Friday, 22 May 2015

Swiss Supreme Court rules on treaty beneficial ownership in connection with derivative transactions

Switzerland’s Federal Supreme Court issued two important decisions on 5 May 2015 regarding the concept of beneficial ownership of income under tax treaties, as it applies to total return swaps and futures contracts.
A total return swap is a financial contract in which the parties agree to exchange the return (dividends and price changes) of an underlying asset or a basket of underlying assets for a set rate. In such an arrangement, the party receiving the total return will receive income generated by the asset, as well as the benefit if the price of the asset increases over the life of the swap.
In return, the recipient must pay to the counterparty the set rate over the life of the swap. If the price of the asset drops over the life of the swap, the total return recipient will be required to pay the counterparty the amount by which the asset has dropped in price.
A futures contract is a financial contract between two parties to buy an underlying asset or a basket of underlying assets at a predetermined price, with settlement occurring in the future. For Swiss market index (SMI) futures, the underlying assets are the shares representing the SMI. SMI futures are traded on the EUREX stock exchange. The cases involved two Danish banks that had fully hedged Swiss equities positions and claimed refunds of Swiss withholding tax on dividends received. The Federal Tax Administration (FTA) denied the refunds on the grounds that the conclusion of these derivative transactions resulted in the loss of beneficial ownership of dividends received from Swiss shares acquired for hedging purposes. The banks appealed to the Federal Administrative Court, which ruled against the FTA. The FTA appealed, and the Federal Supreme Court reversed the decisions of the Federal Administrative Court and upheld the position of the FTA.
Source & more info: Deloitte