In a recently published decision of 23 July 2012 (A-1246/2011), the Swiss Federal Administrative Court decided a second case regarding the definition of beneficial ownership in the context of derivative transactions and confirmed its interpretation thereof established in the previous judgment (A-6537/2010).

Facts

In 2007, Company A, a Danish subsidiary of Group B, traded with SMI Futures and bought the underlying shares to hedge the risk of these contracts.

When SMI Futures matured, Company A would either sell the shares and close its portfolio or keep them and extend the SMI Futures contracts for another three months.

In a few cases, Company A would hold the underlying assets for a longer period.

However, Company A had neither concluded bilateral agreements about price risk and dividends with the counterparties of SMI Futures nor bought any shares from them.

Dividends received during the holding period of the assets were subject to a 35% Swiss withholding tax, for which a full refund was claimed by Company A according to the Switzerland–Denmark tax treaty.

The Federal Tax Administration (FTA) declined the refund, arguing that Company A was not the beneficial owner of the shares, because only a minor part of the dividends remained with the subsidiary.

Company A appealed against this decision.

Issue

The issue was whether or not Company A was the beneficial owner of the underlying assets.

Decision

In its decision, the Swiss Federal Administrative Court approved Company A’s appeal.

It argued that the concept of beneficial ownership, as stated in a double tax convention, has to be interpreted based on a “substance over form” approach, i.e., from an economic point of view.

The beneficial owner is defined as a person who has broad discretion to decide how dividends shall be utilized.

The beneficial ownership may, however, be substantially weakened if a recipient of dividends has a contractual or factual obligation to pass on the dividends to a third party.

Therefore, the court examined to which extent this (possible) obligation was contingent on the receiving of the respective dividends.

The Swiss Federal Administrative Court concluded that, although Company A had a financial duty toward the counterparty of SMI Futures, the contract did not include any obligation for Company A to hedge its position with the acquisition of the underlying shares.

It also denied a factual obligation to transfer any dividend income.

Even if the acquisition of the underlying assets was partly funded by Group B, Company A was not obliged to pass on the dividends in order to repay the interest on debt, since the interest payments were due irrespective of whether Company A had effectively received a dividend.

Hence, in the view of the Swiss Federal Administrative Court, the fact that Company A was bearing the interest rate risk and the financing risk of the assets played a crucial role in strengthening the beneficial ownership.

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