Danon, op. cit., FStR
2007, p 45; Baumgartner, op. cit., pp 130–131). Further, a de facto duty to pass on income may
limit the power to decide on the use of that income to such a degree that the person concerned
can no longer be considered the beneficial owner (cf. Vogel, op. cit., prev. art 10-12, n. 19). The
stronger the mutual or reciprocal dependence or interdependence between the income and the
duty or pass it on, the weaker the power to decide on its use. The key issue is the degree to
which generating income is dependent on the obligation to pass it on. Besides that, the degree
to which the obligation to pass on income is dependent on the generation of that income is to be
considered (Baumgartner, op.cit., pp 139 et seq.). Moreover, a possible indication of beneficial
ownership is the assumption of the risks associated with the income (Baumgartner, op.cit.,
pp 124 and 146 et seq., also with regard to the comments below). Relevant in this in this
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context is particularly who bears the risk that no dividend is paid. In terms of the timing, an
assessment of beneficial ownership is to be made at the time at which the income was paid.
Therefore the fact of a very brief holding period does not preclude beneficial ownership (Jonas
Misteli, Dividenden-Stripping, Berne 2011, p 132 n. 385). Furthermore, the concept of beneficial
ownership disregards subjective factors, such as any intention of abuse. Thus the reasons for
choosing a particular structure are immaterial to the question of beneficial ownership
(Baumgartner, op.cit., pp 128–129).
3.4.3. One has to bear in mind, though, that the concept of beneficial ownership has been
incorporated into the OECD-MC for the purpose of preventing ‘treaty shopping’ [in English in the
judgment] (on this, cf. the summary by Vern Krishna, Treaty Shopping and the Concept of
Beneficial Ownership in Double Tax Treaties, in: Canadian Current Tax, August 2009, pp 129 et
seq., 131–132). Ultimately the idea was to prevent persons not eligible for Convention
advantages from enjoying those advantages by means of middlemen or intermediate structures
(inter alia Xavier Oberson, La notion de bénéficiaire effectif en droit fiscal international, in:
Subilia-Rouge / Mollard / Tissot Benedetto [Ed.], Festschrift SRK, Lausanne 2004, pp 213 et
seq., 225 [hereinafter: Notion]; Vogel, op.cit., n. 12 ad prev. art 10-12; Danon/Glauser, op.cit.,
p 517).
Seen in its proper perspective, however, the concept of beneficial ownership is merely a
condition of entitlement like, say, the concept of residence, rather than an singular abuse clause
(cf. Maja Bauer-Balmelli, Der Begriff ‘Nutzungsberechtigter’ im DBA Schweiz-Luxemburg,
published in Steuer & Wirtschaft International [SWI] 2002 pp 563 et seq., 569; Baumgartner,
op.cit., pp 222 et seq.). Only once all the conditions of entitlement under a DTC are met
(including beneficial ownership) does the question of potential abuse of the convention arise.
This outcome accords with Federal Supreme Court practice, which draws a clear distinction
between the concepts of beneficial ownership and abuse of legal rights (judgment of the
Federal Supreme Court 2A.239/2005 of 28 November 2005 cons. 3.5.3).
4.
4.1. There is no international consensus on what constitutes abuse of a DTC. In Swiss legal
literature—based on Federal Supreme Court practice according to which abuse of law
(including at the international level) is found to exist when a legal institute is used contrary to its
purpose to further interests that the legal institute does not intend to protect (inter alia judgment
of the Federal Supreme Court BGE 127 II 49 cons. 5a)—the view is taken that, although
claiming treaty benefits for purposes alien to the aims of the Convention can be described as an
abuse of law, the same is not necessarily true with respect of all the other frowned upon forms
of conduct described in the Convention with a view to preventing undesirable recourse to a DTC
(known as ‘abuse provisions of treaty law’) (Lutz, op.cit., pp 7 et seq.).
4.2. The issue hotly debated in the literature of whether conventions contain an unwritten
reservation of abuse (on this issue, cf. inter alia Lutz, op.cit., pp 100–101; Vogel, op.cit.,
introduction to n. 190) has been settled by the Federal Supreme Court by way of interpretation.
