Share with your friends

Switzerland: Perceived dividend stripping and stock-lending transactions (court decision)

Switzerland: Perceived dividend stripping

The Swiss federal high court (Federal Supreme Court) in December 2019 issued a decision in a case concerning what is referred to as a “perceived dividend stripping transaction.” The high court—following prior judgments—in its decision once again rejected a claim for a refund of Swiss withholding tax.


Related content


  • A Luxembourg-resident financial institution (LuxCo) borrowed Swiss shares from certain counterparties before the dividend declaration date under a standard stock-lending agreement (GMSLA).
  • The counterparties (or lenders) were all resident in a jurisdiction having a treaty with Switzerland that provides for the same rate of withholding tax provided for by the Swiss-Luxembourg treaty (in other words, there was no withholding tax 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 withholding tax incurred on the “real” dividends distributed from the Swiss shares, under the Swiss-Luxembourg income tax treaty.

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

Supreme Court decision

The Supreme Court agreed with the tax administration and denied the withholding tax refund claim. The high 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 high 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 its precedents set in other recent cases dealing with perceived dividend stripping transactions.

The Supreme Court also discussed the application of Circular 13. The circulars from the tax administration are not legally binding for the courts; however, they are binding on the tax administration under the general constitutional principles of trust and good faith. In this case, the Supreme Court said (as some have noted, 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 Supreme Court concluded that LuxCo could not rely on Circular 13 to claim a refund of withholding tax.

KPMG observation

Tax professionals have observed that the judgment in this case does not appear to be based on a proper application of the tax regulations, and can only be explained by political and financial motives. Moreover given recent trends, to some, it is not surprising that the judges denied beneficial ownership of the dividends in this case. The Supreme Court had already denied beneficial ownership of Swiss dividends in cases when a taxpayer holds the shares as a hedge for a total-return swap, and it is arguable that a taxpayer has a better case to justify beneficial ownership under a total-return swap compared to a stock-lending transaction, given that the shares are not required to be returned to the counterparty under a total-return swap.

Some tax professionals found it to be surprising that the high court refused to recognize the application of Circular 13 in this case. Circular 13, which explicitly covers the reimbursement of withholding tax in stock-lending transactions, clearly states that borrowers that are residents outside Switzerland are entitled to a refund of withholding tax on Swiss dividends under the applicable treaty. Thus, observers have found it is difficult to understand why the Supreme Court felt that the content of Circular 13 is unclear for conclusive application to this situation when the wording and intention of Circular 13 appear to be crystal clear.

Circular 13 (and its previous version dated 1992) reflects the Swiss tax treatment of securities-lending transactions. Having been in place for more than 25 years, this guidance was originally produced by the tax administration after detailed consultation with the financial services industry and numerous industry experts. Therefore, it has been surprising to find that the high 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.

To some, this judgment is yet another demonstration that the Swiss courts “do not like” dividend transactions even if the transactions do not generate any withholding tax enhancement. As a result, lenders need to systematically recall Swiss shares before any corporate actions because neither the borrower nor the lender (especially in a cross-border context) would be able to claim a refund of withholding tax in a stock-lending transaction—resulting in an irrecoverable 35% withholding tax on Swiss dividends and rendering stock-lending transactions with Swiss shares over dividend commercially unviable.

Bottom line: This decision may have considerable adverse consequences for taxpayers, as it is no longer possible to conclusively rely on the contents of the tax administration’s circulars.

Read a January 2020 report prepared by KPMG member firm in Switzerland

The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organization. KPMG International Limited is a private English company limited by guarantee and does not provide services to clients. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.

Connect with us


Want to do business with KPMG?


loading image Request for proposal