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Switzerland: Federal Supreme Court rejects offshore financing of a Swiss real estate group

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Reto Savoia

Sufficient substance in an offshore financing branch of a Swiss company is required so that the foreign branch qualifies as a foreign permanent establishment. In this case, an entirely Swiss-based real estate group managed its finance activities through a Cayman Islands branch of a Swiss finance company. While the finance company had no employees in Switzerland, the Cayman branch had four part-time employees working 20% each.

Based on a ruling with the cantonal tax authorities, the Cayman Island branch constituted a permanent establishment to which all income of the finance company would be allocated and exempt from the Swiss tax base.

The Swiss Federal Tax Administration decided that the ruling would no longer be valid for direct federal tax purposes and subsequently appealed the decision of the cantonal administrative court – which upheld the existence of a permanent establishment – before the Federal Supreme Court. On October 5 2012 the Federal Supreme Court denied the existence of a permanent establishment in the Cayman Islands and ruled that all income of the Cayman branch was taxable in Switzerland.

The decision by the Swiss Federal Supreme Court to tax all financing income in Switzerland and not in the Cayman branch was based on the grounds that the activities of the Cayman Islands branch did not rise to the level of a permanent establishment which would merit an income allocation to the Cayman branch. The court in particular highlighted the fact that although there were four part-time employees in the Cayman branch their total compensation amounted to only $50,000 a year, while they managed a loan portfolio of several hundred million dollars.

In view of the above court case it will be all the more important to make sure that there are sufficient activities and substance in a foreign financing branch so that it qualifies as a foreign permanent establishment.

Reto Savoia (rsavoia@deloitte.ch)

Deloitte

Tel: +41 (0)58 279 63 57

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