More flexibility retated to the refund of swiss withholding tax for private individuals

On 4 December 2019, the Federal Tax Administration published Circular No. 48 on new conditions for entitlement to withholding tax refund for individuals.

On 4 December 2019, the Federal Tax Administration published Circular No. 48 on new conditions for entitlement to withholding tax refund for individuals.

As a reminder, withholding tax, is a tax levied at source at a rate of 35 %, especially known to impact open and deemed dividend distributions from Swiss companies. Its primary purpose is to provide a warranty, i.e. to force the taxpayer to declare said taxable income. Upon disclosure, the taxpayer gets the refund. Otherwise, if he does not declare it, the refund is denied, and this withholding tax becomes a final and punitive tax. Prior to the legal change, which is the subject of this newsletter, this refusal to refund also included cases where the income in question was eventually taxed by the administration (audit, tax reminder procedure, spontaneous denunciation, etc.). There was a double penalty (ordinary income tax and denial of the withholding tax refund), in addition to possible fines.

To best illustrate the old practice of the new one, please consider the following example:

A taxpayer owns shares in an unlisted Swiss company that has been distributing a dividend of CHF 100 every quarter for many years. The said taxpayer forgets, for the first time in 5 years, to declare in his tax return for year N a quarterly of income of CHF 100 and a recoverable withholding tax of CHF 35.

Following a request for information from the tax authorities, the latter adds the income of CHF 100 when it issues the final tax assessment of our taxpayer. On the basis of the old practice, the repayment of the withholding tax of CHF 35 would have been denied whereas it is likely that on the basis of the new practice the said repayment will be granted in the case at hand.

Below you will find more details on the situation before and after the amendment of the withholding tax law that came into force on 1 January 2019 with retroactive effect.

BEFORE THE AMENDMENT

Until the entry into force of the amendment, the tax authorities strictly applied the conditions for obtaining the reimbursement of the withholding tax and the Federal Court repeatedly ruled that a simple negligence was sufficient to lose the refund right.

Indeed, in the court decisions of the Federal Court of 11 October 2011 (2C_95/2011) and 16 January 2013 (2C_80/2012), the Federal Court ruled that the following conditions had to be met in order to obtain the refund right of the withholding tax:

  • Obligation to report in the first tax return following the maturity of the taxable income
  • Right of use and domicile in Switzerland on maturity of the taxable income
  • Possible subsequent indications in the tax return up to its entry into force
  • Principle of self-declaration
  • The Federal Court has repeatedly held that simple negligence is enough to lose the refund:
    • To that extent, the fact that the tax authorities could become aware of the incompleteness of a tax return and have access to the missing information by making a comparison with the tax records of third parties or by requesting it from the taxpayer, other tax authorities or third parties did not limit the obligation of the taxpayer to report taxable income subject to withholding tax.

The refund of withholding tax were denied if the taxable income subject to withholding tax was declared following a request, an injunction or any other intervention performed by the tax authorities in respect of those income.

Thus, a simple error of intend from the taxpayer led in most cases to the loss of his right to reimbursement of the 35 % withholding tax.

AFTER THE AMENDMENT

The new law defines the conditions under which the forfeiture of the right to repayment does not occur, although the taxpayer has not declared spontaneously a taxable income at the maturity of the income.

The new Art. 23 para. 2 LIA mentions that :

There shall be no forfeiture of withholding tax right if the omission of the income or assets from the tax return is due to negligence and if, in a taxation, tax revision or tax reminder procedure whose decision has not yet come into force, such income or assets :

a. is subsequently declared, or

b. have been mentioned in the income or wealth account following a request made by the tax authority..”

First, the income concerned by the withholding tax continues to have to be announced spontaneously by the taxpayer in the first tax return following the maturity of the income and at the latest until taxation takes effect. A decision is considered to have become effective when the 30-day claim period has expired.

But from now on, in a taxation, revision or tax reminder procedure whose decision has not yet come into force, the obligation to declare is also deemed to have been fulfilled when this income:

  • is declared at a later date;
  • or have been mentioned in the income or wealth account following a request made by the tax authority.

The big difference with the old law is that income added or corrected by the tax authority is no longer systematically excluded from reimbursement.

Nevertheless, the failure to declare must be due to negligence and therefore must be unintentional.

NEGLIGENCE OR INTENTION?

It appears from the reading of Circular No. 48 that the tax authority will grant the refund without further investigation if the negligence of the taxpayer is apparent from the files of the tax authority.

Intentional omission presupposes that the taxpayer acts with conscience and will. Evidence of intentional conduct is considered to be proved when it is established with sufficient certainty that the taxpayer was aware that the information given was incorrect or incomplete.

Therefore, if the tax authority has doubts as to the unintentional nature of the omission, the taxpayer will be responsible to demonstrate to the tax authority that he was not aware of the incorrectness or uncomplete information given. The assessment of whether or not the omission was intentional is a matter for the tax authority and is likely to be based on the taxpayer's overall behavior at the time of the tax return.

In the new Article 23 para. 2 LIA, the notion of negligence is central and raises questions as to the application of this subjective condition. This has raised concerns in the tax world and many authors wondered whether it would give rise to new jurisprudence or whether the current jurisprudence related to penal tax law would be used as a basis for the reimbursement of withholding tax.

The Federal Court responded to this concern in a decision of 21 June 2019 by stating that “In this case, on a subjective level, in order to examine whether the omission in question is intentional or is the result of a negligence, there is no reason to proceed differently from what has been developed in the area of tax evasion.”

We can therefore retain that it is the hypothesis of a jurisprudence in line with penal tax law that will serve as a basis for withholding tax.

CONCLUSION

This relaxation of the conditions for the refund right of the withholding tax is good news for the taxpayer provided that the interpretation of the concept of negligence does not become too restrictive in future court decisions which would leave the new provision as a dead letter. This new practice will henceforth apply to all income maturing after 31.12.2013 provided that they have not been the subject of a decision that has become effective. This includes cases in which taxation is reopened as a result of a tax revision or tax reminder procedure. It is however not possible to request the reopening of a file and be granted the withholding tax refund otherwise.

Contact : Daniel Spitz, Head of Tax Switzerland, Certified tax expert [email protected] or phone : +41 21 311 00 21

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