According to Federal Supreme Court practice, a DTC must be interpreted in accordance with
art 31 et seq. VCLT and hence in the light of the principle of good faith (judgment of the Federal
Supreme Court 2A.416/2005 of 4 April 2006 cons. 3.1). Thus every contracting state may
expect the other to interpret the convention in good faith and in accordance with its objectives,
which excludes abuse of law, ie use legal institute for purposes that such institute does not
intend to protect (judgment of the Federal Supreme Court 2A.416/2005 of 4 April 2006 cons.
3.1). The prohibition of abuse of law is therefore to be regarded as subsumed in the good faith
principle and hence to be taken into account in any application of international conventions
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(judgment of the Federal Supreme Court 2A.239/2005 of 28 November 2005 cons. 3.4.3).
4.3. If a convention does not contain an explicit abuse clause, under the practice of the Federal
Supreme Court abuse of law can only be found to exist if the company concerned (in the instant
case, the dividend recipient) does not carry on a genuine economic resp. commercial activity
(judgment of the Federal Supreme Court 2A.239/2005 of 28 November 2005 cons. 3.6.3). To
engage in such activity requires premises, personnel and equipment, the extent of the
necessary infrastructure being dependent on the services rendered (cf. Matteotti, Treaty
Shopping 2007, p 795).
5.
5.1. In the instant case the complainant concluded total return swap contracts in respect of the
shares of listed Swiss companies in the period from 2006 to 2008. To hedge the attendant risks
the complainant bought the corresponding shares. Withholding tax was levied on the various
dividend distributions. The dispute at hand concerns the refund of this withholding tax. The
object of this proceeding is, on the one hand, whether the complainant is entitled to a refund of
withholding tax on dividends falling due in 2007 in the amount of CHF (…) and for those falling
due in 2008 in the amount of CHF (…), and on the other hand, whether the SFTA is entitled to
demand the repayment of withholding tax refunds already made for dividends falling due in
2006 in the amount of CHF (…). A further object of contention is whether the complainant is
entitled to demand interest on any refund claims it may have.
5.2. Since the procedural guarantees in question are of formal character, the first matter to deal
with is the complainant’s objection that the SFTA infringed its right to be heard. The
complainant contends that insufficient rationale was given for the SFTA decision of 29 July
2010 regarding the demand for repayment of the withholding tax already refunded in the
amount of CHF (…). The complainant fails to realise that the rationale provided for a decision is
deemed sufficient if the authority concerned briefly cites the considerations by which it was
guided and on which it bases its decision (cons. 1.4). In its decision of 29 July 2010 the SFTA
did as much for its repayment demand (as well). It clearly stated the reasons why it believes
that abusive recourse to the DTC-DK had occurred. The SFTA subsequently refused an
application for refund of withholding tax in the total amount of CHF (…) and demanded
repayment of the withholding tax previously refunded to the complainant in the amount of CHF
(…). Although the SFTA did not cite a legal basis for its repayment demand in its decision of
29 July 2010, it had already done so in its letter dated 11 March 2009, in which it maintained
that the demand was based on art 51 WHTA. In these circumstances it was possible for the
complainant to contest the decision of 29 July 2010 properly. There was no infringement of the
right to be heard. In any event, even if the SFTA had infringed its duty to state the reasons for
its decision, this would be of no advantage to the complainant. According to the court practice
such an infringement might be deemed rectified, since in the instant complaint proceeding, and
in particular in its submission dated 28 March 2011, the SFTA stated its position concerning the
aforementioned demand and since the complainant has been granted the right to be heard in
full before the Federal Administrative Tribunal as an instance with full decision power (cf. cons.
1.2).
5.3. It is not disputed that the complainant, which claims a refund of the withholding tax levied in
Switzerland, has its seat in Denmark. Any refund of withholding tax to the complainant cannot
be made on the basis of the WHTA, but only under the DTC-DK (cons. 2.3). Since the
complainant is a legal entity with seat office in Denmark and is liable to pay tax in that country, it
is resident of Denmark within the meaning of art 1 DTC-DK. Therefore the DTC-DK applies to
the complainant in principle. Further, it is not disputed that the complainant filed the refund
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applications in a formally correct manner within the meaning of art 26(4) DTC-DK. In principle,
therefore, the complainant is entitled to a refund of withholding tax pursuant to art 10(1) (in the
version applicable here) in conjunction with art 26(2) DTC-DK and art 1(1) O-DTC-DK. A
condition for such entitlement is—should the DTC-DK implicitly deem beneficial ownership to be
a conditions to its being applied (cons. 3.3.1 and cons. 3.3.2)—that the complainant is the
beneficial owner of the dividends received (cons. 6),. If that is the case, then the tribunal must
consider whether there has been abusive recourse to the DTC-DK (cons. 7).
