Judgment of 7 March 2012 - Walder Wyss Ltd.

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A-6537/2010 (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 Translation © Walder Wyss Ltd. 16 / 23
A-6537/2010 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 Translation © Walder Wyss Ltd. 17 / 23
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Judgment of 7 March 2012 - Walder Wyss Ltd.

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