Collective Investment Vehicles in International Tax Law: The Swiss Perspective

Transcription

1 ARTICLE Collective Investment Vehicles in International Tax Law: The Swiss Perspective Dr Reto Heuberger * & Stefan Oesterhelt ** With the Collective Investment Act Switzerland has introduced new types of investment funds, that is, the Société d investissement à capital variable (SICAV), the limited partnership for collective investments (PSCI) and the Société d investissement à capital fixe (SICAF). The Swiss Federal Tax Administration has introduced the tax regulations for a taxation of the funds and their investors at the beginning of the year. This article covers first the amended principles of taxation of funds in Switzerland and the existing uncertainties. It focuses on the international aspects like the entitlement of the funds for treaty benefits, the reimbursement by foreign investors of the Swiss withholding tax levied on distributions by the funds and the qualification of foreign funds for Swiss tax purposes. 1. TYPES OF CIVS IN SWITZERLAND Until recently, the only type of collective investment vehicle (CIV) in Switzerland was the contractual fund (Fonds commun de placement (FCP)). Since the Collective Investments Act has entered into force, two corporate types of funds have been added, one open ended (Société d investissement à capital variable (SICAV)) and one closed ended (Société d investissement à capital fixe (SICAF)). Besides, a non-corporate vehicle has been added, the partnership for collective investments (PSCI). resident investors (holding their investment in the CIV as private assets) to the extent that the profit do not derive from directly held real estate or capital gains realized by the fund. The income derived from directly held real estate is exempt from taxation because it has been taxed at level of the CIV (as representative of the investors). The capital gains are exempt because of the transparent character of the funds. Since capital gains from the disposal of a privately held asset are exempt from taxation in Switzerland, the capital gains realized by the CIVs are also exempt. The CIVs have to separately account for the income from real estate and capital gains. 2. OVERVIEW OVER THE TAXATION OF FUNDS 2.1. Income Tax of the Funds The FCP, SICAV and PSCI are as long as they do not own real estate 1 not subject to income tax. These types of funds are therefore called fiscally transparent CIVs. The SICAF on the other hand is an investment company that is subject to normal income tax rates Income Tax of the Investors Distributions by the CIVs The distribution of profits by the FCP, SICAV and PSCI are subject to normal income tax in the hands of the Swiss Accumulated Profits of the CIVs If the FCP, SICAV or PSCI is a so-called accumulation fund, 2 the Swiss resident investors do not only have to tax the distributions but also the reinvested net income of the fund. The income is realized when it is entered to the CIV s accounts. Income from real estate and capital gains are also exempt from tax in the hands of the private investors if the fund is an accumulation fund. The Federal Tax Administration yearly publishes a list with all the values of the income of the funds Redemption of Fund Investments The redemption of the shares by the FCP and the SICAV are qualified as a tax-free capital gain if the investor has * Dr Reto Heuberger, LL.M. (NYU), Attorney-at-Law, Certified tax expert, Homburger, Zurich. <Reto.Heuberger@Homburger.ch>. ** Stefan Oesterhelt, LL.M. (Cantab), Attorney-at-Law, Certified tax expert, Homburger, Zurich. <Stefan.Oesterhelt@Homburger.ch>. 1 Income and capital gains from directly owned real estate located in Switzerland are subject to income tax; at Federal level and in most of the cantons a reduced tax rate compared to the normal tax rate is applied. 2 An accumulation fund is defined as a fund that is not obliged to distribute at least 70% of the net profit; the net profit includes the net income of the fiscal year in question as well as income carried forward from previous years. 31 INTERTAX, Volume 38, Issue Kluwer Law International BV,The Netherlands

2 Intertax held the investment in his private wealth. The redemption of a share in the PSCI on the other hand is qualified as a partial liquidation. The liquidation proceeds constitute taxable income Sale of a Fund Investment Capital gains from the sale of a fund investment held by private investor are tax free, and capital losses are not tax deductible. The exemption from tax includes income which has not been distributed or accounted for in the respective year Withholding Tax (Anticipatory Tax) For purposes of the Federal withholding tax (anticipatory tax) the FCP, SICAV and PSCI are not treated as fiscally transparent. Distributions (and even accumulated profits of the accumulation funds) by these CIVs are subject to withholding tax at rate of 35%. Since distributions and