Notification procedure for dividend distributions
Dividend distributions of Swiss corporations are generally subject to a withholding tax (WHT) of 35%. Standard procedure calls for the distributing company to retain 35% of the dividends and remit the retained amount directly to the Federal Tax Administration (FTA). Under certain conditions, the distributing company may fulfill its WHT duty by notifying the FTA of the dividend distribution, instead of remitting the WHT. If the requirements for the notification procedure are fulfilled, the distributing company must declare the dividend payment on a special declaration form. The declaration form must be filed within 30 days of the dividend payment becoming due.
Pitfalls in the notification procedure
In the past, the formal requirements of the notification procedure, and in particular the 30-day notification deadline, were applied with a good deal of common sense. It came as a shock when the Swiss Federal Court held in its decision of 19 January 2011, that a company which fails to file the declaration form on time, forfeits its right to use the notification procedure for the respective dividend payment. As a result, a company which misses the 30-day notification deadline must remit the 35% WHT.
Today, the FTA systematically reviews dividend distributions under the notification procedure when performing tax audits. Whenever a company has either failed to file the declaration form or been late in doing so, the FTA deems the WHT duty not fulfilled. As a result, the company must pay (i) 35% of the issued dividend to the FTA and (ii) late interest of 5% on this WHT. The shareholder of the distributing company then must request reimbursement of the WHT.
The FTA applies its strict practice retroactively, i.e. also on dividend payments made before the above mentioned decision of the Swiss Federal Court. In the worst case, they can go back up to five years. As the following example shows, the result of this practice can be devastating: On 1 October 2007, SwissCo, a Swiss company, distributed a dividend of CHF 100 million to its German parent company. SwissCo had obtained the general permission to apply the notification procedure in 2006 but forgot to file the declaration form. During a tax audit in November 2012 the FTA orders SwissCo to immediately pay WHT of CHF 35 million and, in addition, CHF 8.75 million in late interest (5% p.a., calculated from November 2007 to November 2012).
The current practice of the FTA has been harshly criticized by scholars and practitioners. The 5% late interest should in fact not be considered interest for late payment but as an exorbitant penalty for not complying with a simple formal requirement. In addition, it is a very formalistic approach to demand WHT payment although the WHT must be directly paid back to the shareholder of the distributing company.
Despite all the criticism, the current strict practice is a fact and thus companies must prepare their dividend distributions under the notification procedures very diligently to comply with all formal requirements, in particular with the 30-day declaration deadline.