Facts

The appellant, a Danish company in the legal form of an association with its registered office in Denmark, is a specialized credit institution offering low-cost financing loans to its customers. In 2013 and 2014, it acquired five tranches of two Swiss federal bonds (Bond 1 and Bond 2) and simultaneously entered into so-called cross-currency rate swaps with two investment banks (Bank B. and Bank C.). These swaps had a term that exactly matched the remaining term of the respective federal bond. The swaps provided that the appellant would receive from the investment banks an amount in Swiss francs (CHF) corresponding to the nominal value of the bond tranche plus a premium. In return, the appellant undertook to pay an amount in US dollars (USD) at the beginning of the term and received the variable USD Libor rate plus a spread on this amount. The interest on the CHF amount corresponded to the interest on the respective federal bond.

The appellant filed four applications with the Swiss Federal Tax Administration (SFTA) for full refund of the withholding tax levied on the interest payments from the federal bonds. The SFTA rejected these applications in a decision dated 5 March 2020 on the grounds that the appellant was not considered the beneficial owner of the interest. It justified this by stating that the appellant had not borne any significant bond-specific risks and that the transactions were to be regarded as indivisible overall transactions. The SFTA also accused the appellant of breaching its duty to cooperate.

The appellant then filed an appeal with the Federal Administrative Court, which dismissed the appeal in its entirety in a judgment dated 4 September 2023. Against this judgment, the appellant filed an appeal in public law matters with the Federal Supreme Court and requested that the judgment be set aside and the withholding tax refunded in the amount of CHF 5,013,750.- in total.

Considerations

The Federal Supreme Court first examined whether the appellant was to be regarded as the beneficial owner of the interest from the federal bonds within the meaning of Art. 11 para. 1 of the double taxation agreement between Switzerland and Denmark (DTA CH-DK). According to the Federal Supreme Court’s consistent case law, beneficial ownership requires that the recipient of the interest is free to use it and is not bound by contractual or legal obligations to pass it on to third parties. Purely factual or economic constraints are not sufficient to deny beneficial ownership. Beneficial ownership is only lost if the obligation to pass on the interest is legally binding and the amount to be passed on depends on the generation of the interest income.

In the present case, the Federal Supreme Court concluded that the appellant was not subject to any contractual or legal obligation to pass on the interest. Although the swap agreements required the appellant to make payments to the investment banks, these payments did not depend on the generation of interest income from the federal bonds. Rather, the appellant was also obliged to make payments even if the Swiss Confederation had not fulfilled its interest obligations. The appellant thus bore the bond-specific default risk, while other risks (such as interest rate or currency risks) were transferred to the investment banks. This was not sufficient to deny beneficial ownership. The appellant therefore met the requirements for a relief claim under Art. 11 para. 1 DTA CH-DK.

The Federal Supreme Court then examined whether the relief claim should be denied due to treaty abuse. The Federal Supreme Court confirmed that the prohibition of abuse of rights under international law is a general principle of international law that also applies in international tax law. Treaty abuse exists where a party exercises a treaty right in a manner inconsistent with its purpose and thereby disadvantages the other contracting state. However, the denial of the treaty benefit must be consistent with the principle of good faith. This is not the case, in particular, if the contracting state in question would grant the same tax advantage to a person in a comparable situation belonging to it.

The Federal Supreme Court found that although the appellant’s structure ran counter to the purpose and intent of the DTA CH-DK, as the interest income, including the…