Partial approval: sponsorship expenses as hidden profit distribution, shareholder current account as benefit in kind (direct federal tax and cantonal tax SO 2011)

Facts

The shareholder [B.] (resident in 2011 in [U.] , canton of Solothurn, deceased in April 2020) was the sole shareholder of [C. GmbH] , based in (then) [V.] , canton of Nidwalden. The company is a general contractor active in construction and real estate, operating in central and northwestern Switzerland.

In the course of the assessment for cantonal tax and direct federal tax 2011, the assessment authority Olten-Gösgen found that the company had booked sponsorship expenses of CHF 245'000.-- (EUR 190'000.--) to [D. GmbH] (based in [W.] , Germany). The authority classified this as a benefit in kind ("private share of racing costs"). In addition, it made an offsetting of CHF 200'000.-- ("simulated share of increase in shareholder current account [B.] ") in the shareholder current account. In the objection decision of 9 April 2019, it recorded the entire increase of the current account of CHF 529'995.-- to the extent of 60%.

The Cantonal Tax Court of Solothurn partially approved the appeal on 16 March 2020 and remanded the matter for reassessment. It considered the sponsorship payments to be justified for business reasons, but the increase in the current account to be a benefit in kind.

Proceeding 2C_400/2020: The Cantonal Tax Office of Solothurn filed a public law appeal and requested that the sponsorship payments be qualified as a hidden profit distribution. Proceeding 2C_405/2020: The executor of the estate of [B.] filed an appeal and demanded waiver of the offsetting of the shareholder current account. The Swiss Federal Tax Administration requested that the appeal of the tax office be upheld.

Main points in dispute: (1) business justification of the sponsorship expenses or hidden profit distribution; (2) qualification of the increase in the shareholder current account as a simulated loan or benefit in kind.

Considerations

The appeals were consolidated, since they concern the same judgment and the same procedural parties and there is a close factual connection (Art. 71 FSCA in conjunction with Art. 24 FCPA). The executor is legitimised to appeal as a procedural standard-bearer in his own name (FCD 146 III 106). The remand decision is regarded as a (quasi-)final decision within the meaning of Art. 90 FSCA, since the assessment authority has no discretion left. The appeals were admitted.

According to case law, sponsorship expenses are recognised as justified for business reasons if they have at least an indirect advertising effect and stand in a reasonable, economically defensible relationship to the size of the enterprise (Art. 27 DFTA; FCD 115 Ib 111). Sponsorship that serves solely the personal interests of the shareholder is not deductible. A hidden profit distribution presupposes a disproportion between performance and consideration, an advantage to the participant, the absence of an arm's length comparison, and recognisability for the corporate bodies (Art. 58 para. 1 let. b DFTA; FCD 144 II 427). The tax authority in principle bears the burden of proving the disproportion.

The Federal Supreme Court does not consider the lower court's findings of fact, according to which the recipient provided services and customers took part as guests, to be manifestly incorrect (Art. 97 para. 1 FSCA). The incompleteness of the contract description and the subsequently prepared confirmations are not sufficient to make the assessment of evidence appear arbitrary. The lower court does not have to address in detail every submission of the parties (right to be heard).

Legally, however, the lower court's assessment is partly unlawful: the services of driver provision, racing car logo and broadcast on Eurosport are unsuitable for an advertising effect for a locally/regionally active construction company. The hospitality services (invitations, accommodation, catering, VIP access), by contrast, had an indirect advertising effect that led to later business transactions. The total amount of EUR 190'000.-- also appears excessive in relation to the business volume and the absence of advertising in the annual accounts 2011. The part that exceeds the hospitality services is caused solely by the personal interests of the shareholder in motor racing and constitutes a benefit in kind.

The increase in the shareholder current account is to be qualified as a simulated loan and thus as a benefit in kind. Decisive criteria are lack of coverage by the company purpose, unpaid interest, absence of a written agreement, concentration risk, lack of security and lack of repayment (FCD 138 II 57). The Federal Supreme Court finds no objection to the lower court's assessment: the concentration risk is not…