Switzerland vs A AG, September 2021, Administrative Court, Case No SB.2020.00011/12 and SB.2020.00014/15

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A AG, which was founded in 2000 by researchers from the University of Applied Sciences D, has as its object the development and distribution of …, in particular in the areas of ….. It had its registered office in Zurich until the transfer of its registered office to Zug in 2021.

By contract dated 16 June 2011, it was taken over by Group E, Country Q, or by an acquisition company founded by it for this purpose, for a share purchase price of EUR …. On the same day, it concluded two contracts with E-Schweiz AG, which was in the process of being founded (entered in the Commercial Register on 7 September 2011), in which it undertook to provide general and administrative services on the one hand and research and development on the other.

As of 30 September 2011, A AG sold all ”Intellectual Property Rights” (IPR) and ”Non-Viral Contracts” to E-Company, a company in U with tax domicile on the island of V, for a price of EUR … for the IPR and EUR … for the ”Non-Viral Contracts”.

A AG had neither identifiable operating activities nor personnel substance in the financial year from 01.10.2011-30.09.2012 following the shareholding transaction. The transfer of the tangible and intangible business assets and the personnel of A AG to other companies of the E group corresponded to an integration plan that had already been set out in a draft power point presentation of the E group prior to the acquisition of the shares.

Following an audit the tax authorities issued an assessment for additional taxable net profit for the tax period 01.01.-30.09.2011 for state and communal taxes and direct federal tax, as well as taxable equity of CHF … for state and communal taxes. The assessed taxable net profit included a hidden profit distribution from the sale of the IPR and customer relationships to the E-Company. The calculations of profits was made as a discretionary estimate.

An appeal was filed by A AG with the tax court which was dismissed with respect to the calculations of profits due to the sale of intangible assets at a lower price, but were upheld with respect to the transfer of functions.

An appeal was then filed with the administrative court by both A AG and the tax authorities. A AG requested that the assessment of the Tax Office be dismissed with costs and compensation. The Tax Office requested the dismissal of the complaints of the obligated party and the annulment of the decision of the Tax Appeal Court and confirmation of the objection decisions with costs to be borne by the obligated party.

Judgement of the Administrative Court

The court ruled in favour of the tax authorities and remanded the case to the court of first instance for recalculation.

“The subject matter of the proceedings are reorganisation measures carried out after the change of shareholders, which were connected with the sale of assets of the obligated party to other group companies and the abandonment of traditional operating activities. The dispute revolves around the question of whether the obligated party provided services to related companies under conditions that do not comply with the principles of tax law regarding the appropriateness of performance and consideration between related parties and whether it therefore provided non-cash benefits or hidden profit distributions that are subject to profit tax.”

“According to the correct findings of the Tax Appeals Court, to which reference can be made, the large discrepancy between the values according to the transfer price study of company I and the share purchase price and the result of the PPA was suitable to cast doubt on the correctness of the transfer price study. Even if the objections to the comparability with the PPA were true, the relevance of the PPA (wrongly disputed by the obligated party) could not be verified without the data used in its preparation. The share purchase price was agreed among independent third parties and therefore corresponded to the enterprise value at the time of the acquisition of the shareholding. According to the findings of the lower court, the transfer price study was only subsequently prepared in 2012 and is incomplete in various respects, which was not refuted by the obligated party. The Tax Appeals Court therefore concluded that the requirement had not been fulfilled and that the facts of the case had remained unclear. In particular, there had been uncertainty about the actual value of the intangible rights sold after the investigation had been completed. The Cantonal Tax Office’s assertion that the agreed purchase price for the intangible rights was too low had not been refuted and, based on the comparison with the PPA and the share purchase price, this assertion appeared very likely. The Cantonal Tax Office had therefore provided the main evidence incumbent upon it. Because the cantonal tax office had not been able to carry out its own valuation due to the lack of data, it had rightly proceeded to an estimate. According to the decision of the lower court, the discretionary assessments regarding the profit from the sale of the intangible assets were rightly made.”

“Moreover, the burden of proving the obvious incorrectness of the discretionary assessment is placed on the taxpayer, which is not to be equated with a “reversal of the burden of proof” (on the whole Zweifel/Hunziker, Kommentar StHG, Art. 48 N. 44; diesel, Kommentar DBG, Art. 132 N. 37; Zweifel et al., Schweizerisches Steuerverfahrensrecht, § 20 Rz. 22).”

“An estimate is “obviously incorrect” if it cannot be objectively justified, in particular if it is recognisably motivated by penalties or fiscal considerations, if it is based on improper bases, methods or aids for estimation or if it cannot otherwise be reasonably reconciled with the circumstances of the individual case as known from the experience of life. Obviously incorrect is therefore an estimate that is based on an abusive use of the estimation discretion, i.e. is arbitrary (Zweifel/Hunziker, Kommentar StHG, Art. 48 N. 59; dieselben, Kommentar DBG, Art. 132 N. 52).”

“What is proportionate and reasonable in the procedure for imposing an obligation depends on the circumstances of the individual case. If, as here, the case involves complex intra-group transactions carried out according to plan in an international context, as a result of which the Swiss group company is subject to a short-term devaluation in the double-digit millions, and if there are unexplained, significant differences between the information published by the group in the PPA and a transfer price study commissioned by the obligated party, even an extensive condition requiring the completion of factual tables is proportionate and reasonable.”

“The Tax Appeals Court’s finding that there was uncertainty about the value of the intangible assets sold even after the conclusion of the tax investigation, which is why the amount had to be estimated and the discretionary assessments were correct, must therefore be upheld. Since the proof of incorrectness was not properly raised either in the objection or in the appeal proceedings, the continued existence of the discretionary assessment or assessment determined by the lower court must also be confirmed.”

“The circumstance mentioned by the Tax Appeal Court that the Service Agreement did not contain an express prohibition of future self-determined research is irrelevant in this respect. After the sale of the intangible assets and the management integration into the group, the obligated party was neither in a position to continue its previous research and development activities due to a lack of technical and human resources, nor are there any indications that its executive bodies intended to establish its own research in new areas.”

“An independent company in the …industry would hardly have agreed to such drastic restrictions of its operational activities and the massive reduction of qualified personnel that this would inevitably entail, if it had not received, or at least been promised, at the latest upon conclusion of the agreement on the sale of all ”Intellectual Property Rights” and ”Non-Viral Contracts”, an adequate compensation, which would also have compensated for the extensive liquidation of the previous business operations inevitably associated with the sale. Among independent third parties, the compensation would probably not have been agreed only after the sale of the essential business assets, but already at an earlier point in time, when there was still freedom of action and thus a good negotiating position could be taken.”

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Switzerland SB.2020.00011 ORG

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