Derivatives and beneficial ownership under tax treaties
15 mars 2012 –
Derivatives and beneficial ownership under tax treaties – new Swiss court case
The first published court case worldwide dealing with beneficial ownership in tax treaty law with respect to total return swaps in a tax treaty context was handed down by the Swiss Federal Administrative Tribunal on 7 March 2012 and communicated to the parties on 13 March 2012 (judgment A-6537/2010 of 7 March 2012). Walder Wyss is proud to announce that the taxpayer that it represented has won the case and obtained a refund of the Swiss withholding tax in the amount of CHF 54 million.
In the case now decided, in 2007, a Danish bank entered into total return swaps with counterparties in the European Union and the United States with respect to Swiss equities. Under a total return swap, the long party promises to pay to the counterparty the amount of appreciation of the share price of a given equity or basket of equities and an amount corresponding to the dividend distributed, while the counterparty undertakes to pay the amount of depreciation of the share price and a margin. In order to hedge the transaction, the Danish party acquired the corresponding amount of the underlying Swiss equities.
On the shares so acquired, a dividend was paid on which the Swiss withholding tax of 35% was levied. The Danish shareholder asked for refund under the double taxation convention between Switzerland and Denmark of 1974, which provided for a full refund of the withholding tax (the convention has since been amended and now provides for a final withholding tax of 15%).
The Swiss Federal Tax Administration refused the refund, arguing that, because of entering into the total return swap transactions, the Danish bank lacked beneficial ownership and committed treaty abuse. In addition, it claimed repayment of the refund of the withholding tax granted the previous year in the amount of CHF 38 million and interest at the rate of 5% p.a.
On behalf of the Danish shareholder, Martin Busenhart and Marcus Desax of Walder Wyss filed a complaint with the Federal Administrative Tribunal. The Tribunal granted the complaint, finding beneficial ownership and, given the fact that the Danish bank has offices, personnel and a wide commercial activity, lack of treaty abuse. It granted the refund of the 2007 withholding tax, dismissed the Federal Tax Administration’s claim for repayment of the 2006 refund and awarded attorney's fees in the amount of CHF 136’000 against the Federal Tax Administration.
The Federal Tax Administration has until 27 April 2012 to appeal the matter to the Swiss Supreme Court.
Beneficial ownership is a highly controversial issue in international tax, in particular after that the OECD has issued its discussion draft on the matter in April 2011. So far, worldwide, there are no reported court cases on beneficial ownership in the context of derivatives. Hence, the Swiss case is likely to attract worldwide attention and may also influence the work of OECD in this area.