accumulated profits by funds in Luxembourg, Ireland and offshore jurisdictions (Jersey, Guernsey, Bermudas, British Virgin Islands, Cayman Islands and Bahamas) are not subject to withholding tax, this is a substantial disadvantage of Swiss funds. However, the distributions (and accumulated profits) are not subject to withholding tax to the extent that they derive from on capital gains or income from real estate. Income from capital gains is exempt because the main purpose of the Swiss withholding tax is to secure the tax for the Swiss resident persons. Since capital gains on the disposal of securities are exempt from taxation if they are held as private assets, no withholding tax needs to be levied. Income from real estate is taxed at fund level and exempt at investor level. Therefore, this type of income does not need to be secured by the withholding tax either Taxation of Investors in Foreign Funds When Swiss resident investors invest in foreign funds, the question is whether the tax treatment of investments in companies (including SICAF) or of investments in transparent CIVs apply. In principle, the tax treatment of transparent CIVs applies if the foreign investment vehicle meets one of the following three tests: it is authorized for distribution in Switzerland by the Swiss Financial Market Supervisory Authority (FINMA); it is regulated as a fund in its country of registration; 3 its purpose is the collective investment. The question whether this test is met needs to be analysed for each case. The criteria are whether the investment vehicle has a limited term, there is an offering memorandum, the investors have decision-making powers, the reporting is done in the same way as in regulated CIVs, and the fact that the CIVs have the typical bodies of a fund like investment manager, custodian bank and so on. If the foreign CIVs a legal entity, the tax treatment of a transparent CIVs only applicable if the investors have the right to yearly redeem their investment at the net asset value. The consequences of the qualification of a foreign fund as a transparent CIVs that the Swiss investors who hold their investment as part of their private assets are on the one hand not taxed on capital gains but on the other not only taxed on the distributions made by the fund but also on accumulated profits. 3. REIMBURSEMENT OF THE WITHHOLDING TAX ON DISTRIBUTIONS BY THE CIVS 3.1. Swiss Resident Investors Swiss resident investors obtain a full refund of the Swiss withholding tax on distributions by the CIVs if they are the beneficial owners and declare the distributions (and taxable accumulated profits) properly in their tax return Foreign Resident Investors CIVs with at Least 80% Foreign Source Income (Funds Eligible to Affidavit) Reimbursement Based on Domestic Law Foreign resident investors in FCP, SICAV or/and PSCI can claim the reimbursement of the tax withheld on their share based on Swiss domestic law (Article 27 Withholding Tax Act) if at least 80% of the fund s income is from foreign source. The reimbursement of the withholding tax is in this case granted even if the investors are resident in a country with which Switzerland has not concluded a double taxation treaty. In determining the 80% threshold, capital gains which are declared separately will be deducted. This deduction concerns also capital gains from the disposal of foreign investments. If, however, capital gains from the disposal of foreign investments are not declared separately in the statement for the investors, they will be included in determining the 80% threshold. Note 3 This test does not apply to the so-called Einanlegerfonds (i.e., a fund with less than five investors). 32

3 Collective Investment Vehicles in International Tax Law:The Swiss Perspective Notification Procedure The CIVs do not need to pay the withholding tax but can instead apply the notification procedure (so-called affidavit procedure) for the foreign resident investors if at least 80% of their income is from foreign sources. The application of the notification procedure requires that the investor signs a declaration of domicile (affidavit). Funds which have at least 80% foreign source income are thus called funds eligible to affidavit. Until 2006 only banks within the meaning of the Federal Banking Act where entitled to issue such an affidavit. As from 2007 on, also the Swiss fund manager, Swiss asset manager of funds within the meaning of the Federal Investments Act, the Swiss regulated custodian and Swiss securities dealer according to the Federal Stock Exchange Act can issue such declarations of domicile. Besides, declarations of domicile signed by foreign regulated banks are accepted if the Swiss bank is the recipient of such declaration of domicile. The issuer of a declaration of domicile has to confirm in writing (or electronically if ruled) that: (i) the foreign investor is the beneficial owner of the fund investment; (ii) the share in the fund