Switzerland: Tax authorities increasingly challenge withholding tax reclaims from foreign SWFs and PFs

Background

The 35% withholding tax (WHT) on Swiss sourced dividends is a significant source of frustration for many foreign investors into Switzerland. For portfolio investments, relief at source is not possible, meaning that a WHT reclaim process is required in order to obtain a refund of over-withheld amounts down to the correct double tax treaty (DTT) rate. In the asset management industry, these WHT reclaims are common for the following types of foreign investors:

• Certain investment funds domiciled in a limited number of countries only (see list below), based on Competent Authority Agreements supplementary to the DTT which enable the funds to file claims on behalf of the investors in the funds who are tax resident in the same jurisdiction [note that the investment funds themselves are not DTT eligible; this is an administrative simplification only that allows the funds to file the claim on behalf of their investors – the investors remain the DTT eligible persons] (Countries concerned: Australia, Austria, Canada, Denmark, France, Germany, Netherlands, Norway, Spain, Sweden, UK, US)
• Pension funds (PFs), depending on the terms of the applicable DTT
• Sovereign Wealth Funds (SWFs), also depending on the terms of the applicable DTT

For anyone with experience of the WHT reclaim process in Switzerland, it will not be news to you that the Swiss Federal Tax Administration (SFTA):

• Take a long time to manually review each WHT reclaim application, leading to significant delays in receiving the refunds (for simple cases up to 12 months, for complex cases this can last several years)
• Often issue Information Request Letters (sometimes several rounds of such letters) requesting that a significant amount of additional information be submitted within 30 days
• Often reject all or part of a WHT reclaim, in case either all requested additional information has not been submitted, or if the additional information causes the SFTA to question the beneficial ownership of the claimant (often the case where securities lending, short trading or hedging is involved)

Recent trends

Over the past months we have observed that the SFTA has more frequently been rejecting WHT reclaim applications from PFs, and even from SWFs. Most of these rejections are due to the additional information provided (or the claimant’s failure to provide the requested information within the timeframe given), or the SFTA’s detailed and complicated interpretation of beneficial ownership (which is not always aligned with international principles).

There has been no change in the applicable law, the reclaim forms, or the official guidance on the WHT reclaim process. Instead, this trend seems to be caused by a further tightening of the SFTA’s internal review process, where the SFTA is now raising even more detailed and formalistic questions when reviewing reclaims – and appears even more inclined to deny them, including in cases where refunds were granted in previous years.

We also note that in many WHT reclaim cases where the client attempts to respond to the SFTA directly (without involving a Swiss tax advisor), the responses to the SFTA’s questions are prepared by non-tax persons (e.g., foreign custodians/ investment people), who often:

• Have no understanding of the Swiss WHT reclaim process and the underlying point(s) of concern that the SFTA is trying to clarify with the additional information
• Use complicated language which ends up further confusing matters for the SFTA

If you (or any of your clients) are an investment fund (in one of the listed countries), PF or SWF with Swiss‑source investment income, it is worth reviewing:

• Whether Swiss WHT reclaims have recently been filed
• Whether there are significant delays, extensive follow‑up questions, or rejections of DTT‑based reclaims

KPMG Switzerland has successfully helped numerous investment funds, PFs and SWFs in their Swiss WHT reclaim applications over the last years. Anticipating and addressing the SFTA’s underlying points of concern upfront and diligently preparing the supporting documentation to facilitate the SFTA’s review can significantly reduce the number and scope of follow‑up queries, shorten processing times, and ultimately improve the likelihood of a successful reclaim.

For more information, contact your usual KPMG contact or Chris Goddard or Lina Novak from the Swiss Financial Services Tax team.