Facts
The company X. SA, with share capital amounting to CHF 100,000 and held equally by A. SA and B. SA (the latter managed by C.), acquired real estate in the canton of Neuchâtel in December 2008 for a price of CHF 16.8 million. For the 2010 and 2011 tax periods, the company declared taxable profits of CHF 5,509 and a loss of CHF 739, respectively. Its balance sheets showed assets mainly consisting of the real estate, recorded at CHF 17,825,570, and liabilities including a mortgage of CHF 18 million encumbering these properties, contracted with the Fondation D. (represented by [D. SA]).
The Fribourg cantonal tax authority, by tax assessment decisions of 16 November 2012, included in the company’s profit the interest on hidden equity, considering that the mortgage loans were guaranteed by shareholders or related persons, due to insufficient supporting documents. The company unsuccessfully challenged these inclusions before the Fribourg cantonal court, which dismissed its appeal. The company then filed a public law appeal with the Federal Supreme Court, which also dismissed the appeal.
Considerations
The Federal Supreme Court first examined the company’s complaint regarding the arbitrary assessment of evidence by the cantonal judges. The company contested that the market value of its real estate had been set at CHF 17,825,570 (equal to its book value), whereas a private appraisal valued this at CHF 22.67 million. The Federal Supreme Court recalled that the assessment of evidence by cantonal authorities can only be challenged if it is manifestly inaccurate or arbitrary (Art. 9 Cst. and Art. 97 FSCA). It confirmed that the cantonal judges had been able, without arbitrariness, to disregard the private appraisal and retain the book value of the real estate, since the company had not demonstrated that this value was higher. This finding binds the Federal Supreme Court (Art. 105 para. 1 FSCA).
On the merits, the Federal Supreme Court recalled that the issue of hidden equity primarily concerns loans granted directly by a shareholder or a related person, but may also apply to a loan granted by a third party when it is guaranteed by a shareholder or a related person. Circular No. 6 of the Federal Tax Administration (FTA) of 6 June 1997 provides that a guarantee provided by a shareholder or a related person for a loan granted by a third party must be assimilated to a loan from that shareholder or related person, unless the financing complies with market conditions.
The Federal Supreme Court clarified that this assimilation is consistent with Art. 65 DFTA (SR 642.11) when the guarantee economically functions as a loan, particularly when the personal assets of the shareholder or related person are used as a liability substrate. In the present case, the CHF 18 million loan contracted by the company with the Fondation [D.] was secured by a mortgage on the company’s real estate, with a market value equal to its book value (CHF 17,825,570), and by the personal…