Capital contribution principle for inbound dividends

In his 2012 tax return, A. (plaintiff) declared the amount of CHF 14'677.45 as a taxable dividend from his participation in X. AG with its registered office in Germany. But he did not declare the dividends he received by X. AG on 14 May 2012 and on 8 November 2012, which were distributed to him from the company's tax deposit account.

With the assessment of 20 May 2014, however, the Tax Commission U. declared all the dividends distributed to A. by X.AG in the total amount of CHF 118'492.25 taxable income from movable assets and subject to income tax. This was upheld in its appeal decision of 3 July 2015. The Special Administrative Court of the Canton of Aargau dismissed A.'s appeal as well. A. then filed an appeal with the Administrative Court of the Canton of Aargau, which in turn dismissed the appeal by judgment of 30 November 2016. A. then filed a constitutional complaint with the Federal Supreme Court. By judgment of 17 July 2017 (2C_69/2017), the Federal Supreme Court dismissed his appeal on the following grounds.

Right of access to documents

In his first point, A. claimed that his right of access to documents had been infringed. In an application for evidence before the lower instance, the plaintiff had demanded that all of the documents provided to the FTA by the X. AG must be made available to him and had also requested access to documents concerning the X. AG from the FTA directly. However, the FTA refused to grant him access to the files with reference to fiscal secrecy and the lower instance did not respond to his request either. The Federal Supreme Court also found A.'s complaint to be unfounded. The right of access to documents as part of the right to a fair hearing (art. 29 para. 2 BV) only applies to documents which are called in by the authority in the respective proceedings and is also subject to restrictions (art. 114 para. 2 DBG). However, the documents requested by the plaintiff were called in in the relationship between the FTA and X. AG and thus A. is the third party who may not be granted access to these documents pursuant to Art. 110 para. 1 DBG, unless there is a legal basis in federal law (art. 110 para. 2 DBG) or the owner of the information (in this case X. AG) would expressly give his consent to the provision of information. Neither is the case here. A. - as a shareholder of X. AG - could and must have procured this evidence himself in order to bring it into the proceedings.

Capital contribution principle

Income from movable assets, such as dividends, profit shares and monetary benefits from participations of all kinds, is taxable (Art. 20 para. 1 DBG and Art. 7 para. 1 StHG). On the other hand, repayments of capital contributions are not subject to income tax because they do not constitute investment income within the meaning of Art. 7 para. 1 StHG. According to the capital contribution principle, not only the paid-in share capital, but any capital contribution verifiably made by the shareholders is repayable tax-free (Art. 20 para. 3 DBG and Art. 7b StHG). The capital contribution principle is intended to ensure that capital contributions made by the participants to the reserves are not subject to income tax when they are repaid. However, the distribution of retained earnings generated by the company itself should continue to be subject to income tax. This regulation applies not only to domestic companies, but also to repayments of capital contributions by foreign companies. In this case, the taxpayer who invokes the capital contribution principle must prove the existence of corresponding capital contribution reserves, because this is a tax-cancelling fact. In the case of foreign companies, on the other hand, any piece of evidence that can be used to prove the repayment of capital contributions is sufficient.

A German deposit account is not equivalent to the Swiss «Reserves from capital contributions» account

The plaintiff submits that the disputed payments are not actually taxable dividends because the X. AG has been writing losses for several years. The «special dividends» would come from an off-balance sheet «tax deposit account», which the X. AG finances through the sale of real estate, machinery and subsidiaries. The dividends were therefore not paid out of operating profit, but exclusively from share capital and capital reserves from the «tax deposit account».

The Federal Supreme Court, however, did not follow this line of argument. According to the German Corporate Income Tax Act (KStG), the present "tax contribution account" is not to be equated with the account "reserves from capital contributions", which is to be shown separately in the commercial balance sheet according to Art. 959 para. 2 item 3 lit. b CO, since the German contribution account has a different purpose than the account "reserves from capital contributions" under Swiss law. Only open capital contributions made directly by the holders are considered qualified capital contributions within the meaning of Art. 20 para. 3 DBG and Art. 7b StHG. Therefore, even if the distributions made by X. AG to the complainant should be exempt from tax under German law, they are to be qualified as investment income and not as a capital repayment under the Swiss law applicable in casu. Furthermore, B. received from X. AG confirmed to the FTA in an e-mail dated 25 October 2013 that, from a German perspective, the dividend distributions of May and November 2012 come from the profit carried forward in accordance with German commercial law and are therefore normal dividends. This statement is also consistent with the unchanged capital holdings of X. AG, which can be seen in the FTA's Form 170. A. is therefore unable to prove that the distributions of 14 May 2012 and 8 November 2012 originated from the reserves from capital contributions. Consequently, they do not qualify as a tax-free repayment of a capital contribution, but as a taxable dividend.

Final remark

In principle, the provisions of Art. 20 para. 3 DBG and Art. 7 para. 1 StHG, known as the capital contribution principle, also apply to income from participations abroad. Following the introduction of the capital contribution principle with the resulting tax benefits, the question arises in the international context as to how these provisions are applied to foreign participations or which transactions under commercial law are equated with the capital contribution principle in foreign companies. In the context of German law, application was denied in the present case with regard to the term "taxable contribution". The Federal Supreme Court ruling shows that the application of the capital contribution principle is only possible if the foreign income originates from a contribution transaction comparable to Swiss law and mere formal similarities are not sufficient for claiming the tax advantage of Art. 20 para. 3 DBG or Art. 7 para. 1 StHG. The treatment of a distribution by the foreign tax authorities is also not decisive. Only Swiss tax law is authoritative for the assessment of a distribution by a foreign company.