On October 3, 2024, the Federal Supreme Court issued a remarkable judgment on withholding tax refunds (9C_635/2023, published on November 4, 2024). The highest court affirms beneficial ownership of a foreign financial institution (interest recipient) that had applied to the FTA for a refund of withholding tax on bond interest. The financial institution had acquired the underlying Swiss Government bonds in the context of cross-currency rate swap transactions (CCRS) with other financial institutions, whereby the conditions and maturities of the bonds and CCRS were precisely aligned. The decision is noteworthy, especially, since its landmark rulings in 2015, the court has consistently denied beneficial ownership to recipients in similar cases, thus refusing tax refunds.
Key Elements Beneficial Ownership
The following was decisive for the Federal Supreme Court:
- Beneficial ownership can only be denied to a recipient if he has a legal or contractual obligation to forward the income subject to withholding tax.
- The recipient’s payment obligations can only constitute a harmful obligation to forward the income if the payment or at least its amount depends on the recipient generating the income subject to withholding tax.
- In the present case, the financial institution was obliged to make payments under the CCRS, even if it had not received the interest on the Swiss Government bonds.
- Thus, in the case at hand, there was no harmful forwarding obligation, which is why the Federal Supreme Court affirmed the recipient being the beneficial owner of the income.
Caveat: Treaty abuse
The judgment is gratifying. However, it should be noted that the recipient’s refund is not yet certain. The Federal Supreme Court has referred the case back to the lower court for further examination and judgement. The Federal Administrative Court must examine whether the recipient should be refused a refund of withholding tax due to treaty abuse. The prohibition of treaty abuse is a separate requirement from the beneficial ownership requirement. Unlike beneficial ownership, the treaty abuse also takes subjective motives into account, also the fact that the recipient effectively passed on the bond interest and the benefit of the withholding tax refund through an unusual arrangement. More to come.