Swiss federal withholding tax: correction of malpractice

Many Swiss taxpayers, who were charged heavy amounts of late interest as a result of their belated filing of the notification regarding dividend payments, will benefit from an amendment to the WHTA that entered into force on February 15 2017. The Swiss Confederation will have to repay CHF 600 million ($596 million).

Distributions of the profits of corporations are subject to withholding tax at 35%. In the normal case envisaged in the Act, the company pays 35% to the Federal Tax Administration (FTA) and only 65% to the shareholders. In the case of domestic dividends (Swiss company to Swiss shareholder), the shareholders have to apply for the tax refund by, or in addition to, declaring the distribution as income and they then receive the refund as a separate repayment or as a deduction from their personal income tax liability. The intention is to ensure that the shareholders do in fact declare the receipt of the dividend to the tax authorities responsible for them. Thus, in the Swiss national context, withholding tax has the purpose of safeguarding taxation. In an international context (dividend from a Swiss company to a foreign shareholder) the shareholders may be able to reclaim the withholding tax, in whole or in part, according to the applicable international tax agreement (double tax treaty or EU savings tax agreement). In an international context, therefore, withholding tax primarily has a purpose of charging tax.

Where dividends are distributed within a group of companies, the taxpayer can be permitted to perform its withholding tax obligations by making a notification to the FTA where the payment of the tax would lead to unnecessary trouble or to obvious hardship. Provided that the taxpayer fulfils the substantive conditions for being allowed to use the notification procedure, he must declare the taxable payment (the dividend) within 30 days after the date when the claim to tax arose and notify the FTA of it (in an international context, generally if a permit giving permission in principle to use the notification procedure has been granted in advance), or apply for the notification procedure to be used (in a national context). As a consequence of the notification, the obligation to pay the withholding tax ceases to apply. The notification procedure was first introduced in a national context, with the idea of avoiding administrative trouble and the unjustified outflow of liquid funds. The notification procedure thus offers an advantage in cash flow terms, since the shareholder receives 100% of the dividend immediately and, in addition, there is no time-consuming refund procedure. The notification procedure is, therefore, used for internal dividends within the group in the majority of all cases. This statutory exception has thus become the general practice. In an international context, there has also been a change from the refund procedure to the notification procedure.

In most cases, the above-mentioned 30-day limit begins to run from the date on which the general meeting of shareholders approves the annual accounts and decides to pay the dividend. Should the general meeting decide on a specific (later) due date for payment of the dividend, the time limit starts on that due date. If the notification or the corresponding application is not made within the 30-day time limit, formerly (before 2011) the notification procedure was generally allowed if the other conditions were fulfilled, i.e. the withholding tax did not actually have to be paid, despite the belated filing of the notification, and no late interest was charged.

In 2011, in a case concerning the application of the notification procedure for withholding tax and the consequences of a belated notification, the Federal Supreme Court held that the time limit of 30 days mentioned in the Ordinances was to be interpreted as a strict time limit and that the notification procedure could, therefore, not be applied if the notification procedure form was not filed in time. Based on this decision, the FTA considered it legitimate to apply a very inflexible procedure on the notification procedure regarding withholding tax on dividends, without taking into consideration whether the company fulfilled all the substantive conditions for the application of the notification procedure or not.

Before 2011, however, belated notifications of dividends were generally accepted without reservation by the tax administration. After 2011, the tax administration refused to approve the application of the notification procedure for dividends in the case of belated notifications (without making a prior announcement of this change of practice, and without any transition period) and demanded that the tax should in effect be paid. This affected both large groups of companies and SMEs equally.

Invoices regarding late interest at 5%, allegedly due for the period from the expiry of the above-mentioned time limit until the actual payment of the withholding tax, were then issued by the FTA. However, no tax was actually due because in these cases the substantive conditions for the application of the notification procedure and/or the entitlement to a tax refund were not disputed. Significant claims for late interest arose as a result, varying according to the time that elapsed between the due date of the dividend until the FTA's demand for payment of the withholding tax and/or the actual payment, which were out of all proportion to the taxpayer's erroneous behaviour (belated filing of a form, when all other requirements were fulfilled). The late interest of 5% thus took on the character of a frequently unreasonably high fine and was not compensated for – as is usual where late interest is due – by the (here non-existent) advantage gained by the taxpayers of not actually having to pay the withholding tax. Moreover, the charged interest rate of 5% differed considerably from the market interest rate and was incidentally also higher than the maximum rate of interest allowed by the FTA on loans by a shareholder to the company. This led to the FTA demanding a total late interest of CHF 600 million from taxpayers for what are in effect fictitious taxes. For this reason, many taxpayers started legal proceedings with regard to the disputed late interest.

As well as the above-mentioned late interest, the taxpayers that were affected also had to pay very large amounts of withholding tax to the FTA in order to stop the late interest growing and so that they could then apply for the refund of this withholding tax on the following day. Such a procedure not only took a disproportionate amount of effort by the taxpayers affected, but in some cases it even led to an existential crisis because, for example, an SME was not in a position to raise the corresponding cash amounts. Furthermore, the procedure was clearly in contradiction to the arguments used with a view to dividends in the Swiss national context when the notification procedure within a group of companies was introduced in 2001, namely that its purpose was to avoid unnecessary trouble and/or unnecessary administrative work for the taxpayer and the tax administration.

This procedure by the FTA caused a considerable loss of confidence and irritation on the part of Swiss and foreign taxpayers and investors, and led to the rule of law being called into question, which alarmed politicians.

