Switzerland: Federal Supreme Court rules on place of effective management of an offshore finance company

July 30, 2013

In a recently published decision of 16 May 2013 (2C_1086/2012, 2C_1087/2012), the Federal Supreme Court decided on a case regarding the definition of the place of effective management (tatsächliche Verwaltung) in the context of an offshore finance company.

Facts

In 2002, X. Ltd. was registered as an offshore finance company in Guernsey.

The equity capital of CHF35 million was brought in by Y. Holding AG, the headquarters of which are in the canton of Zug.

Between 2002 and 2005, X. Ltd. granted only one loan, and the amount thereof corresponded to the capital provided by Y. Holding AG.

Over the following three years, further loans were exclusively granted to subsidiaries of Y. Holding AG. In 2008, the tax authorities of the canton of Zug established that X. Ltd. had its “place of effective management” in Switzerland.

Issue

Does Switzerland have a jurisdiction to tax based on the “place of effective management” of X. Ltd?

Decision

In its decision, the Federal Supreme Court held that the “place of effective management” must be distinguished from both top-level management activities and purely administrative activities.

It defined the “place of effective management” as the economic and effective center of a company.

The decisive factor is thus the management of daily business activities within the company’s purpose; the place of board meetings or the general assembly is to be disregarded.

Arguing that the business activities of X. Ltd. were restricted to passing on loans to group companies, the Federal Supreme Court concluded that the key business decisions were taken by Y. Holding AG, and that X. Ltd. is subject to tax in Switzerland.


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