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Deemed Professional Trade in Securities –Good News and Bad News! 

by Tina Shih-Thurnheer

Published: August, 2010

Submission: December, 2010

 



Professional trade in securities under the case


law of the Swiss Federal Supreme Court…


Under the Swiss Federal Supreme Court’s prior case


law, capital gains derived from the sale of assets –


in particular real estate, securities, precious metals


and foreign currencies – are subject to federal income


tax if such activity, taken as a whole, qualifies


as self-employment. Private capital gains remain


tax-exempt only if they are derived in the context of


private asset management or an opportunity that


has arisen unexpectedly.


Under its prior case law, the Swiss Federal Supreme


Court determined that trade in securities constituted


self-employed activity if each of the following criteria


were, or, under certain circumstances, just one of


the following criteria was present:


– systematic or methodical investment;


– multiple and frequent transactions and short


holding periods;


– close connection to the taxpayer’s professional


background and use of special skills;


– leverage by substantial debt financing; and


– reinvestment of gains in similar assets.


…and the differing case law in Zurich


For the purpose of Zurich cantonal and municipal


taxes, the Zurich Administrative Court refused to


follow the Swiss Federal Supreme Court’s case law


for the federal tax; rather it set higher standards


for income to be considered as stemming from selfemployment.


Notwithstanding the aforementioned


Swiss Federal Supreme Court criteria, the Zurich


Administrative Court held that only an externally


perceived market presence would cause taxpayers


to be treated as self-employed. Taxpayers who merely


instructed professional asset managers to manage


their portfolios at the stock exchange or over the


counter were not taxed at the Zurich municipal and


cantonal levels with respect to their capital gains since


such taxpayers lacked a market presence.


Notwithstanding the confirmation of its prior


case law, the Swiss Federal Supreme Court provides


for tax predictability.


The unpredictable criteria of self-employed activity


under the Swiss Federal Supreme Court’s practice led


to an intolerable harmonization conflict between


federal and cantonal income tax laws. In its decision


of 23 October 2009 (2C_868 / 2008), the Swiss


Federal Supreme Court made clear that the criteria


for self-employment applicable for federal income


tax purposes apply to the cantonal and municipal


taxes as well. Accordingly, the taxpayer’s own market


presence is no longer a condition for a qualification


of self-employed activity and, therefore, for the


taxation of capital gains.


With its decision, the Swiss Federal Supreme Court


basically affirmed its prior case law regarding trade in


securities, but, at the same time, took into account


criticisms raised by legal authors with respect to the


criteria used by the court.


On the basis of the Swiss Federal Supreme Court’s recent


decision, the following criteria are now crucial:


– transaction volumes and frequencies;


– length of holding periods; and


– leverage by debt financing.


The former criteria of systematic or methodical behaviour


and use of special skills were specifically


stated to be “obsolete” and therefore abandoned.


In particular, the use of options, futures and other


derivatives or the application of a state-of-the-art


investment strategy is no longer relevant when


attempting to distinguish between capital gains that


are tax-free and those that are taxable.

Click Here to read full article.


 


 

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