Tax credit despite failure to submit a tax return

A married couple did not file a tax return for the 2012 fiscal year and was then assessed at dutiful discretion. The assessment grew into legal force.

In 2013, the couple subsequently filed a voluntary declaration of untaxed income components for the tax year 2012. After the self-disclosure, the couple applied for a lump-sum tax deduction of CHF 15'565.00 within the framework of a belated declaration for investment income, which was burdened with non-refundable foreign withholding taxes. The tax authorities refused to recognise the lump-sum tax deduction for foreign withholding tax, pointing out that this right of recovery had been forfeited due to the violation of the duty to declare with the subsequent assessment of discretion, since the lump-sum tax deduction and the withholding tax were both structured as a security tax.

The taxpayers appealed against this decision, but the appeal was rejected. The complaint filed against this ruling was approved by the Tax Appeal Court of the Canton of Zurich. The Federal Tax Administration appealed to the Federal Supreme Court against the ruling of the Tax Appeal Court.

The Federal Supreme Court ruled on 27 July 2016 (BGE 2C_858/2015) that the couple was right and granted the retrospective lump-sum tax deduction for 2012, despite the couple's initial breach of duty within the framework of the tax declaration.

The Federal Supreme Court justified its decision as follows:

In the case of lump-sum tax deduction, tax jurisdiction is divided between the contracting states in order to eliminate the double international taxation of dividend payments. Taxation in the source state is limited in amount and there is an unlimited tax liability in the state of residence, with deduction of the tax of the source state. In this respect, individuals or married couples, based on the DTA, can apply for a lump-sum tax deduction in the country of residence within three years of the end of the tax period. This means that the income in question can be declared retrospectively in the following three tax periods from 2013 to 2015 and a lump-sum tax deduction can still be applied for. Although the married couple did not file a tax return in the fiscal year 2012, it demanded the lump-sum tax deduction, with prior self-declaration of the undeclared income components already one year later. This means that the deadline for the retrospective declaration or the reclaiming of the "withholding tax" on foreign investment income has not yet been forfeited and must therefore be acknowledged.

In principle, the Federal Supreme Court takes the view that the aim of lump-sum tax deduction is to avoid international double taxation and not to secure domestic taxation within the meaning of withholding tax. If the application for lump-sum tax deduction is submitted within the three-year period and the corresponding dividend income has been taxed or declared in Switzerland within this period, the lump-sum tax deduction must be granted, even if the declaration is made retrospectively in a self-declaration.