"Switzerland does not grant mutual assistance for the prosecution of fiscal offences that are the subject of investigations by a foreign authority."(1) This statement in the Federal Department of Justice and Police Guidelines on International Mutual Assistance in Criminal Matters reflects a cornerstone of Swiss policy regarding requests for legal assistance in criminal matters.(2) The policy is based on Article 3(3)(1) of the Federal Act on International Mutual Legal Assistance in Criminal Matters (the Mutual Assistance Act), which – in line with Article 2(a) of the 1959 European Convention on Mutual Assistance in Criminal Matters – states that "a request shall not be granted if the subject of the proceedings is an offence which appears to be aimed at reducing fiscal duties or taxes".
However, this rule is subject to an important exception, as highlighted by the Federal Criminal Court in an October 14 2015 decision.(3) If a party domiciled in the European Union seeks to avoid tax by artificially shifting turnover (and eventually profits) to Switzerland, mutual legal assistance to prosecute fiscal offences may be granted to the jurisdiction concerned on the basis of the Schengen rules on combating fiscal offences in the field of indirect taxation.(4)
In a request for international judicial assistance in criminal matters, the German prosecutor claimed that three individuals resident in Germany (Parties B, C and D) had transacted business through a Swiss limited liability company, pretending that the company was domiciled in Switzerland. While the company had its statutory seat and registered office in Switzerland, the German authorities submitted that the Swiss domicile was purely fictitious. In fact, the company's registered office was located at the private apartment of a Swiss resident providing fiduciary services (Party A). No relevant corporate activity had ever taken place in Switzerland; the company was de facto managed by Party B in Germany. The German authorities thus claimed that the company should be deemed a German undertaking that was fully liable to pay corporate tax, profit tax and value added tax (VAT) in Germany; Party B was accordingly charged with fraudulent evasion of these taxes. Further, since Parties B, C and D had – personally or through the intermediary of a German legal entity controlled by them – sold services to the Swiss company and knowingly portrayed such services as rendered abroad for VAT purposes, they also faced prosecution for evasion of VAT.
Party A appealed the decision of the Swiss authorities to grant the German request for judicial assistance and transmit pertinent documents to the German prosecutor. The appeal was mainly based on the argument that the German proceedings concerned fiscal matters and that Switzerland was thus prohibited from providing legal assistance.
Federal Criminal Court decision
Merits of request for assistance regarding alleged evasion of direct taxes
The court's analysis of the merits first highlighted – by reference to Article 3(3)(1) of the Mutual Assistance Act and Article 2(a) of the 1959 convention – the general rule that Switzerland is prohibited from assisting foreign penal proceedings in fiscal matters by way of mutual judicial assistance, unless the exception in Article 3(3)(2) of the Mutual Assistance Act applies. The latter provision stipulates that mutual assistance in criminal matters may be granted – and, based on the longstanding case law of the Federal Criminal Court, must be granted –(5) if the subject of the foreign criminal proceedings is an act which would be considered as fraud on a public due in Switzerland (Consideration 5.2.3).
The term 'fraud on a public due' is defined in Article 14(2) of the Federal Act on Administrative Criminal Law as conduct whereby the perpetrator fraudulently deceives public authorities so that the municipality:
- is substantially deprived of dues, contributions or other payments; or
- incurs a financial loss in another manner.
Where a person utilises forged or false deeds (eg, financial statements, salary certificates or other certificates) in order to deceive the tax authorities, such conduct always qualifies as an offence under Article 14(2) of the Federal Act on Administrative Criminal Law. That said, fraud on a public due need not involve the use of false or falsified deeds. Pursuant to case law of the Federal Criminal Court, the use of a scheme of lies, other obscure machinations or malicious collaborations would also qualify as fraudulent conduct. However, the simple non-declaration of facts to the competent tax administration does not, as a rule, constitute fraud (Consideration 5.2.3).
In mutual legal assistance proceedings, the requesting authority must provide a statement of facts submitting those elements which constitute fraud from a Swiss legal perspective. While it is not for the Swiss authorities in mutual legal assistance proceedings to adjudicate whether the allegations raised in the foreign request are true, the Federal Criminal Court requires the factual circumstances to be substantiated, so that attempts by the requesting authority to circumvent the prohibition of assistance in fiscal matters may be excluded (Consideration 5.2.4). However, as the court noted, the requirement specifically to substantiate the factual basis of the request for judicial assistance applies only in matters concerning the evasion of direct taxes – not in cases where the evasion of indirect taxes is at issue (Consideration 5.2.5).