After exhaustive discussions during the past few years, the Upper Chamber of Parliament, in agreement with the Lower Chamber, passed a retroactive amendment to the Withholding Tax Act in September 2016. The result of this was that a belated notification regarding dividends and/or a belated application for the use of the notification procedure should not result in a denial of the notification procedure and thus not lead to late interest, but to a fine (provided that the substantive conditions for the notification procedure are met). Therefore, the change of practice made by the FTA has been reversed. The time limit for starting a referendum on this legal amendment expired on January 19 2017 without being used and the Federal Council put the provisions into force on February 15 2017.

The new provisions apply retroactively to situations that occurred before the amendment of the law came into effect, unless the claim for tax or late interest was already statute-barred or finally assessed before January 1 2011.

Due to this retroactive application of the new provisions, the cases affected by the unannounced tightening of the practice can, in principle, be corrected. Where a taxpayer has paid late interest from 2011 onwards, although the substantive conditions for the application of the notification procedure were fulfilled, this late interest will now be repaid on application without interest. The application must be filed by February 14 2018.

The inflexible procedure by the FTA was contrary to the spirit and purpose of the notification procedure and there is no objective justification for the situation where large withholding tax amounts are paid to the tax administration merely due to the late filing of a form, and then have to be reclaimed in a time-consuming process, when it is clear that in the end no withholding tax will remain with the tax authority. It is also difficult to understand from an economic point of view why high late interest claims should arise where no tax will actually remain with the tax authority and the tax authority does not suffer any loss. The strict procedure of the FTA is grossly disproportionate to the taxpayer's misdemeanour (meaning the belated filing of a form). An appropriate fine because of the late declaration or notification accords much better with such misdemeanours.

Therefore, it should be noted that this amendment to the Act continues to support the purpose of safeguarding taxation and it does not in any way protect cases where there is no claim to apply the notification procedure or obtain a tax refund. The relief given here will only apply if "the substantive conditions for performing the tax obligations by way of the notification procedure are fulfilled". It is undisputed that, if the requirements for the permit in an international context are not met, the notification procedure cannot be applied and late interest is due. In a national context, the FTA also has the possibility to later verify the withholding tax (with interest) being subsequently levied if the notification procedure has been wrongly used.

Further, the amendment of the Act is in line with statutory provisions concerning other kinds of tax. In this connection, the provision of the VAT Act (Article 87, paragraph 2) should be noted, which states that no late interest is due if it is the result of an error which, had it been correctly processed, would not have led to loss of tax for the government. Thus, according to the VAT Act (Article 27, paragraph 2 (b)), the FTA would have to waive the levy of VAT that was wrongly shown on an invoice if the taxpayer proves that the government has not suffered a loss of tax as a result.

Companies for which the notification procedure on dividend distributions was not granted during the past few years because of the belated filing of the corresponding forms, and which have consequently paid late interest, should now apply for repayment of the interest by filing form 1 RVZ – Application for Repayment of Late Interest Already Paid with the FTA. It is advisable to file the application by registered post, since the burden of proof that the time limit has been met is with the company. Details about the company that paid the interest (including details of its bank account) and about the late interest payment itself (including the attachment of a copy of the late interest statement or the corresponding decision) must be given in the application. No repayment of late interest will be made without an application having to be made.

Companies for which the notification procedure on dividend distributions was not granted during the past few years because of the belated filing of the corresponding forms, and which consequently were sent an invoice for late interest, but have not paid any late interest (e.g. in connection with a pending/suspended appeal procedure), should ensure that the invoices are not paid but are cancelled by the FTA. According to the FTA's media release, such late interest invoices should be cancelled without a request having to be made. As soon as the cancellation has taken place, a written confirmation should be sent to the companies. In order to obtain clarification in these cases, it is nevertheless advisable to make a request to the FTA using Form 1 RVZ and asking for a confirmation that the late interest is no longer due.

Looking ahead, it will still be necessary to ensure that the time limit of 30 days for filing the corresponding forms is met, even if the notification procedure is granted and no late interest is due (provided that the substantive conditions are fulfilled), since the belated filing of the notification procedure will otherwise be punished by a fine up to a maximum of CHF 5,000.

When calculating the time limit, weekends are also included. The time limit starts to run either from the date of the general meeting of shareholders, or from the due date fixed at the general meeting. The office responsible for filing the notification procedure must be informed about the events of the general meeting in order to be able to file the forms within the time limit. It is advisable to send the forms to the FTA by registered post so that in case of a dispute it is possible to prove that the notification was made within the time limit. In an international context, with regard to applications for a permit giving permission in principle (forms 823 B / 823 C), it remains advisable to file these in advance of the due date of the dividends and to have the permit extended regularly (before its three-year validity has expired).

Olivier Eichenberger Certified Tax Expert, Senior Manager International Corporate Tax KPMG Switzerland Tel: +41 58 249 41 67 oeichenberger@kpmg.com www.kpmg.ch Olivier Eichenberger is a senior manager with KPMG's international corporate tax group based in Zurich. He has a Doctoral (PhD) and master's degree in business administration (accounting, controlling, finance) and is a certified Swiss tax expert. Olivier joined KPMG Switzerland in 2008 after working for four years as a scientific assistant at the chair of tax law at the University of St. Gallen. Olivier provides tax planning, tax accounting, tax consulting and tax compliance services to various international and Swiss corporates in different sectors, including international restructuring projects and financing. Olivier's areas of work include international and national corporate tax, stamp duties and withholding tax. He also has broad experience in inbound investments into Switzerland and is leading KPMG's working group for the Swiss corporate tax reform where he is closely involved in developments of the Swiss corporate tax legislation. He regularly publishes articles in leading tax publications.