Federal Tax Administration, Department of Criminal Matters and Examinations, issues order for withdrawal of fiscal criminal prosecution on grounds of statute of limitations
13 August 2018
Dr. Marcel R. Jung successfully represented a German defendant in a fiscal criminal prosecution in a case where the defendant left is wife in Germany, transferred his tax home to Switzerland, liquidated a Swiss company and, after five years, moved back to his wife in Germany.
The defendant had a brokerage company in Switzerland. Due to marital dispute, he decided to move to Switzerland and to dedicate his strength to his brokerage business.
During his stay in Switzerland, the defendant had a serious accident. Further, he learned about a promising investment opportunity. The company paid out a significant dividend to the defendant. The company withheld the federal withholding tax at rate of 35% and paid it to the federal fisc. The defendant declared the gross dividend in his Swiss tax return and asked the cantonal fisc for a refund of the federal withholding tax. Due to shareholder relief on dividend income and low income tax rates, the offsetting between income tax and federal withholding tax resulted in a net amount that the cantonal fisc paid to the defendant. The refunded federal withholding tax was invoiced by cantonal fisc to the federal fisc. The defendant invested the dividend amount into the promising investment opportunity. Due to his ongoing health problems, the defendant liquidated the company and went back to his wife in Germany.
After deregistration, the cantonal fisc became doubts as to whether the defendant had transferred his tax home to Switzerland and had established a tax home in Switzerland or just a letter box. As a consequence, the German fisc was asked for exchange of information under the German-Switzerland double tax treaty, in particular with regard to deregistration, marital status and filing of German tax returns. Already back in Germany, the defendant fully cooperated with the German fisc and did not take legal measures to prevent the exchange of information. Subsequently, the cantonal fisc initiated a cantonal tax proceeding and issued an order according to which the defendant was not Swiss tax resident during the five years period. The order was not appealed. Conclusively, the federal withholding tax was refunded unlawfully. The cantonal fisc issued additional orders according to which the federal withholding tax was refunded unlawfully and has asked the defendant to pay back the federal withholding tax.
Getting knowledge of the cantonal tax proceeding, the Federal Tax Administration, Department of Criminal Matters and Examinations, initiated a fiscal criminal prosecution against the defendant. The defendant was accused of evasion of federal withholding tax which is a criminal offence. The fine may be up to CHF 30,000 or, if the amount is higher, three times the evaded federal withholding tax. In this case, three times the evaded federal withholding tax would have been very much bigger than the general threshold.
Dr. Marcel R. Jung successfully represented the defendant in the fiscal criminal prosecution. The Federal Tax Administration asked the defendant to come to Switzerland for a hearing. The defendant came to Switzerland, voluntarily attended the hearing and answered all questions of the investigation officer. Subsequently, the Federal Tax Administration issued the final protocol.
The defendant filed a response. The defendant demonstrated that he did not establish Swiss tax residence for purposes of evasion of federal withholding tax, but for bona fide business and marital dispute reasons. The defendant argued that he acted neither deliberately nor negligently and demonstrated that Swiss tax residence did not result in significant tax savings compared to German tax residence. Further, he demonstrated full cooperation with both Swiss and German authorities. He further argued that in any case, a minor fault only can be accused. In case of a minor fault, a minor fine only can be justified. Subsequently, the Federal Tax Administration issued a notification of penalty with a fine of CHF 30,000.
The defendant filed an appeal and gave evidence that his wealth was hit by significant losses as the promising investments felt short. The defendant argued that the fine would hit him sensitively. The Federal Tax Administration was asked to withdraw the fiscal criminal prosecution or to reduce the fine.
On 8 August 2018, the Federal Tax Administration issued an order for withdrawal of the fiscal criminal prosecution on grounds of statute of limitations. The limitation period for the prosecution of federal withholding tax evasion is five years or seven years at maximum (Art. 11(2) of the Federal Act on the Administrative Penal Code in conjunction with Article 333(6)(b) of the Federal Penal Code, see Federal Supreme Court, 16 October 2008, 6B_686/2008 = 134 IV 328).
The limitation period of seven years at maximum seems to be quite short. In this case, the Federal Tax Administration was able to initiate the fiscal criminal prosecution against the defendant five years after the criminal offence. Retrospectively, the time available was probably too short for a due and fair proceeding. One may conclude that the Federal Parliament should consider extending the limitation period to ten years.
The particularities in this case are the lack of international mutual assistance in the collection of taxes that is proposed by Article 27 of the OECD Model and Article 11 et seq. of Convention on Mutual Administrative Assistance in Tax Matters respectively and the provision in Article 57(3) of the Federal Act on the Federal Withholding Tax: If the federal withholding tax was refunded unlawfully, the Federal Tax Administration has to refuse the invoice. This means that the cantonal fisc bears the loss of an unlawfully refunded federal withholding tax. One may further conclude that the Federal Parliament should consider amending the federal withholding tax invoicing provision that passes the full risk of an unlawful refunded federal tax to the cantons.