December 14 2020

Federal Supreme Court Rules on Refund of Dividend Withholding Tax

Source: IBFD Tax Research Platform News

In its decision of 27 November 2020 (case 2C_835/2017), the Swiss Federal Supreme Court decided a case relating to the refund of Swiss dividend withholding taxes by claiming the benefits under the Switzerland - United States Income Tax Treaty (1996) (as amended through 2009).

(a) Facts. The plaintiff, an individual, received from his participation in a Swiss corporation dividend distributions in the years 2008 and 2009. The distributing corporation deducted 35% anticipatory tax on the gross dividend payments and remitted it to the Federal Tax Administration. On 13 January 2011, the plaintiff filed a form requesting the refund of CHF 4,550,000, equalling 20% of the gross dividend distributions. On the refund form, he indicated a residence address in the United Kingdom. The Federal Tax Administration approved the request and remitted the full refund claimed to the plaintiff. On 12 August 2012, the plaintiff filed a further form requesting the refund of CHF 1,174,491.80 anticipatory tax deducted for dividend distributions he had received from various Swiss corporations in 2010. Again, he indicated a residence address in the United Kingdom. Upon request by the Federal Tax Administration, the plaintiff clarified that he was resident in the United Kingdom but not domiciled. He would benefit from a taxation on a remittance basis, i.e. he would only be taxed on income remitted to the United Kingdom. He added that, due to his US citizenship, he would be taxed in the United States on a worldwide basis and that he would also be entitled to benefits granted under the Switzerland - United States Income Tax Treaty (1996) (as amended through 2009). After a further exchange of letters, the Federal Tax Administration rejected the application and denied the refund. The Federal Tax Administration was not convinced that the plaintiff met the conditions of article 4(1)(a)(second sentence) of the Switzerland - United States Income Tax Treaty (1996) (as amended through 2009). Consequently, the plaintiff would not be entitled to treaty benefits. Moreover, in a formal decision, the Tax Administration obliged the plaintiff to pay back the refund of anticipatory tax for CHF 4,550,000 related to the years 2008 and 2009. In addition, the payment of debit interest of 5% per year would be due on the outstanding claim. Upon the plaintiff's objection, the Federal Administrative Court confirmed the decision of the Federal Tax Administration. The plaintiff filed an appeal to the Federal Supreme Court.

(b) Issue. Switzerland levies a withholding tax of 35% on dividend payments made by Swiss corporations (anticipatory tax, Verrechnungssteuer). A partial or full refund of withholding taxes is granted in accordance with applicable tax treaties. The issue was whether the recipient was entitled to claim the treaty benefits under the Switzerland - United States Income Tax Treaty (1996) (as amended through 2009) to obtain a refund of 20% anticipatory tax calculated on the gross dividends. The plaintiff never claimed the application of the Switzerland - United Kingdom Income Tax Treaty (1977) (as amended through 2017). Among other conditions, the application of the treaty to a US citizen that is not a resident of Switzerland requires a substantial presence, a permanent home or an habitual abode of the plaintiff in the United States (article 4(1)(a)(2nd sentence) of the Switzerland - Unite. The Federal Tax Administration held that the condition was not met, even though the plaintiff argued to dispose of a permanent home at the home address of his parents in said country. The tax administration argued that the effective arrangement in the home of his parents did not fulfil the requirement of having a permanent home in the United States.

(c) Decision. The Federal Supreme Court rejected the appeal and confirmed the decision taken by the Federal Administrative Court and the argumentation submitted by the Federal Tax Administration. The Court saw no reasons to deviate from the merits of the case prepared by the Federal Tax Administration.