Walder Wyss Ltd.
August 1, 2010 - Switzerland
Deemed Professional Trade in Securities –Good News and Bad News!
by Tina Shih-Thurnheer
|
Professional trade in securities under the case law of the Swiss Federal Supreme Court… Under the Swiss Federal Supreme Court’s prior case law, capital gains derived from the sale of assets – in particular real estate, securities, precious metals and foreign currencies – are subject to federal income tax if such activity, taken as a whole, qualifies as self-employment. Private capital gains remain tax-exempt only if they are derived in the context of private asset management or an opportunity that has arisen unexpectedly. Under its prior case law, the Swiss Federal Supreme Court determined that trade in securities constituted self-employed activity if each of the following criteria were, or, under certain circumstances, just one of the following criteria was present: – systematic or methodical investment; – multiple and frequent transactions and short holding periods; – close connection to the taxpayer’s professional background and use of special skills; – leverage by substantial debt financing; and – reinvestment of gains in similar assets. …and the differing case law in Zurich For the purpose of Zurich cantonal and municipal taxes, the Zurich Administrative Court refused to follow the Swiss Federal Supreme Court’s case law for the federal tax; rather it set higher standards for income to be considered as stemming from selfemployment. Notwithstanding the aforementioned Swiss Federal Supreme Court criteria, the Zurich Administrative Court held that only an externally perceived market presence would cause taxpayers to be treated as self-employed. Taxpayers who merely instructed professional asset managers to manage their portfolios at the stock exchange or over the counter were not taxed at the Zurich municipal and cantonal levels with respect to their capital gains since such taxpayers lacked a market presence. Notwithstanding the confirmation of its prior case law, the Swiss Federal Supreme Court provides for tax predictability. The unpredictable criteria of self-employed activity under the Swiss Federal Supreme Court’s practice led to an intolerable harmonization conflict between federal and cantonal income tax laws. In its decision of 23 October 2009 (2C_868 / 2008), the Swiss Federal Supreme Court made clear that the criteria for self-employment applicable for federal income tax purposes apply to the cantonal and municipal taxes as well. Accordingly, the taxpayer’s own market presence is no longer a condition for a qualification of self-employed activity and, therefore, for the taxation of capital gains. With its decision, the Swiss Federal Supreme Court basically affirmed its prior case law regarding trade in securities, but, at the same time, took into account criticisms raised by legal authors with respect to the criteria used by the court. On the basis of the Swiss Federal Supreme Court’s recent decision, the following criteria are now crucial: – transaction volumes and frequencies; – length of holding periods; and – leverage by debt financing. The former criteria of systematic or methodical behaviour and use of special skills were specifically stated to be “obsolete” and therefore abandoned. In particular, the use of options, futures and other derivatives or the application of a state-of-the-art investment strategy is no longer relevant when attempting to distinguish between capital gains that are tax-free and those that are taxable. |