By judgement dated 15 September 2016, the Swiss Federal Court overturned a decision of the Federal Tax Administration which had rejected the claim for refund of Swiss federal withholding tax levied on the dividend distributions of Swiss investments held indirectly by a Swiss pension institution through an Irish collective investment scheme (“CIS”). To the extent perceivable, this is the first time that the highest Swiss court addressed the question whether the tax transparency of a foreign CIS allows a Swiss resident investor to claim a refund of federal withholding tax levied on the underlying investments. 

Background

Switzerland levies federal withholding tax at the rate of 35% on certain capital income, in-cluding dividend distributions of Swiss corporations. The federal withholding tax is fully refundable for Swiss resident recipients, provided that they (i) are beneficially entitled to and (ii) correctly declare respectively account for the taxable income. In turn, a foreign resident recipient may only claim a (full or partial) refund of federal withholding tax if the provisions of a double tax treaty between Switzerland and the residence country of the investor provide so. 

For tax purposes, a CIS will typically be treated as tax transparent, meaning that it will not be considered as a taxable person and therefore generally not be entitled to claim treaty benefits. In case of Swiss investments held through a foreign CIS, a limited number of intergovernmen-tal understandings (concluded with Denmark, Germany, France, the UK, the Netherlands, Norway, Austria, Sweden and Spain) allow the foreign CIS to apply for the refund of the federal withholding tax in its own name, but only on behalf of the investors who are resident in the respective treaty states. Investors who are resident in a third party state would need to apply for a refund in their own name, which will generally fail due to the investor not being in a position to document the underlying dividend income which has been subject to Swiss withholding and reconcile it with his share of the earnings in the CIS.

In the case of Swiss resident investors, who would generally be entitled to a full refund of the federal withholding tax in case of a direct investment, the Swiss Federal Tax Administration so far refused to grant the refund if the Swiss investor held the investments indirectly through a foreign CIS (even if such CIS was treated as tax transparent for direct tax purposes). The Swiss Federal Tax Administration based its practise on art. 26 of the Federal Law on With-holding Tax, according to which a CIS established in Switzerland is entitled to claim the re-fund of federal withholding tax levied on its underlying investments in its own name. This led the Swiss Federal Tax Administration to believe that - with respect to a Swiss resident inves-tor - the CIS itself qualifies as the beneficial owner of the underlying income, leading to the conclusion that in case of a foreign CIS a refund will generally not be possible on behalf of a Swiss resident investor. In turn, the Swiss Federal Court held that the position of the Swiss Federal Tax Administration was a misinterpretation of the law, because the said article was enacted as a matter of practicality in order to simplify the refund procedure for Swiss CIS and should not be understood as determining that a CIS must be qualified as the beneficial owner of its underlying investments. Rather, the transparency of a foreign CIS also applies with a view to the refund of federal withholding tax for a Swiss resident investor.

Moreover, the Swiss Federal Tax Administration argued that the pension institution did not qualify for the refund because the taxable dividend income had not been correctly accounted for as set forth by the law, since the relevant dividend income had been booked at the level of the CIS and not directly at the level of the pension institution. However, the Swiss Federal Court also rejected this argument, with the reasoning that the position taken by Swiss Federal Tax Administration would effectively render a refund claim impossible. Rather, it was suffi-cient that the pension institution was able to prove that (i) the relevant dividend income and the underlying assets had been correctly accounted for at the level of the CIS and (ii) the pension institution had correctly accounted for its shares in the CIS and the resulting income. 

Opportunities

A Swiss resident investor (individual or legal entity) may claim a full refund of federal with-holding tax within three years after the end of the calendar year during which the taxable income became due. Hence, until the end of 2016, refund claims can be submitted reaching back to 1 January 2013. Hence, the managers of foreign CIS who invest in equities or bonds of Swiss issuers may wish to review if a claim for the refund of Swiss federal withholding tax is possible for its Swiss resident investors. However, from a practical point of view this may only make sense for qualified or institutional Swiss investors since the CIS will need to pro-vide detailed and comprehensible evidence that the Swiss dividend income has been correctly accounted for in the books of the CIS.