A most recent (although not yet final) decision of the Swiss Federal Administrative Tribunal is likely to change the way the Swiss Federal Tax Administration handles requests for refund of withholding tax under tax treaties.
The Swiss Federal Administrative Tribunal, in interim decision A-6537/2010 of 11 January
2011, held that denials by the Swiss Federal Tax Administration (SFTA) of refund
claims under the Denmark-Switzerland tax treaty can be appealed directly to the tribunal
and need not go through opposition proceedings.
Although not yet final, the tribunal’s decision is likely to change how the SFTA handles
requests for refunds of withholding tax under tax treaties. This could be important to
many non-Swiss parties reclaiming Swiss withholding tax on dividend payments from
Swiss listed companies. Financial institutions in particular have found themselves deadlocked
with the STFA over the last two years regarding refund claims. The SFTA has most
often qualified these claims as abusive with the dividend stripping argument, and denied
them only after a long and burdensome administrative procedure.
The Federal Withholding Tax Act prescribes the opposition proceedings for refunds of
withholding tax in a domestic tax situation. Under the procedure, a request is made for
mandatory reconsideration by the same authority that issued the denial. The authority
will examine the opponent’s arguments and issue a second decision (a decision on opposition),
which is then subject to judicial appeal. The opposition procedure is free and
allows the authorities to re-examine their decision informally without losing face.
The SFTA has consistently instructed petitioners whose requests for refunds under a tax
treaty have been denied to seek remedy through the opposition procedure. Even in cases
when extensive correspondence was exchanged between the petitioner, its adviser, and
the SFTA before the denial, this time-consuming “second loop” has been required. In
practice, the SFTA is unlikely to reverse its decision. It is much more likely that after a
petitioner formally files an opposition procedure that points out the factual or legal deficiencies
of the decision, the SFTA will confirm its decision before it can be appealed to
Until now, petitioners haven’t challenged the SFTA’s practice, although they complained
about the time taken up by the opposition proceedings (a decision on opposition could
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take 18 months or longer). The procedure is even more burdensome considering that, at
least under Swiss domestic law, no interest is due on late withholding tax refunds.
Before the Tribunal
After a long exchange of correspondence, the SFTA denied a Danish bank’s refund claim
and indicated in its decision — as it is required to do — that the appropriate remedy was
the opposition proceedings. The petitioner appealed directly to the tribunal.
In its interim decision, the tribunal decided to limit the proceedings, for the time being, to
the issue of jurisdiction. It found for the petitioner and held that denials of refund claims
under the Denmark-Switzerland tax treaty can be appealed directly to the tribunal without
the need to go through opposition proceedings.
A Swiss federal government ordinance regulates the procedure for refund of withholding
tax under the Denmark-Switzerland tax treaty. Similar ordinances exist for treaties with
the United States and Germany but not for other treaties. These ordinances were
amended when the tribunal was established on 1 January 2007. While the original 1974
ordinance to the Danish treaty provided for opposition proceedings, the current version
states: “Decisions of the SFTA shall be subject to appeal in accordance with the general
provisions governing the administration of the Federal Judiciary.” The tribunal held that
that provision excludes the opposition proceedings because it identifies both the impugnable
decision (“decisions of the SFTA” and no longer “decisions on opposition of the
SFTA”) and the appropriate remedy (“appeal” and not, as previously stated, “opposition
filed with the SFTA”).
The decision has not yet been published online (www.bvger.ch). The SFTA has until 21
February 2011 to appeal to the Swiss Federal Supreme Court.
Possible Treaty Implications
The SFTA argued before the tribunal that under its current structure, requests for refunds
under tax treaties are handled by its Refund Division, whose officers usually have no legal
background. Only once an opposition procedure is filed is the matter passed on to the
Law Division to be handled by lawyers. The tribunal rejected that argument:
Hence, in the future the SFTA will have to deal with an application for refund
of withholding tax once and once only. There is no apparent reason
why (and nor has it been claimed that) this shorter process for challenging
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decisions should give rise to insurmountable organisational problems as
compared with the practice hitherto, whereby applications for reimbursement
of withholding tax were dealt with first and then, if challenged, examined
again in closer detail.
The tribunal’s decision is limited to the Denmark-Switzerland tax treaty. However, the
implementing ordinances for Switzerland’s treaties with the United States and Germany
were subject to exactly the same amendment. If the Supreme Court confirms the tribunal’s
decision, the tribunal will almost certainly also allow refund petitioners residing in
the United States and Germany to skip the opposition proceedings.
This raises the question of whether denials of refunds under other treaties that have no
federal government implementing ordinance can also be appealed directly to the tribunal.
That issue will be decided soon; the authors have just received a denial of a refund
under a treaty without an implementing ordinance and will again appeal directly to the
Marcus Desax, attorney and partner, and Martin Busenhart, certified tax expert and partner,
Walder Wyss Ltd., Zurich, represented the petitioner before the SFTA and the tribunal.
Zurich, 11 February 2011