The taxpayer X, born in 1959, emigrated to Israel on 30 September 2012 with the intention of settling there. Prior to that, X lived and worked in Switzerland and regularly made compulsory contributions to a pension foundation.
In 2012, upon leaving Switzerland, the taxpayer was paid a lump-sum payment by the pension provision, which was debited with a withholding tax in Switzerland.
In 2013, the taxpayer applied for a refund of the withholding tax deducted in Switzerland, in accordance with the DTA between Switzerland and Israel. With the claim for reimbursement, the taxpayer presented an official form of the Israeli authority, which confirmed that the taxpayer had received the lump-sum payment on a bank account in Tel Aviv and that the lump-sum payment is fiscally recorded in Israel.
The Geneva tax administration refused to reimburse the withholding tax on the grounds that the lump-sum payment in Israel was not actually taxed. X filed an appeal against the tax administration's decision with the Geneva Administrative Court, which approved the appeal. The Geneva tax administration then filed an appeal with the next cantonal authority, which approved it and thus confirmed the decision of the Geneva tax authority. The taxpayer passed this decision on to the Federal Supreme Court. The Federal Supreme Court dismissed the appeal by decision of 25 January 2017 (2C_606/2016) on the following grounds:
Which Contracting State may claim the right of taxation
In connection with the disbursement of the capital payment, X is subject to limited tax liability in Switzerland based on Art. 5 para. 1 lit. e in connection with Art. Section 6 para. 2 DBG. As a recipient of private-law pension benefits with domicile abroad, X is subject to withholding tax for the capital payment received in accordance with Art. 96 and 100 DBG. Since X is simultaneously subject to unlimited tax liability in Israel, clarification as to which of the two states can actually claim the right of taxation for this lump-sum payment is required within the framework of the Double Taxation Agreement between Switzerland and Israel.
In Art. 18, the Double Taxation Agreement between Switzerland and Israel provides the country to which the capital payment is ultimately transferred with the right of taxation. In the present case, the capital payment is transferred from Switzerland to Israel, which means that Israel has the right of taxation.
However, an additional protocol to the DTA between Switzerland and Israel specifies the conditions under which the receiving state is granted the right of taxation. Paragraph 5 of the protocol states the following:
«It is agreed that as long as the income of an Israeli resident from Swiss sources is subject to taxation in Israel under Israeli law only to the extent of the amount received in Israel, and not with respect to the entire amount, or such income is exempt from taxation in Israel, the exemption or reduction in the tax rate of Swiss tax granted by this Agreement (with or without conditions) only applies to the portion of income which is received in Israel or is subject to taxation in Israel in other form.»
The Federal Supreme Court referred in particular to the ending of paragraph 5 and dealt with the question of what is meant by the regulation "... subject to taxation in Israel". In this respect, the Federal Supreme Court had to decide whether it would suffice if the lump-sum payment was simply transferred to Israel or whether it actually had to be taxed in Israel.
Special arrangements in the Double Taxation Agreement between Switzerland and Israel
For the purposes of this regulation, the two states agreed that the exemption can only be claimed in Switzerland if the capital contribution in Israel is effectively received and effectively taxed. Thus, the DTA between Switzerland and Israel stipulates the principle of the remittance base and additionally contains a subject-to-tax clause. From Switzerland's point of view, with the agreement on the subject-to-tax clause, no unconditional exemption of the Swiss capital payment has taken place.
The Federal Supreme Court concluded that although the lump-sum payment was received in Israel and is also subject to taxation, no effective taxation has taken place. In Israel, there are privileged conditions for immigrants which exempt them from taxation for 10 years. X was able to claim this privilege.
Israel is the only contracting state in Switzerland's DTA network which requires that capital payments from the other state must be effectively transferred and effectively taxed in order for the right of taxation of the resident state to be valid, so that the other state exempts the capital payment from tax. This also confirms the interpretation of paragraph 5 of the protocol, whereby the DTA between Switzerland and Israel seeks to prevent double non-taxation in both contracting states.
In paragraph 5 of protocol of the DTA between Switzerland and Israel, there is a subsidiary right of taxation for the other Contracting State, provided that the country of residence does not exercise its right of taxation. Therefore, paragraph 5 is regarded as lex specialis in relation to Art. 18 of the DTA between Switzerland and Israel and Switzerland has the right to levy a withholding tax if Israel has taken note of the lump-sum payments from occupational benefits, but has not taxed them.
The taxation of capital payments from pension provision is the subject of tax disputes in an international context time and again. Taxpayers try to reduce or even avoid the tax burden on capital payments from pension provision by skilfully using the different taxation rules in individual countries. The present decision shows that the existing planning possibilities are being restricted increasingly, also from Switzerland's point
of view. The introduction of Art. 5 para. lit. E DBG unilaterally created an economic point of contact for taxation law in Switzerland. However, the possible suppression of Switzerland's right of taxation within the framework of a Double Taxation Agreement is obviously no longer being easily accepted. The application of the remittance principle and a subject-to-tax clause are also increasingly being used in Switzerland's DTAs, thus restricting the room for manoeuvre.