Acts against good faith are not subject to legal protection, even in the case of an inter-cantonal double taxation

Bucher Tax AG, taxes, acts against good faith, good faith, Switzerland, Lucerne, Zug, national taxes, federal court decisions, tax planning, tax return, tax declaration, private individuals, companies, corporate taxes, double taxation, intercantonal taxes

On 2 July 2009, A. AG (now in liquidation) transferred its registered office from the canton of Lucerne to the canton of Zug, leaving a permanent establishment in U., canton of Lucerne. For the tax period from 1 July 2009 to 30 June 2010, A. AG declared a taxable net profit of CHF 26'395 to the canton of Zug in the course of its liquidation, but did indicate the permanent establishment in the canton of Lucerne to the tax administration.


Accordingly, the Zug tax administration assessed A. AG on 30 January 2012. This assessment remained unchallenged. In August 2014, the tax department of the canton of Lucerne demanded documents from A. AG and submitted a proposal for assessment on 3 February 2015. Subsequently, A. AG requested the tax administration of the canton of Zug to revise the assessment order of 30 January 2012, which rejected this request by decision of 6 March 2015. Again, no appeal was lodged against this decision. A. AG was assessed by the Tax office of the canton of Lucerne on 15 May 2015 as announced. It relinquished 20% of the profit for headquarters and administration to the head office in Zug and left the remaining profit for the operating activities in U. A. raised an objection against this assessment, which the Tax Office rejected on 19 August 2015. A. AG then appealed this decision in front of the Cantonal Court of Lucerne. With its decision of 30 June 2016, the Cantonal Court of Lucerne approved the appeal and re-assessed A. AG. Nevertheless, A. AG filed a complaint with the Federal Supreme Court and filed for the elimination of the inter-cantonal double taxation between the cantons of Lucerne and Zug. The Federal Supreme Court dismissed the complaint against the canton of Lucerne and the canton of Zug by judgment of 17 July 2017 (2C_655/2016) on the following grounds.

The prohibition of inter-cantonal double taxation

Art. 127 para. 3 BV prohibits double taxation between cantons. According to the Federal Supreme Court, such is the case if a taxable person is taxed by two or more cantons for the same tax object and at the same time (so-called current double taxation) or if a canton, in violation of the applicable conflict-of-law rules, exceeds its tax sovereignty and levies a tax that should rightfully be levied by another canton (so-called virtual double taxation).

In the case at hand, A. AG (plaintiff) became subject to unlimited tax liability in the canton of Zug with the transfer of its registered office on 2 July 2009. At the same time, it remained subject to limited tax liability in the canton of Lucerne, as it retained the permanent establishment in U. Consequently, both the canton of Lucerne and the canton of Zug were entitled to levy taxes from the plaintiff in the tax period from 1 July 2009 to 30 June 2010. However, the tax allocations of the two cantons differed greatly from one another: the canton of Zug only carried out one allocation on a pro rata temporis basis, claiming around 99.7 % of its assets, while the canton of Lucerne carried out the allocations on the basis of the employment factors capital and labour, allocating a premium of 20 % of its profits to the canton of Zug and claiming around 7 % of its profits and 0 % of its capital. Thus, the case at hand clearly represents a current double taxation.

Forfeiture of the right to challenge an assessment

However, it is questionable whether A. AG has forfeited its right of appeal by submitting its tax return without reservation, not making any tax exemption and not expressing in any way that, in spite of the relocation of its domicile from Lucerne to Zug, a limited tax liability remains in the canton of Lucerne due to a permanent establishment. In addition, the plaintiff paid the tax invoices without reservation after a first reminder.

According to the previous federal jurisdiction, a taxable person forfeits the right to challenge the assessment of a canton if he or she unconditionally recognises his or her tax liability there without reservation in the knowledge of the conflicting tax claim of another canton by, for example, expressly or tacitly submitting to the assessment, submitting a tax return, waiving an objection or other legal remedies and pays the assessed tax amount. Some of the teaching takes the view that under the rule of the Federal Supreme Court Act (BGG) there is no longer a reason for the forfeiture of persons affected, while another part of the teaching takes the view that the present constellation is a special feature of the inter-cantonal double taxation law, which is still applicable under the BGG. However, the Federal Supreme Court did not answer this question in the present decision, as the proceedings of A. AG proved to be going against good faith anyhow.

Acts against good faith are not subject to legal protection

A. AG argued that it was only able to obtain assured knowledge about the conflicting tax claim between the canton of Lucerne and the canton of Zug with the assessment order issued by the canton of Lucerne on 15 May 2015. The Federal Supreme Court, however, found this argument to be implausible. It is not convincing that the plaintiff, whose Chairman of the Board of Directors as well as legal representatives are lawyers and qualified tax experts, should have failed to declare the permanent establishment in Lucerne in the tax declaration of the main tax domicile. On the contrary, it seems that he has tried to evade at least part of the tax liability. The plaintiff's conduct thus proves to go against good faith and does not merit any legal protection. A. AG has to accept the consequences of inter-cantonal double taxation.

Final remark

It is worthwhile to plan and implement compliance tasks properly and not to count on the possibility that, if different tax authorities are affected, something might be overlooked. This development will also become more and more accepted in the international environment. Increased attention regarding the implementation and control of tax obligations is recommended.