Overview

In a recent judgment 9C_591/2023, the Federal Supreme Court of Switzerland delved into the intricacies of determining the place of effective management for tax purposes, a pivotal factor in resolving disputes related to intercantonal double taxation. This judgment sheds light on how the place of effective management is identified, the required degree of proof, and the implications of such determinations on avoiding double taxation, particularly in light of mechanisms like the National Financial Equalization (NFA).

Determining the place of effective management

The place of effective management, or the actual location where a company conducts its central administrative activities, plays a crucial role in establishing tax liability across different cantons. In the case at hand, a company engaged in the trade, import, and export of cosmetic products, found itself embroiled in a tax dispute involving the cantons of St. Gallen (SG) and Appenzell Ausserrhoden (AR).

Arguments of the parties

The company argued that its place of effective management was in AR, where it had relocated its headquarters in 2008. They maintained that their managing director conducted essential financial monitoring and business transactions from this location, albeit while also admitting that significant operations occurred in other locations, including SG.

The tax authorities in St. Gallen contended that the place of effective management remained in SG, citing the continued presence of extensive office space and business activities there, despite the registered office being moved to AR. They highlighted that strategic business decisions and customer interactions were predominantly conducted from SG.

The canton of Appenzell Ausserrhoden supported St. Gallen’s stance, noting that the company’s activities in AR were minimal and did not constitute significant managerial operations. They emphasized that the company’s primary business activities and external representations were linked to SG.

Degree of proof required

A critical aspect of this case was the degree of proof required to establish the place of effective management. The Federal Supreme Court reaffirmed that the standard of proof in tax matters is the “balance of probabilities.” This standard necessitates that the asserted facts are more likely than not to be true, though absolute certainty is not required.

The court scrutinized the evidence provided by both cantons and the company. It concluded that the extensive and substantive business activities in SG outweighed the minimal operations in AR. This assessment was based on the presence of significant office space, employee activities, and the conduct of key business functions in SG.

Avoiding double intercantonal taxation

The judgment ultimately highlighted the importance of accurately determining the place of effective management to avoid double intercantonal taxation. The company had been subjected to tax assessments by both St. Gallen and Appenzell Ausserrhoden, leading to a scenario of double taxation, which is prohibited under Swiss law.

Despite arguments from Appenzell Ausserrhoden about the potential impact on the NFA, the Federal Supreme Court ruled that such financial implications do not justify retaining wrongfully collected taxes. The court underscored that the NFA’s complexities and the resultant financial distributions should not influence the primary determination of tax liability based on the place of effective management.

The Federal Supreme Court’s decision to annul the tax assessments by Appenzell Ausserrhoden affirmed the company’s main tax domicile in St. Gallen, thus eliminating the issue of double taxation. This ruling ensures that companies are taxed fairly based on their actual place of management, reinforcing the principle of preventing double taxation across cantonal boundaries.

Conclusion

This landmark judgment clarifies the criteria and proof required for determining the place of effective management in Swiss tax law. By focusing on where a company’s central administrative activities are genuinely conducted, the Federal Supreme Court did not allow the company to transfer its place of effective management, and thus its unlimited tax liability, to another canton. At the same time, it protected the company from double intercantonal taxation by canceling the tax assessment of another canton. 

It is important to note that, in most cases, intercantonal double taxation can only be avoided by appealing to the Federal Supreme Court against one of the tax assessments issued by the disputing cantons, even if the taxpayer agrees with the jurisdiction of the canton that issued it.

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