Acts against good faith are not subject to legal protection

On 2 July 2009, A. AG (now in liquidation) transferred its registered office from the canton of Lucerne to the canton of Zug, leaving a permanent establishment in U., canton of Lucerne. For the tax period from 1 July 2009 to 30 June 2010, A. AG declared a taxable net profit of CHF 26'395 to the canton of Zug in the course of its liquidation, but did indicate the permanent establishment in the canton of Lucerne to the tax administration.

Accordingly, the Zug tax administration assessed A. AG on 30 January 2012. This assessment remained unchallenged. In August 2014, the tax departement of the Canton of Lucerne demanded documents from A. AG and submitted a proposal for assessment on 3 February 2015. Subsequently, A. AG requested the tax administration of the Canton of Zug to revise the assessment order of 30 January 2012, which rejected this request by decision of 6 March 2015. Again, no appeal was lodged against this decision. A. AG was assessed by the tax department of the Canton of Lucerne on 15 May 2015 as announced. It relinquished 20 % of the profit for headquarters and administration to the head office in Zug and left the remaining profit for the operating activities in U. A. AG raised an objection against this assessment, which the tax department rejected on 19 August 2015. A. AG then appealed this decision in front of the Cantonal Court of Lucerne. With its decision of 30 June 2016, the Cantonal Court of Lucerne approved the appeal and re-assessed A. AG. Nevertheless, A. AG filed a complaint with the Federal Supreme Court and filed for the elimination of the inter-cantonal double taxation between the cantons of Lucerne and Zug. The Federal Supreme Court dismissed the complaint against the Canton of Lucerne and the Canton of Zug by judgement of 17 July 2017 (2C_655/2016) on the following grounds.

The prohibition of inter-cantonal double taxation

Art. 127 para. 3 BV prohibits double Taxation between cantons. According to the Federal Supreme Court, such is the case if a taxable person is taxed by two or more cantons for the same tax object and for the same time (so-called current double taxation) or if a canton, in violation of the applicable conflict-of-law rules, exceeds its tax sovereignity and levies a tax that should rightfully be levied by another canton (so-called virtual double taxation).

In the present case, A. AG (the plaintiff) became subject to unlimited tax liability in the Canton of Zug with the transfer of its registered Office on 2 July 2009. At the same time, it remained subject to limited tax liability in the Canton of Lucerne, as it retained its permanent establishment in U. Consequently, both the Canton of Lucerne and the Canton of Zug were entitled to levy taxes from the plaintiff in the tax period from 1 July 2009 to 30 June 2010. However, the tax allocations of the two cantons differed greatly from one another: the Canton of Zug took only carried out one allocation on a pro rata temporis Basis, claiming around 99.7 % of its assets, while the Canton of Lucerne carried out the allocations on the basis of the employment factors capital and labour, allocating a premium of 20 % of its profits to the Canton of Zug and claiming around 7 % of its profit and 0 % of its capital. Thus the case at Hand, clearly represents a current double taxation.

Forfeiture of the right to challenge an assessment

However, it is questionable whether A. AG has forfeited its right of appeal by submitting its tax return without reservation, not making any tax exemption and not expressing in any way that, in spite of the relocation of its domicile from Lucerne to Zug, a limited tax liability remains in the canton of Lucerne due to a permanent establishment. In addition, the plaintiff paid the tax invoices without reservation after a first reminder.

According to the Federal Supreme Court Jurisprudence , a taxpayer forfeits the right to challenge the assessment of a canton if, knowing of the conflicting tax claim of another canton, he or she unconditionally acknowledges his or her tax liability there by, for example, expressly or tacitly submitting to the assessment, submitting the tax return, waiving an objection or further legal remedies and paying the assessed tax amount. On the other hand, a part of the doctrine is of the opinion that under the rule of the Federal Supreme Court Act (FCA) there is no longer a need for a ground for forfeiture of affected persons, while another part of the doctrine is of the opinion that the present constellation is a special feature of intercantonal double taxation law which continues to apply under the FCA. However, the Federal Supreme Court left this question open in the present decision, since the action of A. AG in liquidation proved to be disloyal anyway.

No legal protection for disloyal conduct

A. AG argued that it was only able to obtain assured knowledge about the conflicting tax Claim between the Canton of Lucerne and the Canton of Zug with the assessment order issued by the Canton of Lucerne on 15 May 2015. However, the Federal Supreme Court found this argument to be implausible. It is not convincing that the plaintiff, whose Chairman of the Board of Directors as well as legal representatives are lawyers and qualified tax experts, should have failed to declare the permanent establishment in Lucerne in the tax declaration of the main tax domicile. On the contrary, it seems as he has tried to evade at least part of the tax liability. The plaintiff's behaviour thus proves to go against good faith and does not merit any legal protection. A. AG has to accept the consequences of inter-cantonal double taxation.

Final remark

It is worthwhile to plan and implement compliance tasks properly and not to count on something falling between the table and the bank when various tax authorities are involved. This development will become more and more prevalent in the international environment as well. Increased attention to the execution and control of tax obligations is recommended.