• Charles Hermann, Partner |

On 16 December 2019, the Swiss Federal Supreme Court (“the Court”) ruled on a case concerning perceived dividend stripping transactions. Similarly to previous rulings, the Court once again rejected the refund of Swiss withholding tax (WHT).

The case

A Luxembourg-resident financial institution (“LuxCo”) borrowed Swiss shares before the dividend date from counterparties under a standard stock lending agreement (GMSLA). The counterparties (“Lenders”) were all resident in a jurisdiction having a treaty with Switzerland providing for the same rate of WHT as the Swiss-Luxembourg treaty (i.e. there was no WHT enhancement). As usual in any stock lending transaction, LuxCo paid an arm’s length manufactured dividend to the Lenders under the applicable GMSLA. LuxCo claimed a partial refund of WHT incurred on the real dividends from the Swiss shares, under the Swiss-Luxembourg Treaty.

The Swiss Federal Tax Administration (SFTA) and the Federal Administrative Court denied LuxCo’s reclaim request on the grounds that LuxCo was not the beneficial owner of the dividends generated by the Swiss shares. Additionally, the SFTA argued that Circular 13 (which provides that the foreign borrower is entitled to a refund of the WHT in a stock lending transaction), did not apply.

Court ruling of 16 December 2019

The Court agreed with the SFTA and denied the refund of WHT. The Court concluded that LuxCo was not the beneficial owner of the dividends due to the obligation to pay a manufactured dividend to the Lenders under the stock lending transactions. The Court again interpreted the concept of beneficial ownership from a cash-flow – and not from a proper legal – perspective, thus ignoring all OECD commentaries on beneficial ownership and instead following the same precedents set in other recent cases dealing with perceived dividend stripping transactions.

The Court also discussed the application of Circular 13. The Circulars of the SFTA are not legally binding for the Courts, however they are binding for the SFTA under the general constitutional principles of trust and good faith. In this case, the Court said, without any justification, that Circular 13 is “unclear” and does not provide enough clear guidance on beneficial ownership in the context of securities lending transactions. As a result, the Court concluded that LuxCo cannot rely on Circular 13 to claim a refund of WHT.

KPMG’s view – beneficial ownership

This ruling does not appear to be based on a proper application of the tax regulations, and can only be explained by political and financial motives.

Given the recent trends, it is not surprising that the judges denied beneficial ownership of the dividends in this case. The Court had already denied beneficial ownership of Swiss dividends where a taxpayer holds the shares as a hedge for a total return swap (TRS), and it is arguable that a taxpayer has a better case to justify beneficial ownership under a TRS compared to a stock lending transaction, given that the shares are not required to be returned to the counterparty under a TRS.

KPMG’s view – Circular 13

It is surprising that the Court refused to recognize the application of Circular 13 in this case. Circular 13, which explicitly covers the reimbursement of WHT in stock lending transactions, clearly states that “borrowers resident outside Switzerland are entitled to a refund of WHT on Swiss dividends under the applicable treaty”. It is very difficult to understand why the Court felt that the content of Circular 13 is unclear for conclusive application to this case; in our opinion, the wording and intention of Circular 13 (as quoted above) is indeed crystal clear.

Circular 13 (and its previous version dating 1992) reflects the Swiss tax treatment of securities lending transactions. In place for more than 25 years, it was originally produced by the SFTA after detailed consultation with the financial services industry and numerous industry experts. We therefore find it surprising that the Court was unclear on the intentions of Circular 13 and its application to the case, especially given the practice in Switzerland for over 25 years without any specific challenge on this point.


This ruling is yet another demonstration that the Swiss courts “do not like” dividend transactions even if they do not generate any WHT enhancement. It shows that the Court will ignore perfectly valid technical arguments in order to deny such claims.

As a result, lenders should systematically recall Swiss shares before any corporate actions as neither the borrower nor the lender (especially in a cross-border context) are able to claim a refund of WHT in a stock lending transaction, resulting in an irrecoverable 35% WHT on Swiss dividends and rendering stock lending transactions with Swiss shares over dividend commercially unviable. Last but not least, this ruling has considerable adverse consequences for taxpayers, as it is no longer possible to conclusively rely on the contents of the SFTA’s Circulars.

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