6.
6.1. The complainant concluded a number of total return swaps with its counterparties. This
instrument involves exchanging the entire income generated by an asset (or asset portfolio) in
return for a set payment stream (Max Boemle/Max Gsell, Geld-, Bank- und Finanzmarkt-
Lexikon der Schweiz, Zurich 2002, for a definition of the term ‘total return swap’, p 1030). In the
total return swap contracts in this instant case, when the swap agreement matured the
complainant was obliged to pay the entire performance (increase in value in the form of price
gains and dividends) on the underlying (basket of Swiss equities) to the counterparty. In
exchange the complainant received a variable rate of interest (Libor) plus a margin. The
complainant hedged these swap transactions by buying the equity basket in question.
Accordingly, although the complainant was obliged to pay the amounts corresponding to the
price gains and dividends to the total return swap counterparty as part of the increase in value,
thanks to the hedge it received dividends and price gains in the same amount. Furthermore, the
complainant effected both the swap transactions and the share sales and purchases over the
counter via international brokers. It is undisputed that none of the swap transactions had a
duration of less than three months, the average duration being six months.
6.2.
6.2.1. The key to determining the issue of beneficial ownership is the extent of the
complainant’s power to decide on the use of the dividends paid to it (cons. 3.4.1 and 3.4.2). The
SFTA holds that the complainant was obliged under the swap agreements to pass on the full
amount of the dividends to the counterparty. Contrary to the SFTA’s view, however, no legal
obligation to pass on those payments can be found in the contracts available to the tribunal.
The contractual obligation entered into by the complainant consisted in paying to the
counterparty an amount equivalent to the entire increase in value (incl. dividends) over the
duration of the swaps. According to the available documents, there was no civil law obligation in
any shape or form to hedge the swap contracts and/or to purchase the corresponding shares.
The tribunal must therefore consider whether there was a de facto obligation to pass on the
dividends. Such an obligation is one way to limit the decision-making power to an extent that
the person concerned can no longer be considered to be the beneficial owner (cons. 3.4.2). To
this extent, therefore, the SFTA is right to assume that an approach based on ‘substance over
form’ [in English in the judgment] (cf. cons. 3.4.1) or economic considerations is authoritative.
To answer the question as to whether there was a de facto obligation to pass on the dividends,
it must first be ascertained whether the complainant would have been obliged to pay the
dividend amount to the counterparty even if on its part it had not received the dividends.
Secondly, the tribunal must examine whether the complainant would have received the
dividends even if it had not been obliged to pay the dividend amount to the counterparty. In the
present case the answer to both questions is in the affirmative. Regardless of whether it
received the dividends, the complainant was obliged to pay the counterparty the amounts
equivalent to the dividends. At the same time, the complainant was free to decide,
independently of the swap contracts, whether to buy the shares in question and to receive the
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corresponding dividends. The lack of interdependence (cf. cons. 3.4.2) shows that the
complainant did indeed have the power to decide how to use the dividends it received. The
complainant therefore was under no de facto obligation to pass on the dividends. It was free to
dispose of them as it wished and to use them for other purposes instead.
The SFTA’s contention that the complainant cannot be considered to be the beneficial owner
because the dividend amount did not remain in its possession does not hold water according to
the view taken by the Federal Administrative Tribunal. When evaluating the power to decide
how the dividends paid out are used it is wrong to take a purely ex post facto perspective
focussing on whether the dividends remained with the complainant in economic terms. In terms
of the timing, the determination of beneficial ownership must be based on the time at which the
income was paid, ie in this case the point at which the dividends were distributed (cons. 3.4.2).
The complainant’s power to determine usage is to be assessed with regard to that point in time
by examining the degree of interdependence between the transactions.
6.2.2. The Federal Administrative Tribunal is well aware that in the case of the (hedged) swap
contracts described it was not the complainant but ultimately the counterparty who bore the risk
that the companies might pay no dividends. Although this might be seen as militating against
the complainant’s qualification as beneficial owner (cf. cons. 3.4.2), However, because the
underlyings were purchased at the sole discretion of the complainant for the purpose of hedging
its obligations under the swap contract, in this case the assumption by the counterparty of the
risks associated with the revenue streams does not preclude qualifying the complainant as the
beneficial owner of the dividend payments (cf. M. Baumgartner, op.cit., p 376).
