Federal Court confirms VAT on deemed service charge for strategic management of Swiss Holding Companies

By judgement dated 11 January 2017, the Swiss Federal Court (which is the highest instance in Switzerland) confirmed the practice of the Swiss Federal Tax Administration in relation to the assessment of VAT on a deemed service charge for strategic group management and general administration where a Swiss holding company does not dispose of the adequate personnel in order to perform the respective functions itself. In the case at hand, a European company headquarters established in Switzerland was held liable to pay CHF 2.75m VAT and late interest as a result of a VAT audit carried out by Swiss Federal Tax Administration for the periods 2008-2012. The VAT assessment was appealed through all instances but the decision was finally upheld by the Swiss Federal Court.

Background

Since the total revision of the Swiss VAT law effective 1 January 2010, the general place of supply for services is at the place of the recipient. While the exceptions to this rule are very similar to the provisions as set forth by the EU VAT Directive (e.g. services connected with immovable property, passenger transport, activities relating to culture, sport, education and entertainment, restaurant services, etc.), the general location of the place of supply at the place of the recipient is not just limited to B2B cases (as in the EU), but also applies in B2C transactions. Therefore, if a service is supplied by an enterprise established outside of Switzerland to (i) a Swiss consumer or to (ii) a legal entity established in Switzerland which is not registered for VAT under Swiss law, the general place of supply for the relevant services still lies in Switzerland. To the extent that the foreign supplying enterprise is not registered for VAT in Switzerland, the reverse charge mechanism applies and the Swiss acquirer of the services is obliged to account for the applicable VAT at the current standard rate of 8% with the Swiss Federal Tax Administration (so-called "acquisition tax"). In case of a private acquirer or an entity which is not registered for VAT in Switzerland, however, the acquisition tax only applies if the value of the services acquired from abroad exceeds CHF 10’000 per annum.

Consequently, services acquired by a non VAT-registered Swiss holding company from its foreign subsidiaries trigger acquisition tax in Switzerland if such services exceed the value of CHF 10’000 per annum. In the case at hand, the Swiss holding company had not accounted for any acquisition tax and was not able to sufficiently establish the amount of such services acquired. Hence, the Swiss Federal Tax Administration was entitled to proceed with a discretionary assessment which, according to the published administrative guidelines, is carried out by reference to the (a) total amount of assets held on average by the Swiss holding company (b) multiplied by 0.3% (c) minus any administration services acquired from independent third parties. In certain cases the multiplier can be reduced to 0.2%, e.g. where the Swiss group is not listed and the administration expenses for a privately held group can be deemed to be significantly lower. The deemed costs covered by this calculation formula include expenses for accounting, group consolidation, maintenance of the shareholders register, documentation and preparation for the decisions of the board of directors and organisation costs in relation to the preparation of the general meeting of shareholders.

Expressly not covered are further costs such as:

• auditing of the accounts of the Swiss holding company;
• inquiries in relation to the purchase or disposal of participations;
• custody and asset management costs for the financial assets;
• treasury management functions; and
• board member fees.

If such services are supplied by group companies, it is to be expected that acquisition tax would apply on the deemed service fees which would have to be paid by the Swiss holding company on arm’s length terms.

Practical Recommendations

Even though the discretionary assessment of acquisition tax is an established practise of the Swiss Federal Tax Administration, Swiss holding companies have often been caught by surprise by this issue in the past since it leads to a VAT obligation without a corresponding payment stream. Companies at risk are holding companies established in Switzerland which do not dispose of the adequate personnel to carry out the strategic management and related shareholder functions themselves or whose personnel does not effectively exercise these functions. Since the activities of purchasing, holding and selling participations have explicitly been defined as an entrepreneurial activity in the Swiss VAT law effective 1 January 2010, a practical solution in order to mitigate the issue of acquisition tax is to register the Swiss holding company for VAT. Subject to further income of the Swiss holding company requiring an input tax correction, the VAT registration allows the Swiss holding company to claim an input tax deduction for any acquisition tax to be paid in connection with the exercising of the aforementioned functions in relation to the management of its subsidiaries.