Facts
The [A. AG] , based in [U.] , offers investors direct investments in teak trees on plantations in Ecuador and Costa Rica. Investors acquire a right to the value of future proceeds from the sale of harvested timber, while the management of the plantations is carried out by the company CO its subsidiaries. After a rotation period of 20 years, the trees are harvested and sold, with investors receiving the net proceeds minus a 15% management fee.
In the annual accounts for 2016 and 2017, the company created provisions under the heading “Provisions for tree maintenance” amounting to CHF 2 million (2016) and CHF 4.5 million (2017). The Canton of Nidwalden Tax Office initially did not take these provisions into account when determining taxable income. Following the company’s appeal, the assessments for the 2016 and 2017 tax periods were adjusted, with the tax office allowing provisions for risks to be borne by the company itself amounting to 5% of annual turnover (2016: CHF 793,660.–; 2017: CHF 894,839.–). The Administrative Court of the Canton of Nidwalden, Tax Division, dismissed the appeal against these assessment decisions with a judgment dated 25 October 2021. The company then filed a public law appeal with the Federal Supreme Court, seeking recognition of the originally recorded provisions of CHF 2 million and CHF 4.5 million for the 2016 and 2017 tax periods.
Considerations
The Federal Supreme Court examines the appeal for admissibility and finds that the lower court issued a single judgment for cantonal taxes and direct federal tax, which is permissible since the legal issues are uniformly regulated under harmonised law. The appeal was filed in a timely and proper manner and challenges a final judgment of an upper cantonal court. The appellant argues that the provisions are commercially justified as they correspond to the actual risks of the teak plantations in Ecuador and Costa Rica. It refers to the high political and climatic risks in the growing countries and contends that the flat-rate provisions of 5% of turnover, as recognised by the Canton of Nidwalden Tax Office and the lower court, are insufficient.
Regarding the tax recognition of provisions, it should first be noted that tax law is based on commercial law (Art. 957 et seq. CO). The principle of relevance (Art. 58 para. 1 lit. a DFTA) ties tax assessment to the annual accounts prepared in accordance with commercial law, subject to any special deviating provisions. Provisions must be recognised in the balance sheet if they result from past events, a cash outflow is probable and their amount can be reliably estimated (Art. 959 para. 5 CO). For tax purposes, provisions for obligations existing in the financial year with an uncertain amount CO for imminent loss risks are permissible (Art. 29 para. 1 lit. a and c DFTA).
The appellant misconceives the nature of tax-recognised provisions. The provisions originally created for “tree maintenance” relate to ongoing management costs that are incurred on a period-by-period basis and must therefore be recorded as expenses in the respective financial year. They do not constitute true external obligations but rather typical internal obligations that are not eligible for provisioning. The appellant cannot rely on a provision for impending losses either, as it has not provided substantiated evidence of a concrete loss risk.
The flat-rate provisions of 5% of turnover recognised by the lower court were not created for tree maintenance but for two specific risks: the warranty risk (1% of turnover) and the risk of unsaleability of the trees (4% of turnover). The warranty risk arises from the appellant’s general terms and conditions, under which replacement CO replanting is owed if more than 10% of the trees die…