In the decision 2C_209/2017 dated 16 December 2019, the Swiss Federal Supreme Court had to decide on the Swiss withholding tax refund entitlement on dividends on Swiss equities that were subject to Global Master Stock Lending Agreements (GMSLA) with cash collateral
- A Luxembourg resident borrower (Borrower) entered into several GMSLA transactions with an affiliated UK resident lender (Lender).
- Under the GMSLA, the Lender transferred legal title of, inter alia, Swiss equities to the Borrower, and the Borrower was obliged to make manufactured payments to the Lender in case of dividend payments on the underlying Swiss equities (85% of gross original dividend) and to re-transfer similar Swiss equities to the Lender.
- By entering into the GMSLA, the Lender was put in a financial position as if it retained ownership in the Swiss equities.
- Subsequently, the Borrower filed several withholding tax refund requests with the Swiss Federal Tax Administration (SFTA) claiming refund of withholding tax on the original dividend payments based on the tax treaty between Switzerland and Luxembourg (DTT CH/LU; 15% non-refundable Swiss withholding tax).
- The SFTA rejected these refund requests due to lack of beneficial ownership of the Borrower and qualification of the transactions as collateralised financing transactions (harmful pass on of dividends under GMSLA to the Lender).
- The Borrower filed an objection against the SFTA’s decision with the Swiss Federal Administrative Court, which was dismissed by the court.
2. Considerations of the Swiss Federal Supreme Court
The Swiss Federal Supreme Court followed the reasoning of the Swiss Federal Administrative Court and based its decision on the following considerations:
- Art. 10 para. 2 lit. a of the DTT CH/LU states that the taxation right of the source state is only limited if the recipient of the dividends qualifies as beneficial owner.
- According to the Swiss Federal Supreme Court’s established jurisprudence (see in particular the Danish Cases) the recipient of a dividend qualifies as beneficial owner of the dividend if it is able to ‘make full use of the dividends and can fully enjoy them’. In particular, the recipient is not considered as beneficial owner if it has to forward the dividends to another person under a contractual obligation.
- Not only contractual but also factual obligations to pass on dividends result in a loss of beneficial ownership. A factual obligation includes payments which are equivalent to the amount of the dividends. This is also given if the amount of the dividends is included in a gross amount which includes other elements such as compensation for risks (e.g. price fluctuations) and services (e.g. execution of transaction). Payments of less than 100% of the dividends can also be regarded as harmful pass on of dividends.
- The assessment whether a harmful contractual or factual obligation to pass on dividends exists has to be made on a case by case basis based on the facts at the time of the dividend distribution (“substance over form”). Also subsequent payments may be taken into consideration if the forwarding of dividends was agreed before the due dates of the dividend.
- The Swiss Federal Supreme Court held that, based on the GMSLA and the established circumstances of the transactions, the Borrower was contractually obliged to pass on the dividends to the Lender. In particular, a sale of the Swiss equities by the Borrower to a third party would not have been consistent with the Borrower’s obligations under the GMSLA. Therefore, in the Court’s view, the Borrower implicitly qualified as a ‘conduit entity’.
Based on the above, the Swiss Federal Supreme Court held that the Borrower was not entitled to a refund of Swiss withholding tax on the original dividend payments due to lack of beneficial ownership (harmful pass on of dividends under GMSLA to Lender). With its decision, the Swiss Federal Supreme Court confirms its case-law on beneficial ownership as well as the hurdles for financial institutions to receive refund of Swiss withholding tax in the context of supposed dividend or interest arbitrage transactions.