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From tax optimization to tax evasion

Xavier Oberson, Professor at Geneva University, Attorney-at-Law, Partner Oberson Abels

“Everyone has the right to organize their affairs in such a way as to pay the least amount of tax possible”. This principle is generally accepted every where. Even the United States Supreme Court or the Swiss Federal Tribunal have recognized this right. However, there has recently been a subtle challenge to this rule.

How far does it remain legal, or even ethical, to arrange to reduce one’s tax burden? May an overly aggressive tax planning even result in criminal tax law penalties? We will try to provide some answers to these interrogations.

At first, as the most authoritative case law recognizes, tax savings as such are absolutely legal. Moreover, from the point of view of a market economy, is it not justified to reduce its costs with a view to the optimal allocation of resources? However, this apparent rule is not so easy to implement here because it is necessary to consider the specific nature of the tax burden, which must be borne by all, in accordance with the constitutional principle of equal treatment.

Consequently, very early on, at least as early as the 1930s, Swiss law introduced a first barrier to tax planning based on the general principle of the prohibition of abuse of rights, known as the theory of “tax evasion”. From this point of view, a taxpayer commits such an abuse when the form or structure chosen is unusual, it has the exclusive purpose of saving taxes and when

said form or structure put in place effectively leads to such saving. This rule thus allows the administration and the courts to counteract abusive or artificial schemes and to tax them according to their economic reality. It still applies today and aims to thwart an operation, apparently legal, but whose unusual and artificial nature can only be explained by the final and effective aim of saving taxes. For example, an independent entrepreneur who, shortly before retirement, transforms the business into a public limited company (SA) and then sells the shares to a third party in order to realize a tax-free capital gain, would be treated as if the business had in fact been liquidated, thus not transformed into a SA, and therefore the taxpayer would be taxed on a business profits from liquidation. Subsequently, from the 1970s onwards, case law went even further.

Xavier Oberson, Professor at Geneva University, Attorney-at-Law, Partner Oberson Abels


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