6.2.3. The SFTA contends that the complainant systematically acquired the shares just before
the dividends fell due with the aim of passing those dividends on in their entirety via swap
contracts to third parties without paying withholding tax or basic tax; that, once the dividends
had fallen due, the swap contracts were dissolved together with the share sales; that for this
reason the swap contracts largely had durations of only three to six months, and that the
construct was designed purely for tax purposes. The Federal Administrative Tribunal takes the
view that these contentions of the SFTA do not hold water. The holding period is of no
relevance to the issue of beneficial ownership (cons. 3.4.2). It is therefore superfluous to pay
further attention to the duration of the swap contracts. Also irrelevant are the complainant’s
motives: the concept of beneficial ownership does not depend on any subjective factors (cons.
3.4.2). The motives and the holding period are only potentially relevant to the issue of treaty
abuse
6.2.4. The SFTA also objects to the failure by the complainant to disclose the identities of the
counterparties to the swap contracts, contending that for this reason it is not clear whether the
complainant bought the shares from the swap counterparties. To which the complainant
responds that Danish banking law forbids it from disclosing the identity of its clients. Moreover,
on 14 September 2010 it submitted to the Federal Administrative Tribunal a certificate signed by
a Swiss notary to the effect that the swap contract counterparties were resident of the UK,
Germany, the USA and France and were not the same as the buyers and sellers of the shares.
The complainant’s duty to co-operate with the judicial authorities is limited to necessary,
conscionable co-operation (Patrick l. Krauskopf/Katrin Emmenegger, in
Waldmann/Weissenberger [Ed.], Praxiskommentar zum VwVG, Zurich/Basel/Geneva 2009,
art 13 n. 40; Jürg Steiger, Verfahrensmaximen vor dem Bundesverwaltungsgericht, dargestellt
am Mehrwertsteuerverfahren, ST 2011, p 174). In particular the complainant cannot reasonably
be expected to co-operate to the extent of rendering itself liable to criminal prosecution. The
assertions of the complainant on this point—that this would be the case if it were to disclose the
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identity of its banking clients—are plausible and reasonable. Hence the complainant’s refusal to
provide the requested client data does not constitute an infringement of its duty to co-operate.
Further, proceedings before the Federal Administrative Tribunal are governed by the principle of
free evaluation of evidence. The required level of proof is attained once the tribunal, based on a
free evaluation of evidence from an objective perspective, is persuaded that the legally pertinent
facts have been established (Moser/Beusch/Kneubühler, op.cit., ss. 3.140 et seq.). In the light
of the aforementioned notarised certificate the Federal Administrative Tribunal considers it
proven that the swap counterparties were not the same as the buyers and sellers of the shares.
This finding based on the evidence means that there is no need to resolve the question as to
whether the notarised certificate constitutes a public deed within the meaning of art 9 of the
Swiss Civil Code (CC, Zivilgesetzbuch, ZGB) of 10 December 1907 (SR 210) and thus has
enhanced probative force (cf. decision of the Federal Administrative Tribunal A-8527/2007 of 12
October 2010 cons. 2.4.2).
6.3. In conclusion it may be stated that, even if the requirement of beneficial ownership were
deemed to exist in the DTC-DK despite there being no explicit mention of it there (cons. 3.3.2),
the complainant would qualify as the beneficial owner of the dividends received.
7.
7.1. There is no explicit abuse clause in the DTC-DK. According to Federal Supreme Court
practice, however, the prohibition of abuse of law is subsumed in the principle of good faith, of
which account must be taken whenever applying international treaties (cons. 4.2). Thus the
DTC-DK is also subject to the reserve of treaty abuse. According to Federal Supreme Court
practice, however, if there is no explicit abuse clause in the DTC then treaty abuse is to be
assumed only if the company concerned also engages in no genuine economic or commercial
activity (cons. 4.2.1). The tribunal must therefore consider at the outset whether the
complainant actively engaged in commercial activity.
7.2. By its own account the complainant was established in 1924 with a share capital of (…)
Danish krone (DKK) and currently employs 61 people. Its total assets in 2008 amounted to DKK
(…) in 2006 it posted profits of DKK (…) (cf. complaint, s. 72). These assertions were not
disputed by the SFTA. Further, it is not disputed that the complainant has premises at its
registered office in Copenhagen. Accordingly, the complainant engages in genuine commercial
activity. Consequently, according to Federal Supreme Court practice there can be no treaty
abuse. Further investigations into this aspect are thus superfluous.
