Deemed dividends can result from non-arm’s length transactions either in form of an underpriced supply to a related party or, alternatively, when receiving a supply from a related party and overpaying it. In either case, taxable profit needs to be adjusted in order to be compliant with Swiss tax law.

 

Apart from corporate income tax (“CIT”) consequences, deemed dividends distributed by a Swiss corporate taxpayer are also subject to Swiss withholding tax (“WHT”) at a rate of 35% and must be duly declared and paid to the Swiss Federal Tax Administration (“SFTA”) to the extent it cannot be settled by means of the notification procedure. In any case, the WHT must be passed on to the recipient (beneficiary) of the deemed dividends, otherwise a gross-up applies.

 

In a recent ruling, the Swiss Federal Supreme Court (“SFSC”) affirmed a lower court’s decision, whereby an employee of a Swiss corporation entrusted with its accounting and tax affairs was made personally responsible and fined for contingent intent of WHT evasion based on Swiss administrative criminal law.

 

In the case at hand, excessive interest on an intra-group loan was added back to taxable profit of the Swiss borrower as a result of a CIT audit and reflected accordingly in the final tax assessments issued upon completion of the tax audit. Beforehand, the amounts of interest added back as non-deductible business expenses were discussed and agreed between the tax inspector and the person responsible for accounting and tax affairs within the taxpayer’s organization.

 

However, no corrective action was undertaken by the taxpayer as regards WHT implications of the excessive interest payments requalified as deemed dividends for CIT purposes.

 

Notwithstanding the fact that the obligation to comply with Swiss WHT law remains with the taxpayer who also remains liable for any WHT payments due, Swiss administrative criminal law stipulates also a personal responsibility of any person entrusted with the taxpayer’s tax affairs and failing to comply with Swiss tax law when acting with the contingent intent of tax evasion.

 

Given that in the case at hand the employee was actively involved in the CIT audit resulting in deemed dividends, the SFSC concluded that the employee should have known the WHT implications of such deemed dividends and his failure to initiate corrective action as regards WHT compliance was with the contingent intent of WHT evasion for which he was made personally responsible. In this regard, it did not matter whether this person had management power, played a subordinate role, or took over as a deputy.

 

This supreme court decision confirms that it is not only the taxpayer itself who is obligated to comply with Swiss tax law and liable for due taxes being paid. But that also other persons actively involved in the taxpayer’s tax affairs can be held personally responsible and fined for the taxpayer’s non-compliance if it can be proven that they were acting with the contingent intent of tax evasion.

 

This personal liability is stipulated by Swiss administrative criminal law and does generally not entail a personal liability for the taxpayer’s unpaid taxes. Insofar this personal liability needs to be distinguished from the subsidiary personal (joint and several) liability board members of a taxpayer may face if the latter does not respectively is not in a position to pay its taxes and this is due to board members having violated their duties of care.

 

In case deemed dividends are added back to the taxable profit by the tax authorities, one must not lose sight of the obligation for a duly undertaken WHT declaration in order to be compliant with Swiss WHT law.

This applies to all persons entrusted with a taxpayer’s tax affairs, regardless of whether they have management power or not.

 

Even though the court decision only deals with personal fines in connection with tax evasion in the context of Swiss WHT, it may have more far-reaching implications as regards other Swiss taxes concerned, e.g. Swiss VAT on business expenses requalified as deemed dividends for which input VAT was claimed but not corrected upon the requalification of those expenses as deemed dividends.