is in the foreign resident investor s bank deposit and (iii) the taxable income has been booked to the account of the foreign resident investor CIVs With Less Than 80% Foreign Source Income: Reimbursement Based on Double Taxation Treaties Administrative Practice in Switzerland The foreign resident investor of a CIV with less than 80% foreign source income (funds not eligible to affidavit) may claim the reimbursement of the withholding tax on the distributed or accumulated profits of the CIV based on a double taxation treaty between the country of residence and Switzerland. The Organization for Economic Cooperation and Development Model Tax Convention (OECD MTC) and practically all Swiss double taxation treaties do not contain specific rules for the qualification of the income of CIVs. 4 The Swiss Federal Tax Administration applies the socalled predominant income test to determine the qualification of income: if more than 50% of the income of the CIV derived from dividends, it grants the reimbursement of the withholding tax based on the dividend article of the respective double taxation treaty (equalling Article 10 OECD MTC). If more than 50% of the income of the fund is derived from interest, the reimbursement is granted based on the interest article of the respective double taxation treaty (equalling Article 11 of the OECD MTC) Taxation Right of the Source Country? It is, however, questionable whether the predominant income test applied by the Federal tax administration is the appropriate method. The reimbursement in question concerns the withholding tax on the profit of the CIV rather than the reimbursement of all the withholding taxes on the single investments: If the FCP, SICAV and PSCI earns solely Swiss source income, it can be argued that the withholding tax on the profit (distributed or accumulated) replaces the withholding tax on the Swiss investment which has been reimbursed to the CIV based on domestic law (Article 26 Withholding Tax Act). But if the CIV has both interest and dividend income and the dividend article is applicable based on the predominant income test, the application of the higher residual withholding tax for dividends is not in line with the applicable double taxation treaty to the extent that interest income is concerned. If the CIV has (also 5 ) income from foreign investment, it is in our view questionable whether Switzerland as source state even has a taxing right for the distributions of the CIV. Since the distributions by the FCP, SICAV and PSCI are neither dividends nor interests or royalties, the residence country has the right to tax based on Article 21 OECD MTC to the full extent. Consequently, the investor should obtain the full refund of the Swiss withholding tax based on the applicable double taxation treaty TREATY ELIGIBILITY OF CIVS 4.1. Refund of the Withholding Tax on Swiss Investments (Inbound Investments by CIVs) Swiss CIVs The FCP, SICAV and PSCI are entitled to obtain a full refund of the Swiss withholding tax on Swiss investments (shares, bonds and funds) based on domestic law (Article 26 Withholding Tax Act). 4 The only exception is Art. 10 s. 4 of the German-Swiss double taxation treaty, which expressly provides that distributions on the shares of a collective investment company (investment fund) fall within the definition of dividends. Therefore, the income from CIVs is always qualified as dividend income with respect to Germany. 5 Provided foreign source income is less than 80% of the total income and the foreign resident investors cannot obtain a refund of the withholding tax based on Art. 27 Withholding Tax Act. 6 All Swiss double taxation treaties except for the ones with Argentina, Australia, China, India, Indonesia, Canada, Malaysia, Mexico, Pakistan, Philippines, Singapore, Thailand, Trinidad and Tobago and Vietnam have implemented clauses in compliance with Art. 21 of the OECD MTC. 33

4 Intertax Foreign CIVs Foreign CIVs need to base their claim for refund of the Swiss withholding tax on their Swiss investments on a double taxation treaty. The OECD MTC and the commentary have to up now expressly left the question open whether CIVs are entitled to treaty benefits. 7 The OECD report of 12 January however proposed that the OECD commentary shall expressly state that the CIVs shall be entitled to treaty benefits. 