Professional securities dealer?

Most of this kind of securities dealers do not think that they could possibly be qualified as performing a self-employed activity in the sense of Swiss tax law and hence would not report such profits or losses to the tax authorities.

The term «tax-free capital gains» is somehow deeply rooted within the general opinion of Swiss people regarding such securities trades. Furthermore, Swiss population has supported the rule on the ballot on several instances over the past few years.

Nevertheless, the term «tax-free capital gains» has been increasingly restricted by tax authorities in recent years, also due to recent court decisions. Tax authorities have on various occasions qualified the self-dependent management of private assets as performing a self-employed activity in the sense of tax law and therefore tax capital gains realized in the course of that activity.

Since the term of self-employed activity has not been exhaustively defined in any Swiss tax statute, tax authorities could convince courts to steadily restrict the concept of «tax-free capital gains».

For the taxpayer the decisive question is then, which criteria apply in order to qualify his or her trading in securities as a self-employed activity subject to tax.

Concept of Security

Securities within the meaning of the circular letter of the FTA are securities and non documented rights or value rights with the same function. Securities in the narrower sense can again be converted into securities in the civil law sense with full membership rights (e.g. shares), can be subdivided into mere property rights under participation law (e.g. participation certificates) or debt rights (e.g. bonds). Securities also include Book-entry registered membership and receivables rights, futures and derivatives.

Professional Trading in Securities

In order to assess whether a self-employed activity or private asset management is involved, it is necessary to consider all circumstances in the specific individual case. The facts of the case are under the criteria of the so-called "Safe Haven Rules". These must be fulfilled cumulatively in order to rule out professional securities trading:

• The holding period of the securities sold is at least 6 months;

• The transaction volume, i.e. the sum of all purchase prices and sales proceeds per calendar year, is less than five times the securities and credit balance at the beginning of the tax period;

• The realisation of capital gains from securities transactions may not constitute a necessity in order to finance one's livelihood. In other words, realized capital gains must account for less than 50% of net income in the tax period;

• The investments are not leveraged, or the taxable investment income from the securities (e.g. interest or dividends) is greater than the pro rata interest on debt;

• The purchase and sale of derivatives (mainly options) is limited to the hedging of own securities.

If only one of the above-mentioned criteria is not fulfilled, then tax authorities further test the case in view of the criteria developed by the Federal Supreme Court in accordance with the following weighting:

Criteria in the foreground:

• The amount of the transaction volume

In this case, a short period of ownership indicates that the taxpayer(s) are not primarily pursuing investment purposes, but are aiming for the quickest possible profit. Furthermore also take into account the relationship between the number of transactions and the volume of assets under management.

• The use of derivatives to hedge participations

Whenever the use of derivatives exceeds hedging of participation risks and when the turnover in derivative positions is considerably high, then this indicates that the taxpayer deals in securities in the course of a self-employed activity.

• Use of substantial external funds to finance the business

The taxpayer bears a higher risk when financing the transaction by borrowed money and therefore a higher use of debt capital indicates that he deals in securities in the course of a self-employed activity.

Indications of subordinate importance:

• The systematic or planned way of proceeding

In order to take up a self-employed activity, it is not necessary for the taxable person to carry out this activity in an organised business or to be externally visible on economic transport.

• The close link between the transactions and the professional activity of the taxable person(s) and the use of specific expertise

It is also irrelevant whether the taxpayer(s) carry out securities transactions themselves or through an authorised third party or whether there is a close connection with their professional activity.

Conclusion

The question whether a taxpayer qualifies as a self-employed securities dealer is in accordance with the applicable administrative rules and jurisprudence often uncertain and not straightforward. The basis for assessment is imprecise and have been weighted differently by courts on a case by case basis. In theory, the threshold for applying the standard for self-employed activity seems to be low. However, practice has shown that cantons are rather reluctant in applying the standard strictly. This situation creates substantial legal uncertainty for taxpayers dealing in securities.

Furthermore, it must be noted that many cantons have developed other rules for the qualification of self-employed securities dealers for cantonal- and communal income tax purposes.

It is therefore recommended that persons dealing in securities consider the above-mentioned tax risks and review on a regular basis whether their investment strategies and behaviour is in line with the applicable tax rules and jurisprudence in order to avoid unpleasant surprises.