8
8.1. Since from the foregoing it is clear that the complainant is the beneficial owner of the
dividends and there is no treaty abuse, the complainant is entitled to refund of the withholding
tax. Accordingly, the following refund applications are to be granted: no. 13855 in the amount of
CHF (…), no 13856 in the amount of CHF (…), no 13857 in the amount of CHF (…) and
no 279535 in the amount of CHF (…). In addition, there are no grounds for the SFTA’s demand
for repayment of the refund already granted in the amount of CHF (…). It follows from this that
the complainant’s other assertions on this matter do not require further consideration. On these
points the complaint is therefore upheld. Consequently, the complainant’s procedural motion
that a preliminary partial decision be handed down on the SFTA’s demand for repayment of the
refund already granted is now irrelevant.
8.2. The complainant also moves that interest be payable on its refund applications. It contends
that, although in an international context no interest is paid on refunds of withholding tax, this
rule makes sense only if the refund is carried out promptly. According to the complainant, if the
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refund application is first rejected by the SFTA but subsequently granted by the Federal
Administrative Tribunal, there is no obvious reason why no interest should be payable for the
period of delay attributable to the SFTA. Referring to art 168(2) of the Federal Act of
14 December 1990 on Federal Income Tax (FITA, Bundesgesetz über die direkte
Bundessteuer, DBG, SR 642.11) the complainant further contends that Swiss tax law also
provides for the payment of interest where too much tax has been paid and is subsequently
refunded. Moreover, the complainant states that it is not claiming compensatory interest so
much as default interest, the reason being that, were the tribunal to uphold the complaint, the
SFTA ought to have granted the refund applications rather than rejecting them and hence
should have made the refunds. The complainant argued that art 108(3) CO—whereby the
debtor is considered in default, without any time limit being set, from the point in time at which
his performance is due—could justifiably be applied to this case. The complainant maintains
that the SFTA was actually in default from an earlier date, namely 8 July 2008, when the SFTA
was set a time limit in which to hand down a contestable decision.
Contrary to the complainant’s view, the SFTA was not in default in respect of the refund
applications either from 8 July 2008 or from 29 July 2010, the date on which the contested
decision was handed down, or from 13 September 2010, the date on which the complaint was
lodged. it is important to note that, pursuant to art 3(2) and (3) O-DTC-DK, the SFTA is required
to issue a decision or decree establishing the withholding tax to be refunded, if any.
Consequently, the SFTA may be said to be in default of the relevant payment only once its
refund obligation has been established by means of an order that has entered into force. Such
an order may be handed down by the SFTA itself or by a higher instance (Federal
Administrative Tribunal or Federal Supreme Court) (cf. art 3(4) O-DTC-DK). The SFTA can owe
interest on the refundable withholding tax for the period prior to the entry into force of said order
only if compensatory interest is expressly provided for.
Unlike default interest, compensatory interest is not conditioned on the SFTA’s being in default
(judgment of the Federal Supreme Court 2C_191/2007 of 11 October 2007 cons. 3.2).
Compensatory interest is payable where excess tax has been paid and the excess is therefore
to be refunded. It is payable from the juncture at which the refund ought to have been made.
However, compensatory interest is only ever payable where statutory provision is made for it
(judgment of the Federal Supreme Court 2C_410/2008 of 20 October 2008 cons. 3.2; decision
of the Federal Administrative Tribunal A-6971/2008 of 8 June 2009 cons. 5.5 with refs.). There
is no provision for compensatory interest in the DTC-DK. Article 168(2) 2 FITA cannot possibly
serve as the legal basis for such interest in this case, since that provision relates to Federal
income tax. What is more, art 31(4) WHTA explicitly states that no interest is payable on
amounts to be refunded. In the instant case there is no reason to take a different approach to
refunds under the DTC-DK. Moreover, the judgment of the German Federal Fiscal Court
(Bundesfinanzhof, BFH) of 29 October 1981 (I R 142/78), which was submitted by the
complainant, is of absolutely no relevance to the instant complaint proceeding. Merely for the
sake of completeness the tribunal points out that, in said judgment, there was a legal basis on
which the BFH could found its view that compensatory interest was payable. In the instant case
no such legal basis exists. On this point the complaint is therefore rejected.
