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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.
The concept or negligence according to recent jurisprudence
Since the introduction of this article in the LIA, the Federal Court has been able to rule on certain cases. In particular, it confirms that "In this case, on the subjective level, in order to examine whether the omission in question is intentional or results from negligence, there is no reason to deviate from what has been developed in the field of tax evasion".
Thus, according to the case law, an intentional evasion or attempted evasion presupposes that the taxpayer has acted consciously and willingly. It is important to note that the possible fraud, which implies that the perpetrator foresees the harmful result, but nevertheless acts because he or she is willing to accept it in case it occurs, is sufficient. Negligence will not be found if one fails to exercise the care that one is required to exercise under the circumstances and one's personal situation. By personal circumstances is meant, for example, a person's training, intellectual abilities and professional experience (2C_397/2017 - judgment of May 9, 2019)
According to established case law, proof of intentional conduct in connection with an attempted tax evasion must be considered to be provided when it is established with sufficient certainty that the taxpayer was aware of the incorrect and incomplete nature of the information provided to the tax authorities. If such awareness is established, it must be presumed that the taxpayer voluntarily sought to deceive the tax authorities, or at least acted out of possible fraud, in order to obtain more advantageous taxation. It is also important to note that this presumption is not easily rebutted, as it is difficult to imagine any other reason why a taxpayer would provide the tax authorities with information that he knows to be incorrect or incomplete.
According to recent case law, it follows first of all that this new law is only applicable to AI refund claims in connection with benefits that fall due on or after January 1, 2014, and provided that the right to a refund of withholding tax has not yet been the subject of a ruling that has become effective (2C_901/2018 - ruling of June 17, 2019). Thus, dividends that were due before this date cannot benefit from this new art 23, para. 2 LIA.
Moreover, the omission by negligence of the taxpayer was notably retained by the Federal Court in the case of a taxpayer who failed to declare a return subject to withholding tax in his tax return, having however previously announced to the tax authorities that he was going to benefit from this return by requesting the administration for new ballots for his instalments, and by leaving the box in his tax return, in connection with this return, empty (2C_1110/2018 - judgment of 27 June 2019). The Federal Court also considers the notion of negligence in the case of a taxpayer who failed to declare a dividend in his tax return under the statement of securities, even though he had indicated this yield in the additional schedule concerning qualified holdings in private assets (additional form of the tax return of the canton of Zurich), while submitting a copy of the form 110 to the FTA in connection with this dividend distribution (2C_224/2017 - judgment of August 16, 2019). In its judgment of September 16, 2019 (2C_74/2018), although the fact that a taxpayer knew about the existence of a dividend, the Federal Court admits that this does not mean that he was also aware of the incompleteness of the tax return for the tax period in question. Indeed, the taxpayer had not filled out the tax return himself, but had done so through a trustee. The trustee had relied on the financial statements submitted, in which no dividend distribution was mentioned. According to the Federal Court, there is no indication that the plaintiffs knowingly and voluntarily submitted incomplete documents to their agent. Moreover, there was no reason to believe that the documents submitted were incomplete.
It should be noted that in another decision submitted to the Federal Court (2C_1066/2018 - decision of June 21, 2019), "the fact that a share sale agreement specifically drew the attention of the sellers (also the appellants) to the problem of declaring the dividends received, as well as the expertise in tax matters of the trustee mandated by the appellants to carry out their tax declaration, do not allow to rule out negligence, resp. to admit intention. Furthermore, the argument of the appellants that they failed to declare the income in question because the shares in the company, sold in 2016, were not included in the statement of securities of their tax return, does not allow to exclude an intentional omission either. Another case did not allow the Federal Court to uphold negligence in a withholding tax refund claim where the taxpayer had failed to declare a dividend (2C_240/2021 - judgment of August 24, 2021). The justification for such an oversight was proven by a single medical certificate proving obstructive sleep apnea syndrome (with the side effect of memory loss). While the lower cantonal courts in Basel had considered this single element as proof of negligence, the FCA and the Federal Court disagreed. The Federal Court therefore referred both cases back to the lower court for further investigation.
Another interesting case decided by the Federal Court is that of a taxpayer from Zurich who, despite his obligations and the summons issued by the cantonal tax authorities, never submitted a tax return and was therefore taxed ex officio (2C_107/2020 - decision of June 17, 2020). Consequently, the income that could have benefited from a withholding tax refund could not be declared. The Federal Court ruled that in this case, in addition to the fact that the taxpayer was not able to demonstrate that the non-filing of his tax return was not intentional, it was necessary to admit intention due to his passive behavior and therefore to refute the right to the application of art. 23 al. 2 LIA. Furthermore, the Federal Court clarified in this decision that this judgment is not arbitrary, since the said case differs from all other cases already judged (see above) in which a tax return was submitted, and although an incomplete declaration of the relevant income and/or assets was made.
Conclusion
The relaxation of the conditions for the right to a refund of the witholding 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 and leave the new provision as a dead letter. According to the recent decisions summarized above, it appears that the knowledge of the taxpayer of the inaccuracy of the tax return is essential in order to conclude whether the taxpayer has acted intentionally, with the aim of obtaining a tax reduction. According to the Federal Court, such omissions were the result of negligence, as the taxpayer would have probably refrained from announcing/communicating to the administration these returns subject to withholding tax, and therefore negligence seems to be recognized when the taxpayer has used the necessary precautions when submitting the tax return.
This new practice will now apply to all returns due after 31.12.2013, provided that they have not been the subject of a ruling that has become effective. This includes cases in which taxation is reopened due to a tax review or reminder procedure. However, outside of these cases, it is not possible to request the reopening of the file and obtain a refund of the withholding tax.