9 Currently the following requirements need to be fulfilled for a CIV to be entitled to treaty benefits: the CIV needs to be a person within the meaning of Article 3 section 1 lit. a OECD MTC; the CIV has to be a resident person within the meaning of Article 4 section 1 OECD MTC; the CIV has to be the beneficial owner of the investments held by it within the meaning of Article 10 section 2 OECD MTC and Article 11 section 2 OECD MTC. Until recently, only one of all Swiss double taxation treaties has included the treaty eligibility of CIVs. 10 With some countries, however, bilateral agreements have been concluded in the mean time, which provide for the treaty eligibility of the CIVs. Under these agreements, the CIV is not itself eligible to the treaty benefits, but it can claim the refund of the withholding tax as a representative of its investors resident in the same country. In this respect, the requirement for reimbursement based on the double taxation treaty does not need to be fulfilled by the CIV, but by its investors Contractual CIVs and Trusts OECD MTC Contractual CIVs (such as the FCPs under Luxembourg law) have no legal personality. These vehicles are therefore usually no persons within the meaning of Article 3 section 1 lit. a OECD MTC unless if they are taxed like companies. 11 The same is in principle true for trusts which are in particular in common law jurisdictions often used as CIVs. 12 Therefore, these CIVs are not entitled to obtain a refund of the Swiss withholding tax based on Articles 10 and 11 OECD MTC. 13 The investor resident in a treaty state on the other hand can in principle in his own name claim the refund of the Swiss withholding tax based on Article 10 or 11 OECD MTC. In practice, however, this usually makes only sense if the investor owns a high stake in the CIV. The same is true for offshore funds the investors of which are resident in a treaty state Special Treaty Rules Switzerland has concluded special bilateral agreements with Australia, Denmark, Germany, France, United Kingdom, Japan, Canada, the Netherlands, Norway, Austria, Sweden and Spain providing for the full or partial refund of the withholding tax on investments held by the CIV. Under all these agreements, the CIVs claim the refund in the own name but not in the own right. Since they can claim the refund only as representatives of the investors, only a 15% refund (portfolio rate) is granted if the CIV earns dividend income Corporate Funds CIVs in corporate form (e.g., Luxembourg SICAV and SICAF) are persons within the meaning of Article 3 section 1 lit. a OECD MTC. This is also true for CIVs in the form of foundations. 15 The CIV in corporate form can only obtain a refund of the withholding tax on dividends and interest based on the double taxation treaty if it is qualified in addition as a resident person. Under Article 4 section 1 OECD MTC the person is resident of a contracting state if it is subject to unlimited tax liability in that state. A CIV in corporate form which is treated as fiscally 7 See n. 59 OECD commentary to Art. 10 OECD MTC. 8 OECD report on the granting of treaty benefits with respect to the income of CIVs. 9 Inclusion of a new n. 6.8 et seq. in the OECD commentary to Art. 1 OECD MTC (OECD report of 12 Jan. 2009, n. 50). 10 See Art. 27 s. 9 UK-Swiss double taxation treaty (in the version applicable until 31 Dec. 2008). 11 Vehicles that are treated like legal entities for tax purposes are companies within the meaning of Art. 3 s. 1 lit. b OECD MTC and therefore also persons within the meaning of Art. 3 s. 1 lit. a OECD MTC (see n. 2 OECD commentary to Art. 3 OECD MTC). 12 Some of the Swiss double taxation treaties with common law countries (e.g., Art. 3 s. 1 lit. a US-Swiss double taxation treaty) expressly treat trusts as persons. Whether this vehicle is also qualified as a resident person within the meaning of Art. 4 OECD MTC, which is eligible to treaty benefits, depends on whether the trust is subject to tax in the resident state. 13 See OECD report of 12 Jan n. 21 et seq.; Ed Bongaarts, The taxation of investment funds, general report to 51. IFA congress 1997 in New Delhi, CDFI 1997b, 107 et seq., 133 et seq. 14 However, if the investor indirectly through the CIV holds a participation which exceeds the participation threshold of the double taxation treaty, he should in our view be entitled to obtain a full refund of the 15% residual withholding tax in his own name (example: investor holds 40% of the shares of German fund which holds 15% of a Swiss resident company; he thus owns indirectly 20% of the Swiss resident company; the fund is entitled to reduce the withholding tax on the dividend paid by the Swiss resident company to 15% based on Art. 10 s. 2 lit. c German-Swiss double taxation treaty; the investor can reclaim the residual 15% based on Art. 10 s. 3 German-Swiss double taxation treaty). 15 See n. 2 OECD commentary to Art. 3 OECD MTC; OECD report of 12 Jan. 2009, n

