SWITZERLAND Law and Practice Contributed by: Joseph Merhai, Thomas Pasquier and Laurent Schenker, Aegis
Embezzlement of tax at source This is another specific tax offence that occurs where a person obliged to levy tax at source on employ - ment income unlawfully retains or diverts the amounts collected for their own benefit or for the benefit of a third party. It constitutes a qualified tax offence and is punishable by a jail sentence of up to three years and/or a fine. Tax avoidance Swiss case law and legal scholars also recognise the concept of tax avoidance ( évasion fiscale/Steu - erumgehung ) developed by the SFSC. An arrange - ment may be treated as abusive tax avoidance if the following three conditions are cumulatively met: • the legal structure chosen appears unusual, inap - propriate or artificial; • it was adopted with the intention of achieving a tax saving; and • it results in significant tax savings. Where these criteria are satisfied, the tax authorities may disregard the chosen form and assess taxation based on an economic recharacterisation of the situ - ation (ie, on the basis of the circumstances that would have existed absent the abusive arrangement). 5.2 Anti-Avoidance Mechanisms Switzerland combats tax fraud, tax evasion and abu - sive tax avoidance in cross-border situations through a combination of: • treaty-based provisions; • administrative practice (in particular for treaty relief and withholding tax); • general and specific domestic anti-abuse rules; and • case law developed by the SFSC. Specific DTA Provisions Swiss DTAs often contain provisions that are intend - ed to prevent abuse, although the content differs depending on the treaty partner. By way of example, the Switzerland–US DTA includes a limitation-on- benefits approach under which treaty benefits (eg, reduced withholding tax) are granted only if the recipi - ent qualifies as a “qualified person” within the mean -
ing of the treaty (eg, Article 22 of the Switzerland–US DTA). General Anti-Abuse Reservation in Treaty Application Historically, Switzerland applied the Federal Council decree of 1962 (ACF 62) to limit treaty abuse. Fol - lowing a partial repeal in 2017, the decree was fully abolished as of 1 January 2022. Separately, the SFSC has recognised that all Swiss DTAs are subject to an implicit reservation against treaty abuse. According to SFSC case law, based on the requirement to apply treaties in good faith (pacta sunt servanda; Article 26 of the Vienna Convention on the Law of Treaties), treaty benefits may be denied in abusive situations even where the treaty does not contain an explicit anti-abuse clause. In this context, and particularly in the context of WHT relief, beneficial ownership plays a key role: treaty relief may be refused if the formal recipient is not the effective beneficiary (eg, where the economic beneficiary should not have benefited from the relevant DTA). Administrative Practice: Treaty Shopping/Rule Shopping To counter treaty shopping and rule shopping, Swiss practice applies substance-oriented tests aimed at identifying inappropriate or artificial arrangements in the context of WHT relief. Under this practice, sub - stance may be demonstrated in particular through: • personal substance (own personnel operating from own premises in the state of residence; personnel may also be employed by a related local entity); • functional substance (in addition to the Swiss participation, at least one other substantial par - ticipation in another state so that the entity can be regarded as acting as an international holding company); and • balance sheet substance (eg, an equity ratio of at least 30% in the commercial balance sheet). Whether these elements must be met alternatively or cumulatively depends on the specific circumstances. Domestic Anti-Abuse Rule Swiss domestic law sometimes contains specific rules against cross-border abusive structures. This
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