The court went on to state, that pursuant to longstanding Swiss case law, the use of domiciliary companies to avoid or reduce the tax burden cannot be considered malicious and thus will not amount to fraudulent conduct. As the German authorities had failed to submit further elements supporting the allegation of fraud, the court concluded that the prerequisites for judicial assistance for the prosecution of the evasion of direct taxes were not met (Consideration 5.4.2)
Merits of request for assistance regarding alleged evasion of indirect taxes
The court's analysis of the merits of the request regarding the alleged evasion of indirect taxes primarily relied on the Schengen Implementation Agreement.
By ratifying the Schengen Implementation Agreement, Switzerland agreed to implement and apply the Schengen provisions,(6) including the 1990 Convention Implementing the Schengen Agreement.
Pursuant to Article 50(1) of the 1990 convention, the contracting parties undertook:
"to afford each other, in accordance with the  Convention and the Treaty referred to in Article 48, mutual assistance as regards infringements of their laws and regulations on excise duties, value added tax and customs duties."
In Article 51 of the 1990 convention,(7) the contracting parties further agreed not to:
"make the admissibility of letters rogatory for search or seizure dependent on conditions other than the following:
(a) the act giving rise to the letters rogatory is punishable under the law of both Contracting Parties by a penalty involving deprivation of liberty or a detention order of a maximum period of at least six months, or is punishable under the law of one of the two Contracting Parties by an equivalent penalty and under the law of the other Contracting Party by virtue of being an infringement of the rules of law which is being prosecuted by the administrative authorities, and where the decision may give rise to proceedings before a court having jurisdiction in particular in criminal matters;
(b) execution of the letters rogatory is consistent with the law of the requested Contracting Party."
Under Article 50(4) of the 1990 convention, mutual assistance may be refused only in cases:
"where the alleged amount of duty underpaid or evaded does not exceed ECU 25000 or where the presumed value of the goods exported or imported without authorisation does not exceed ECU 100000, unless, given the circumstances or the identity of the accused, the case is deemed to be extremely serious by the requesting Contracting Party."
The court thus examined whether the German request for judicial assistance alleged conduct which was punishable under Swiss law by a penalty involving deprivation of liberty of six months or longer. It pointed out that the evasion of VAT is indeed subject to a penalty of up to two years' imprisonment in aggravating circumstances, such as repeated violations of the law for financial gain.(8) Noting that the acts described in the German request spanned five years and resulted in a loss to the German fiscal authorities of at least €40,000, the court found that, had the conduct at issue occurred in Switzerland, it would have been subject to a criminal penalty of up to two years' imprisonment (Consideration 5.5.4).
Consequently, the court concluded that the German request was admissible to the extent that the evasion of indirect taxes was concerned. However, in accordance with Article 67(1) of the Mutual Assistance Act, it prohibited the German authorities from using the information furnished by Switzerland for purposes other than the prosecution of the evasion of indirect taxes (principle of specialty; Consideration 5.6).
The decision of the Federal Criminal Court confirms that the general principle under which Switzerland will not provide judicial assistance to support criminal prosecution of tax offences abroad except in case of fraud on a public due does not apply to cases where:
- the requesting state is a EU member state; and
- the conduct alleged by the requesting authority involves evasion of indirect taxes.
The use of legal entities with a fictitious Swiss domicile for tax purposes in commercial trade entails significant legal risks. These risks will gain even more significance due to ongoing efforts of the Organisation for Economic Cooperation and Development to combat unfair tax practices. Switzerland will take an increasingly critical stance towards legal arrangements without substance that simply purport to create a Swiss tax domicile.
For further information on this topic please contact Bernhard Loetscher or Axel Buhr at CMS von Erlach Poncet Ltd by telephone (+41 44 285 11 11) or email (firstname.lastname@example.org or email@example.com). The CMS von Erlach Poncet website can be accessed at www.cms-vep.com.
(1) International Mutual Assistance in Criminal Matters, Guidelines of the Swiss Federal Department of Justice and Police, 2009, page 22.
(2) The 2009 edition of the guidelines is available in English here.
(3) Case RR.2015.191; the decision is available in German here.
(4) See the Agreement between the European Union, the European Community and the Swiss Confederation on the Swiss Confederation's association with the implementation, application and development of the Schengen acquis (the Schengen Implementation Agreement); and the Cooperation Agreement between the European Community and its Member States, of the one part, and the Swiss Confederation, of the other part, to combat fraud and any other illegal activity to the detriment of their financial interests.
(5) See Federal Criminal Court Decision 125 II 250 dated April 19 1999, Consideration 2.
(6) See Article 2 of the Schengen Implementation Agreement in connection with Annex A.
(7) A similar rule is contained in Article 31(1)(a) of the Anti-fraud Cooperation Agreement.
(8) Article 97(2)(b) of the Federal Act on VAT.
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