5 Collective Investment Vehicles in International Tax Law:The Swiss Perspective transparent and therefore not subject to income tax can thus in principle not be a resident person. 16 On the other hand, if the CIV in corporate form is treated as fiscally intransparent in the country of residence, it is in principle a resident person even if it is subject to lower tax rates or if certain parts of the income are exempted from taxation. 17 However, not all the countries follow this view. 18 As mentioned above, the third requirement for the refund of the withholding tax on dividends and interest in its own name is that the CIV is the beneficial owner of the income based on Article 10 section 2 OECD MTC or Article 11 section 2 OECD MTC. Since the term beneficial owner is not defined in the OECD MTC, the source state (Switzerland with respect to the Swiss withholding tax) has to interpret it. The large majority of the OECD countries is of the opinion that a CIV in corporate form which is qualified as a resident person within the meaning of Article 4 section 1 OECD MTC is the beneficial owner of its investment as long as the managers of the CIV have discretionary powers to manage the assets on behalf of the holders of interests in the CIV Partnerships OECD MTC CIVs in the form of a partnership are in principle qualified as persons within the meaning of Article 3 section 1 lit. a OECD MTC. 20 However, it is only classified as a resident person within the meaning of Article 4 section 1 OECD MTC if it is subject to corporate income tax in the residence state. Therefore, fiscally transparent partnerships are not classified as resident persons and are therefore not entitled to the treaty benefits. Most of the Swiss double taxation treaties follow this view of the OECD MTC Special Treaty Provisions Certain double taxation treaties that Switzerland has concluded treat the partnerships as resident persons. They are the ones with Belgium, Denmark, Finland, France, Greece, the United Kingdom, Island, Ireland, Italy, Japan, Canada, Croatia, Portugal, Sweden, Tunisia and the United States of America. But these treaty provisions are based on the concept that the foreign resident partners of the partnership become subject to limited tax liability as co-owners of a trade or business for the profit of the partnership in the country where the partnership is located. The partners of a CIV in the form of a partnership on the other hand do not become subject to limited tax liability in the country where the partnership is located because the CIV does not carry on a trade or business. Therefore, the foreign resident partners of a Swiss partnership can usually not obtain the refund of the Swiss withholding tax. On the other hand, the investors who are resident in the same country as the location of the partnership should in principle be entitled to a refund of the withholding tax. This entitlement could only be denied if according to the applicable treaty provision the benefits are only granted if the partnership carries on a trade or business Claim for Refund by Investors in a Foreign CIV Investors Resident in the Same Country as the CIV If the Foreign CIV is not considered to be a resident person within the meaning of Article 4 section 1 OECD MTC and is therefore not in its own right entitled to obtain a refund of the withholding tax on dividends and interests, it is considered to be transparent for purposes of the withholding tax. But the investors in the CIV who are resident in the same country are entitled to the benefits of the treaty between the source state (Switzerland) and the residence state. But usually, the administrative burden to obtain the refund is too high considering the tax amount at stake. Besides, the investors can often not easily prove that they indirectly receive Swiss source dividend and interest income. But if the investor can show proof, he needs to be granted the refund of the withholding tax. In our opinion it would be a violation of the double taxation treaty if the tax authorities denied the request on the basis that the investor legally does not earn income from Swiss securities but rather income from a CIV. Such a formal view would not be in line with the purpose of the double taxation treaty. With respect to countries with which Switzerland has concluded a double taxation treaty, the claim for refund of the withholding tax is made by the CIV as representative of the investors. The investor himself has no claim to obtain the refund. If the investor indirectly through the CIV holds a qualifying participation in a Swiss company, he should be entitled to obtain a full refund of the 16 See in this respect in detail Aigner, 57 et seq., 96 et seq. 17 See OECD report of 12 Jan. 2009, n The adverse position is indeed taken by the countries that had a minority opinion in n. 8.6 OECD commentary to Art. 4 OECD MTC (see OECD report of 12 Jan. 2009, n. 27). 19 See n. 29 et seq. OECD report of 12 Jan The OECD report suggests to expressly describe it in the OECD commentary to Art. 1 OECD MTC. 20 See n. 2 OECD commentary to Art. 3 OECD MTC (in the version in force since 2000; see also OECD Committee on Fiscal Affairs, The Application of the OECD MTC to partnerships, Paris 1999). 21 The requirement that the partnership has to carry on a trade or business in certain treaties shall ensure that the investors are subject to tax in the country of the partnership. In this regard, this requirement should be waived in case the investors are residents in the same countries as the partnership. 35