8.3. Further, the complainant criticises the length of the refund proceedings before the SFTA. It
filed its refund application for dividends falling due in 2007 on 2 August 2007 and for dividends
falling due in 2008 on 29 July 2008. The SFTA decision on these applications was made on 29
July 2010. The duration of the proceedings—approximately three and two years respectively—
no longer appears to be short. It must be remembered, however, that the instant case turns on
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a very complex matter. Furthermore, the SFTA undertook numerous investigative actions
which, at least in its opinion, were appropriate. In addition, on several occasions the
complainant itself requested extensions of time limits for the submission of the requested
documentation (cf. e-mails from the complainant dated 1 April 2009 and 28 April 2009; letters
from the complainant dated 22 May 2009 and 22 June 2009, and letter dated 20 January 2010
in reply to an SFTA inquiry made on 29 September 2009). Furthermore, the complainant did not
expressly call for a contestable decision until 15 March 2010, ie only some four months before
said decision was handed down on 29 July 2010. In the light of all the available facts it is not
reasonable to describe the duration of the proceeding as inappropriately long. And in any event,
even if the complainant’s claim on this point were to be upheld, there would still be no interest
due on the refund amounts (cons. 1.4). The complainant is quite right to assert that, where
proceedings regarding the refund of withholding tax are protracted, the fact that no interest is
payable on the refund amounts is to the economic detriment of the taxpayer. Contrary to the
complainant’s view, however, such detriment cannot result in the payment of compensatory
interest where there is no legal basis for such interest.
8.4. Finally, contrary to the complainant’s view, the manner in which the SFTA conducted the
proceedings in the instant case cannot reasonably be described as dawdling. The SFTA has
the right in an exchange of legal submissions (or, as in this case, more than one exchange) to
take new points in law and in fact and to submit fresh evidence (on the admissibility of new
arguments in fact and in law in appellate proceedings, cf. Moser/Beusch/Kneubühler, op.cit., ss.
2.196 et seq.). In any event the complainant had ample opportunity—and indeed took that
opportunity—to respond to the SFTA’s submissions.
9.
9.1. In the light of the foregoing, the complaint is upheld in part. The tribunal costs are set at
CHF 50,000 (art 63(1) APA; art 4 of the Regulations of 21 February 2008 concerning Costs and
Reimbursements in Federal Administrative Tribunal Proceedings [VGKE, SR 173.320.2]).
Pursuant to art 63(1) APA, court costs are generally borne by the losing party. The degree by
which a party loses determines the apportionment of costs and depends first and foremost on
the prayers for relief entered in the appeal, based on the substance of what the losing party
actually wished to happen (Moser/Beusch/Kneubühler, op.cit., s. 4.43). In the main action the
tribunal finds in favour of the complainant (cons. 8.1). However, the complainant has not
prevailed in its motion that default interest be paid (cons. 8.2) or in its allegation that its right to
be heard had been infringed (cons. 5.2). Given the outcome of the instant proceeding, 1/10 of
the court costs—or CHF 5,000—shall be borne by the complainant. Since the SFTA is the lower
instance, no court costs may be imposed on it (art 63(2) APA).
9.2. Where a party prevails only partially, its entitlement to reimbursement for legal costs is
reduced (art 64(1) APA; art 7(2) Regulations concerning Costs and Reimbursements in Federal
Administrative Tribunal Proceedings). Such reimbursement for legal costs covers in particular
the costs of legal representation, including the attorney’s fee. This is based on the hours of
input required from the legal representatives, with hourly rates for attorneys ranging from the
minimum of CHF 200 to the maximum of CHF 400 and for solicitors and other non-attorney
representatives from the minimum of CHF 100 to the maximum of CHF 300. In disputes over
pecuniary interests the attorney’s fee and/or the remuneration for non-attorney professional
representation may be increased by an appropriate amount. The Federal Administrative
Tribunal decides on the prevailing party’s reimbursement for legal costs ex officio on the basis
of the cost note, where available, and the case documents and is generally not required to state
its reasons in detail. Where the reimbursement for legal costs is determined on the basis of a
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cost note, the court has the task of verifying the extent to which the claimed costs may be
recognised as necessary for the party’s legal representation (art 7 et seq. Regulations of
concerning Costs and Reimbursements in Federal Administrative Tribunal Proceedings). In
other words, unnecessary input is not reimbursed, as laid down by way of supplement in
art 8(2) Regulations concerning Costs and Reimbursements in Federal Administrative Tribunal
Proceedings.
