Input tax deduction on the sale of own shares: inflow of funds as non-consideration (contribution to a company) and no input tax correction

Facts

The [A. AG] , with its registered office in [U.] , was active in the period from 1 January 2012 to 31 December 2015, according to its commercial register entry, in the participation in, acquisition and establishment of undertakings and their financing. It had been registered in the register of VAT-liable businesses of the Swiss Federal Tax Administration (FTA) since 1 December 2008 and held shares in several operationally active companies.

During an on-site audit in 2017, the FTA found that in the tax periods 2012 to 2015 the [A. AG] had deducted input tax on input services that were connected with the sale of own shares. The FTA classified the sale of own shares as an exempt turnover and, by assessment notice of 18 December 2017, under the heading of input tax deduction corrections demanded repayment of CHF 402'774.-- plus default interest.

By decision of 27 February 2018, the FTA confirmed the claim. By objection decision of 12 November 2018, it set the company's credit at CHF 196'706.-- and confirmed the input tax reclaim of CHF 402'774.-- plus default interest of 4% from 31 August 2014.

The Federal Administrative Court, Division I, upheld the appeal of the [A. AG] by judgment of 18 September 2020 (A-7028/2018) and set aside the objection decision. The FTA filed a public law appeal with the Federal Supreme Court and requested the annulment of the lower court's judgment and the confirmation of its objection decision. The [A. AG] requested the confirmation of the lower court's judgment.

Subject matter of the dispute: Whether the sale of own shares constitutes a VAT supply, or whether the inflow of funds is to be qualified as non-consideration (contribution to a company under Art. 18 para. 2 lit. e VATA) and whether for that reason an input tax correction under Art. 29 para. 1 VATA may be made.

Considerations

The admissibility requirements (final decision, standing of the FTA under Art. 89 para. 2 lit. a FSCA in conjunction with Art. 141 VATO, timely and formally proper filing) are met. The Federal Supreme Court bases its assessment on the facts established by the lower court (Art. 105 para. 1 FSCA) and reviews the application of law in principle ex officio, but only the complaints raised, insofar as legal defects are not manifest (Art. 106 FSCA).

The starting point is whether a supply relationship exists under Art. 18 para. 1 VATA. There must be a sufficient inner economic connection between supply and consideration; the perspective of the recipient of the supply is decisive for this link. Art. 18 para. 2 VATA names non-consideration by way of example, including contributions to companies (lit. e), which according to the Message are to be understood broadly and in particular include capital contributions and shareholder contributions. VAT law is to be interpreted in an economic manner (economic approach); civil-law arrangements are only an indication.

The transfer of shares may indeed constitute a service (Art. 3 lit. e no. 1 VATA); however, issue proceeds from newly issued shares are capital contributions under Art. 18 para. 2 lit. e VATA and do not establish a supply relationship. This also corresponds to the case law of the CJEU (Kretztechnik, KapHag), whereby EU law may serve as an aid to interpretation.

Economically and under accounting law (Art. 959a para. 2 no. 3 lit. e CO, IFRS, Swiss GAAP FER 24), own shares are not an asset but a withdrawal of capital. The resale of own shares therefore leads, in the same way as a capital increase, to an inflow of funds which is to be qualified as a capital contribution by the acquirer. The formal differences from a new issue do not change the economic substance; good reasons for a different treatment are lacking. The FTA's objection that Art. 21 para. 2 no. 19 lit. e VATA (exception for turnover in shares in companies) speaks against an economic approach is rejected: the tax exemptions presuppose the…