6 Intertax AQ1 withholding tax in his own name in the amount of the difference of the 15% rate on the basis of the double taxation treaty Investors Resident in the Source Country (Switzerland) Swiss resident investors of a transparent foreign CIV which itself holds Swiss securities should in our view be able to obtain a refund of the Swiss withholding tax based on Article 22 section 1 Federal Withholding Tax Act and Article 23 section 2 Federal Withholding Tax Ordinance. However, the Federal tax administration takes a different view Refund of Foreign Source Taxes (Outbound Investments by Swiss CIVs) FCP OECD MTC Since the FCP has no legal personality, it is in principle no person within the meaning of Article 3 section 1 lit. a OECD MTC and therefore not entitled to treaty benefits. It would only be entitled if it were taxed like a legal entity and therefore classified as a company within the meaning of Article 3 section 1 lit. b OECD MTC. But this is not the case for the FCP investing in securities which is treated as fiscally transparent 24 for purposes of the income tax. 25 But if the FCP owns real estate it is subject to corporate income tax (Article 49 section 2 Federal Income Tax Act). Thus, if such a fund in addition earns income from foreign securities (e.g., income from foreign real estate companies), the question may be raised whether such an FCP should be entitled to treaty benefits. The fact that only income from directly held real estate is subject to corporate income tax, should not contradict the qualification as a company within the meaning of Article 3 section 1 lit. b OECD MTC nor as a resident person within the meaning of Article 4 section 1 OECD MTC. 26 The fact that these CIVs are subject to corporate income tax at Federal level and in many cantons only at a reduced income tax rate should also not conflict such a qualification. 27 If this view is followed, it can be assumed that the FCP are in principle subject to corporate income tax and the income from securities is only exempt from taxation. Since according to the OECD report dated 12 January 2009 and the OECD commentary to Article 4 OECD MTC 28 it is not relevant whether the CIV is indeed paying corporate income tax, it can be argued that the FCP (even if it does not directly hold real estate) is in fact a resident person within the meaning of Article 4 section 1 OECD MTC and therefore entitled to treaty benefits. 29 But unfortunately we are not aware of any cases in practice in which an FCP in its own right has been able to obtain a refund of foreign withholding taxes Special Treaty Provisions Agreements Regarding Refund of the Withholding Tax Switzerland has concluded bilateral agreements with Denmark, Germany, France, the United Kingdom, the Netherlands, Norway, Austria, Sweden and Spain, which grant the full or partial refund of the withholding tax on the investments to the FCP as representative of the investors resident in the same country. On dividend income the reduction is usually only granted up to the residual tax rate of 15% Agreements Regarding the Reduction at Source Australia, Japan and Canada grant a reduction of the withholding taxes at source for securities which are held by a FCP. These countries levy withholding taxes only at the rate of the residual withholding tax for dividends (15%) or 22 Example: An investor resident in Germany holds 20% of a German CIV, which holds 100% of a Swiss resident company. The CIV can obtain a refund of 20% of the 35% Swiss withholding tax based on Art. 10 s. 2 lit. c German-Swiss double taxation treaty. The investor himself has to obtain the refund of the remaining 15% based on Art. 10 s. 3 German-Swiss double taxation treaty. 23 See Federal tax administration 16 Apr. 1991, praxis federal taxes, Second. Part, Art. 26 s. 3 Withholding Tax Act no See s. 3.1 supra. 25 The distribution and accumulated profits of the fund are subject to withholding tax according to Art. 4 s. 1 lit. c Withholding Tax Act. This does, however, not change the fact that the FCP is not taxed like a company and therefore not entitled to the treaty benefits. Besides, it is questionable whether Switzerland is indeed entitled to levy the withholding tax on the distributions and accumulated earnings (see supra s ). 26 This is expressly described in the OECD report of 12 Jan. 2009: However, a CIV that is treated as opaque in the contracting state in which it is established should be treated as a resident of that contracting State even if the specific items of income it receives are exempt from taxation, or if it receives a deduction for dividends paid to investors, or if it is subject to a lower rate of tax on its income (OECD report dated 12 Jan. 2009, n. 26). 27 See OECD report dated 12 Jan. 2009, n See s. 8.5 OECD commentary to Art. 4 OECD MTC. 29 If a FCP is classified as a resident person within the meaning of Art. 4 s. 1 OECD MTC based on the definition of the source state, it is also according to the opinion of most OECD states classified as beneficial owner within the meaning of Art. 10 s. 2 OECD MTC and Art. 11 s. 2 OECD MTC since the fund management has discretionary powers to manage the assets on behalf of the holders of interests in the CIV (OECD report dated 12 Jan. 2009, n. 29 et seq.). 36

