Income from participations in cooperatives

On 24 December 2015, a payment over CHF 20'000 in the form of a dividend was made to the married couple by the milk cooperative U. Subsequently, the tax commission set the couple's taxable income at CHF 71'400 for the 2015 tax period by way of an assessment decree and thus taxed the payment of CHF 20'000 as income from self-employment. The couple then requested that this payment of CHF 20'000 was to be taxed as investment income at 40% of the tariff. The tax commission remained of the opinion that the payment of CHF 20'000 should be taxed as income from self-employment and therefore dismissed the couple's application by means of an objection decision dated 3 July 2017.

The Special Administrative Court of Canton A. in turn upheld the appeal lodged by the complainants against the decision of the Tax Commission of 3 July 2017 and set the taxable income to CHF 71'400, of which CHF 20'000 is qualified investment income. The appeal in turn lodged by the Cantonal Tax Office A. to the Administrative Court of Canton A., was approved and overruled the decision of the Special Administrative Court of Canton A. Finally, the couple filed a complaint in public law matters to the Federal Supreme Court with an application for the annulment of the judgment of the Administrative Court of Canton A.

Therefore, the Federal Supreme Court had to examine whether of the taxable income of CHF 71'400, the payment of CHF 20'000 could be assessed as income from investments. Furthermore, it had to be clarified whether distributions of a cooperative without share capital and share certificates can be qualified as investment income according to OR 828 ff. and whether these distributions, if the conditions are met, are subject to privileged taxation.

The privileged investment income to mitigate economic double burden

The complainants challenged the view of the previous instance that the distribution did not constitute as qualified investment income within the meaning of § 45a of the Tax Law of Canton A., thereby denying unjustly privileged taxation, even though there would have been a economic double burden.

The principle of privileged treatment of investment income is contained in the Tax Harmonisation Act. Art. 7 para. 1 sentence 3 StHG. It bindingly states that the cantons shall minimize the economic double taxation of cooperatives and shareholders in the case of dividends, profit shares, liquidation committees and monetary advantages from participation of any kind, which are at least 10 % of the share capital of a corporation or cooperative. This process is known as partial taxation procedure. The cantons have a degree of discretion as to the extent and form of partial taxation. For example, taxation by the Cantons can either occur according to the partial income procedure or the partial rate procedure. In the partial income procedure, only a certain part of the income is taxed. In the partial rate procedure, the taxed income is subject to a reduced tax rate.

The Tax Harmonisation Act determines who, if applicable, is entitled to a reduction of the economic double burden (subject of partial taxation) and deals with the question of whether distributions from a corporation without share capital and share certificates qualify as investment income [object of partial taxation (see also verdict 2C_429/2014 of 6 November 2015 E. 2.6.1.)]. Accordingly, art. 7 para. 1 sentence 3 StHG stipulates for § 45a of the tax law of the Canton A. for which distributions an economic double burden can be mitigated.

The present case requires an interpretation of art. 7 para. 1 sentence 3 StGH, which must be made according to the wording. For the sake of simplicity, in brief:

According to art. 7 para. 1 sentence 1 StHG, all recurrent and non-recurrent income is subject to income tax. The norm speaks of "participations of all types", which is a rather vague term. Accordingly, it is questionable whether a membership in a cooperative without share capital and without share certificates falls under the term "participation of any kind". There are no exceptions to the objective tax liability for income from investments in art. 7 para. 1 sentence 3 StHG. However, the Cantons are authorised to make such income taxation more mildly. For the purposes of vertical tax harmonisation, art. 18b para. 1 DBG of the Federal Tax Law comes to use. In contrast to art. 7 para. 1 sentence 3 StHG, this provision explicitly refers to shares in cooperatives and not merely to all types of shareholdings.

In principle, a cooperative without share capital is a legal entity pursuant to art. 838 Para. 1 OR in conjunction with art. 52 Para. 1 OR, which is generally subject to profit tax. According to OR 859, the cooperative is authorised to distribute its net income in accordance with the articles of incorporation. A distribution of the net income after use of the institution by its members in accordance with art. 859 OR is provided for in the articles of association, regardless of whether the cooperative may or may not have share capital. The distribution of the net income is recorded as income for the cooperative members and taxed with income tax. The aforementioned net income is again subject to income tax when distributed to the cooperative's members. Thus, a cooperative without share capital is exposed to a economic double burden. In order for the mitigation of economic double taxation to apply, the natural person must be a participant of the legal person. At the federal level the existence of cooperative shares is also presupposed in art. 18b para. 1 DBG and art. 20 para. 1bis DBG. If there is ultimately no cooperative share capital, no share certificates may be available.

Conclusion

According to art. 7 para. 1 sentence 3 StHG, a distribution from a cooperative without share capital and share certificates does not therefore constitute income from an investment. In order that a mitigation of the economic double burden can be achieved, income from movable assets or a fee for the transfer of use of capital by a natural person is required. Since the Tax Harmonisation Act bindingly defines the object of partial taxation and there is no scope for individual cantons to determine this, the court ruled that the economic double burden on a cooperative without share capital and share certificates is not mitigated based on § 45a StG/A. The taxation of the payment of CHF 20'000 is subject to ordinary income tax and does not have to be privileged with partial taxation.