March 2023 / Switzerland

In a recently published decision of 16 February 2023 (A-1954/2022), the Swiss Federal Supreme Court decided on a case concerning the tax treatment of a debt waiver between related companies. The Supreme Court ruled in favour of the tax authorities and found that the debt waiver constituted a hidden profit distribution.

The case concerned a stock company (A) that rented office space and subsequently sublet the office to another stock company (F). F provided services of all kinds, especially within project development. The owner of the office space was not prepared to conclude a rental agreement with F because the latter had not provided the required securities.

Therefore, A signed a rental agreement and agreed to sublet the space to F. However, F did not pay any rent to A because of financial difficulties. During the relevant years, an individual taxpayer (B) was the sole shareholder of A and held more than 50% of the shares in F. The tax authorities assessed A and requested the payment of CHF 130,163.30 of withholding tax as the waiver of the rental payments constituted a monetary benefit subject to withholding tax at a rate of 35%. A appealed against the decision.

The Supreme Court ruled in favour of the tax authorities and found that the debt waiver constituted a hidden profit distribution based on the ownership relationships between A, F and B. The Court noted that hidden profit distributions are subject to withholding tax of 35% as regular profit distributions. The Court held that the waiver of the rental debts granted by A to F constituted a benefit for F and deprived A of income. The ultimate beneficiary of the debt waiver is B controlling both companies. The debt waiver was only granted because of the close relationship between A and F (both are under the control of B). A would not have given such a debt waiver to an unrelated third party. The Court further noted that a hidden profit distribution required that the unusual character of the benefit, particularly the disproportion between the benefit granted and the consideration received, must have been recognizable to the acting corporate bodies. The Court found that it is obvious that the companies involved must have recognized this disproportion as A showed irrational commercial behaviour as a prudent businessperson would not have continued the sublet agreement without consideration. It would not have been acceptable for an unrelated third party not to receive rent for years.

As an important business and research location, Switzerland is committed to the development of comprehensive international rules on digital trade. Switzerland supports cross-border data flows and opposes restrictive localization requirements. Switzerland also contributes to the development of long-term, broad-based solutions for the digital economy in various international organizations.

Switzerland secures market access for its companies and is committed to ensuring best possible legal certainty in the area of digital trade. This is done on the one hand through comprehensive rules within the framework of free trade agreements, bilaterally or within EFTA, and on the other hand by means of active participation in the joint initiative on e-commerce within WTO, “Joint Statement Initiative on E-Commerce (JSI)”.

To strengthen legal certainty, Switzerland is also examining the use of further instruments, such as specific trade agreements on digital trade ("Digital Trade Agreements"). Improvements are constantly being sought in specific sub-areas, for example in the area of data protection, including the Swiss-U.S. Privacy Shield or standard contractual clauses on data protection for companies. Switzerland closely monitors international projects regarding data protection equivalence, particularly with regard to the UK and the EU. Other similar strategies are being examined where necessary.

To enable innovation and growth, regulations of the digital economy in Switzerland must preserve economic openness in the future. For example, restrictions such as data localization requirements must be avoided in legislative projects, as these can inhibit trade and conflict with Switzerland's international obligations.

Switzerland is also helping to bridge the digital divide by supporting developing countries in establishing reliable economic frameworks for e-commerce. This is done, for example, within the framework of the "E-Commerce and the Digital Economy" (ECDE) program implemented by the United Nations Conference on Trade and Development (UNCTAD).

According to a press release of 9 March 2023, published by the European Free Trade Association (EFTA), Free Trade Association (EFTA), a first round of negotiations for a digital economy agreement (DEA) between the EFTA states (Iceland, Liechtenstein, Norway and Switzerland) and Singapore took place virtually on 8 March 2023. The second round of negotiations is scheduled to take place in April 2023.

Source: Admin.ch