7 Collective Investment Vehicles in International Tax Law:The Swiss Perspective interest according to the applicable double taxation treaty. Since the reduction at source is also granted for investors in the FCP which are not resident of Switzerland, the FCP has to declare and pay the respective amounts allocated to foreign resident investors to the Federal tax administration with the respective forms SICAV OECD MTC Since the SICAV itself has legal personality it is considered a person within the meaning of Article 3 section 1 lit. b OECD MTC. But it can only obtain a refund of the withholding tax on dividends under Article 10 OECD MTC or interest under Article 11 OECD MTC if it is in addition treated as a resident person within the meaning of Article 4 section 1 OECD MTC. But since the fiscally transparent SICAV is normally not subject to income tax liability at the place of residence it is not classified as a resident person. However, in analogy to the view described with regard to the FCP, it can be argued that the SICAV is indeed subject to corporate income tax even if these taxes are only levied on the directly held real estate. If one followed this view, the SICAV would be treated as a resident person and thus be entitled to the treaty benefits in its own right Special Bilateral Agreements The bilateral agreements with Denmark and the United Kingdom expressly include also the SICAV. But many of the agreements (Germany, France, Norway, Austria, Sweden and Spain) were concluded before Switzerland introduced the SICAV and therefore only mention the FCP. However, in our view the content of these agreements regarding FCP should also be applied to the SICAV. 30 Australia, Japan and Canada grant the reduction at source also to the Swiss SICAV PSCI OECD MTC The PSCI is a person within the meaning of Article 3 section 1 lit. b OECD MTC. But they are fiscally transparent and therefore like the SICAV usually not resident persons within the meaning of Article 4 section 1 OECD MTC. 31 But just like with respect to the FCP and the SICAV, a different view can also be taken with regard to a partnership because of the taxation of income from directly held real estate Special Bilateral Agreements Partnerships as Resident Persons Some double taxation agreements concluded by Switzerland contain provisions according to which a partnership is qualified as a resident person within the meaning of Article 4 section 1 OECD MTC. But some of the agreements require that the partnership carries on a trade or business in the resident state. Since the PSCI does not carry on a trade or business, it cannot be treated as a resident person. But even if the respective double taxation treaty does not require the partnership to have a trade or business, it is questionable whether the PSCI can be qualified as a resident person. The reason is that the background for the treaty provision is that the foreign resident partner in the partnership is subject to limited tax liability in Switzerland according to Article 4 section 1 lit. a Federal income tax act. This is not the case with respect to the investor in a PSCI Bilateral Agreements Under the bilateral agreements with Denmark and the United Kingdom the PSCI can obtain a refund of the withholding tax for Swiss resident investors. Austria, Japan and Canada grant the reduction at source on the payments to the partnership. In our view, the other bilateral agreements with Germany, France, Norway, Austria, Sweden and Spain should also be applied to the PSCI SICAF SICAF are companies and therefore persons within the meaning of Article 3 section 1 lit. b OECD MTC. Since they are subject to corporate income tax, they are also resident persons within the meaning of Article 4 section 1 OECD MTC. The question is whether they are qualified as beneficial owners within the meaning of Article 10 section 2 OECD MTC or Article 11 section 2 OECD MTC since they hold their investments for the investors. The interpretation of the term beneficial owner is done by the foreign source state since there is no definition in the agreement. The majority of the OECD states take the view that the SICAF is the beneficial owner of its investments, since the managers have discretionary powers to manage the assets on behalf of the holders of interests in the SICAF The Federal tax administration seems to take a different view, see circular letter no. 24, Appendix See 8.5 OECD commentary to Art. 4 OECD MTC. 32 See n. 29 et seq. OECD report dated 12 Jan The OECD report suggests to expressly describe it in the OECD commentary to Art. 1 OECD MTC. 37