A contribution from Philippe Kenel, Doctor of Law, lawyer in Pully-Lausanne, Geneva and Brussels, Partner, Valfor Avocats & Daniel Gatenby, LL.M. Tax, lawyer in Pully-Lausanne and Geneva, Valfor Avocats
Introduction
The purpose of this article is to examine the conditions under which a legal entity with its registered office abroad is nonetheless liable to tax in Switzerland. As we shall see, such a requalification has important consequences not only for the company in question, but also for its shareholders, particularly if they are subject to lump sum taxation.
Applicable Swiss and international legal provisions
Under Swiss domestic law, according to article 50 of the Federal Act of 14 December 1990 on Direct Federal Taxation (FDTA), “legal entities are subject to tax on the basis of their personal nexus when they have their registered office or effective management in Switzerland”. Similarly, article 20 paragraph 1 of the Federal Act of 14 December 1990 on the Harmonisation of Direct Taxes of the Cantons and Municipalities (FHTA) stipulates: “joint stock corporations, cooperative companies, associations, foundations and other legal entities are subject to tax when they have their registered office or effective administration in the canton”. Paragraph 2 of the same article specifies that “foreign legal entities, commercial companies and communities of persons are assimilated to Swiss legal entities which they most closely resemble by their legal form or their effective structures”. The fact that a company is taxed in Switzerland by virtue of these provisions means that it is subject to tax on capital and profits in Switzerland. Furthermore, article 9 of the Federal Act of 13 October 1965 on Withholding Tax (FWTA) also provides that “legal persons or commercial companies without legal personality whose registered office is abroad, but which are effectively managed in Switzerland and carry on business there” are deemed to be domiciled in Switzerland. If this is the case, the Swiss Confederation levies withholding tax, normally at a rate of 35%, on income from securities (e.g. a dividend distribution).
At the international level, Article 4 of the OECD Model Tax Convention on Income and on Capital (2017 version) (OECD MC) provides as follows: “For the purposes of this Convention, the term ‘resident of a Contracting State’ means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature, and also includes that State and any political subdivision or local authority thereof as well as a recognised pension fund of that State […]” (par. 1). “Where by reason of the provisions of paragraph 1 a person other than an individual is a resident of both Contracting States, the competent authorities of the Contracting States shall endeavour to determine by mutual agreement the Contracting State of which such person shall be deemed to be a resident for the purposes of the Convention, having regard to its place of effective management, the place where it is incorporated or otherwise constituted and any other relevant factors […]” (par. 3).
As for the conventions signed by Switzerland, by way of example, Article 4 paragraph 1 of the Convention concluded on 21 January 1993 between the Swiss Confederation and the Grand Duchy of Luxembourg for the avoidance of double taxation with respect to taxes on income and on capital provides that “For the purposes of this Convention, the term “resident of a Contracting State” means any person who, under the laws of that State, is liable to tax therein by reason of the person’s domicile, residence, place of management or any other criterion of a similar nature’. Paragraph 3 specifies that “where by reason of the provisions of paragraph 1 a person other than an individual is a resident of both Contracting States, he shall be deemed to be a resident of the State in which his place of effective management is situated”.