9.3. In respect of the instant complaint proceeding the complainant submitted detailed cost
notes on 29 December 2010, 6 June 2011 and 12 July 2011 in a combined amount of CHF (…).
Since these cost notes are sufficiently detailed (cf. Moser/Beusch/Kneubühler, op. cit., s. 4.85),
they may serve as the starting point.
9.3.1. The tribunal must first examine the hourly rates on which the cost notes are based. These
are: for representation by attorneys-at-law a rate of CHF 650 per hour, and for non-attorney
representation hourly rates of CHF 650, CHF 400, CHF 340 and CHF 220. Given the size of the
amount in controversy—approx. CHF (…)—there is justification for increasing the permissible
hourly rate for representation by attorneys pursuant to art 10(3) Regulations concerning Costs
and Reimbursements in Federal Administrative Tribunal Proceedings to a maximum of CHF
450. Hence the maximum hourly rate for representation by attorneys to be applied to the cost
note submitted by the complainant is reduced from CHF 650 to CHF 450. Furthermore the
hourly rate for non-attorney professional representation is set at CHF 300. After these
adjustments, further consideration of costs is based on a cost note in the amount of CHF (…)
([…] hours @ CHF […] plus […] hours @ CHF 300 plus […] hours @ CHF 220).
9.3.2. The next step is to assess the proportion of the claimed expense that is eligible for
reimbursement under the relevant provisions and regulations. The costs incurred by the parties
are only considered necessary if they appear to be indispensable to the appropriate, effective
pursuit of or defence against legal action. Although the Federal Administrative Tribunal is
generally minded to exercise a certain degree of restraint when making this assessment (cf.
Moser/Beusch/Kneubühler, op.cit., ss. 4.68 and 4.86), both the reply submitted by the
complainant on 26 November 2010 and the surrejoinder dated 28 December 2010 appear to be
particularly unnecessary within the meaning of the aforementioned norms (cf. cons. 9.2). The
assertions made by the complainant here on the issue of jurisdiction—an issue which the
tribunal must address ex officio—are by definition unnecessary, and in substantive terms these
two submissions fail to add anything to what was already in the complaint submission.
Consequently the amount claimed is reduced accordingly, taking the amount in consideration
down to CHF (…) ([…] hours @ CHF 450 and […] hours @ CHF 300).
9.3.3. Finally, because the complaint is only partially upheld, the total reimbursement amount
resulting from this calculation is further reduced to CHF […].
Accordingly, the Federal Administrative Tribunal finds:
1.
The complaint is partly upheld in accordance with the above considerations. The decision of the
Federal Tax Administration of 29 July 2010 is set aside. The Federal Tax Administration is
ordered to grant the following withholding tax refunds to the complainant: CHF (…) (application
no 13855), CHF (…) (application no 13856), CHF (…) (application no 13857) and CHF (…)
(application no 279535).
2.
Of the court costs of CHF 50,000 the complainant is ordered to pay CHF 5,000, to be set off
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against the CHF 50,000 advance on costs paid by the complainant. Once this judgment has
entered into force, the surplus of CHF 45,000 shall be reimbursed to the complainant.
3.
The FTA is ordered to pay the complainant CHF (…) by way of reimbursement for legal costs.
4.
This judgment is to be notified to:
– the complainant (court document)
– the Lower Instance (ref. no. SR-8’901’118/ MUD 2221; court document)
Presiding Judge: Michael Beusch
Secretary of the Tribunal: Jürg Steiger
Legal remedy:
This judgment may be challenged by way of appeal under public law lodged with the Federal
Supreme Court, 1000 Lausanne 14, within 30 days of notification (art 82 et seq., 90 et seq. and
100 of the Federal Act of 17 June 2005 on the Federal Supreme Court, Bundesgerichtsgesetz,
BGG, SR 173.110]). Such appeal should be couched in suitably official language and must
contain the prayers for relief, the reasons for them, an indication of the evidence adduced and
the complainant party’s signature. The disputed decision and such evidence as is available to
the complainant party must be enclosed (art 42 Federal Supreme Court Act).
Despatched: 12 March 2012
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