Facts
The appellants A. and B. are resident in the Canton of Valais and own properties in the Canton of Zurich. In the 2017 tax year they received a dividend of Fr. 200'000.-- from a qualifying participation.
The Cantonal Tax Administration of Valais assessed them for cantonal and municipal taxes (tax period 2017) with taxable income of Fr. 51'868.-- and rate-determining income of Fr. 686'642.--. The dividend was taken into account as income from assets, and the tax base was reduced by Fr. 80'000.-- under the partial taxation procedure.
The Cantonal Tax Office of Zurich, by decision on objection of 26 June 2020, assessed the appellants for cantonal and municipal taxes of the Canton of Zurich at taxable income of Fr. 635'900.-- and rate-determining income of Fr. 766'700.--. In the appeal, the appellants requested that a portion of Fr. 69'200.-- of the taxable income, as income from a qualifying participation, be taxed under the half-rate procedure pursuant to § 35 para. 4 aStA/ZH. The Tax Appeals Commission (30 October 2020) and the Administrative Court of the Canton of Zurich, 2nd Division (judgment of 15 January 2021, SB.2020.00112), dismissed the appeals.
By public law appeal of 22 March 2021, the appellants requested the Federal Supreme Court to set aside the judgment and to determine a portion of Fr. 69'200.-- as income from a qualifying participation. They complained in particular of a violation of the prohibition of less favourable treatment under Art. 127 para. 3 Cst. The Cantonal Tax Office of Zurich and the Administrative Court requested dismissal. The Cantonal Tax Administration of Valais did not submit observations.
Subject matter of the dispute: Applicability of the Zurich half-rate procedure (§ 35 para. 4 aStA/ZH) to dividends from qualifying participations that are only taken into account for the rate in the Canton of Zurich but not taxed there, and whether a prohibited less favourable treatment exists.
Considerations
Admissibility and scope of review: The public law appeal is admissible (Art. 82 let. a, Art. 86 para. 1 let. d and para. 2, Art. 90, Art. 83 FSCA; right of appeal under Art. 73 para. 1 DTHA). The Federal Supreme Court reviews harmonised tax law with full cognition, and autonomous cantonal law only for arbitrariness (Art. 95 let. a, Art. 106 para. 1 FSCA). The interpretation of § 35 para. 4 aStA/ZH is reviewed only restrictively, whereas the complaint of a violation of Art. 127 para. 3 Cst. is reviewed with full cognition.
Legal framework for participation income: Art. 7 para. 1 third sentence DTHA permits the cantons to mitigate the economic double taxation of qualifying participations. The subject and object of the relief are prescribed by federal law, while the type and extent of the relief (partial income procedure or partial rate procedure) fall within the cantons' scope of discretion. Cantons applying partial taxation reduce the tax base, whereas cantons applying the partial rate reduce the tax rate on the unreduced gross income.
Distinction between rate-determining income and the partial rate procedure: The appellants conflate the determination of rate-determining income (§ 6 para. 2 StA/ZH) within the framework of intercantonal tax apportionment with the rate reduction under § 35 para. 4 aStA/ZH. The consideration of expenses and general deductions even without a connection to taxable income in the canton (e.g. the deduction of interest on debts under § 31 para. 1 let. a StA/ZH) concerns only the determination of the rate. By its wording, the half-rate procedure in the Canton of Zurich presupposes income from qualifying participations that is taxed in that canton; without such income, § 35 para. 4 aStA/ZH does not apply.
Prohibition of less favourable treatment (Art. 127 para. 3 Cst.): No less favourable treatment exists. The Canton of Zurich treats the appellants in the same way as any other person with participation income, since the dividend is taken into account only for the rate and no tax is levied on…