On 7 March 2012, the Federal Administrative Court rendered an important judgment on the issues of ownership and treaty abuse in connection with fully hedged total return swaps. A Danish bank had entered into such swaps for Swiss equities and, in order to hedge its exposure, acquired the necessary number of Swiss underlyings. While Swiss withholding tax was withheld on the dividends declared in relation to the Swiss equities, the Federal Tax Administration refused the refund of the withholding tax under the Denmark-Switzerland tax treaty, arguing that the bank did not have beneficial ownership and had engaged in treaty abuse. The Federal Administrative Court reversed the decision and granted the refund, stating that even if the requirement of beneficial ownership were deemed to exist in the Denmark-Switzerland tax treaty despite there being no explicit mention of it, (i) the bank had no de facto obligation to pass on the dividends to its counterparties under the swap agreements, (ii) the counterparties (and not the bank) ultimately bore the risk that no dividends are paid by the issuers of the underlying securities and (iii) the bank thus qualifies as the beneficial owner of the dividends received. In addition, the Federal Administrative Court found no tax treaty abuse on the part of the bank, stating that it engaged in genuine commercial activity. Against this judgment, two appeals have been launched with the Federal Supreme Court, which are expected to be decided in the fall of 2012.

Reference: CapLaw-2012-35