Hidden profit distribution and market value of properties transferred to a person close to the shareholder: remittal for new assessment

Facts

The applicant, a public limited company ([A. SA] ), had acquired in 1996 from the bankruptcy estate of another company five units of ownership by apartment (PPP) of a base fund in the Municipality of [X.] , at a total price of approximately CHF 377'000.-- for each of the two units subsequently at issue.

On 18 February 2010 the company sold two of these PPP (yyy and zzz) to the daughter of the shareholder, at prices of CHF 347'443.-- and CHF 348'857.--.

In the declaration for the real estate gains tax, the company indicated improvement and purchase/sale expenses such that no profit was realized, while in the declaration for the 2010 corporate taxes it declared a net profit of CHF 1'461.--.

The Ticino tax authority, by decisions of 26 November 2014, corrected the alienation value by adding further taxable elements amounting to CHF 543'354.--, considering that the transaction between persons close to each other had to be valued at the total market value of CHF 1'239'654.--, instead of CHF 696'300.--. It also recaptured the same sum as a benefit valuable in money, adding CHF 37'526.-- for interest expense, with a resulting taxable profit of CHF 582'341.-- (direct federal tax) and CHF 241'174.-- (cantonal tax), after deduction of the profit subject to the real estate gains tax.

The Tax Law Chamber of the Ticino Court of Appeal, by judgment of 7 December 2018, confirmed the decisions. It held that the authority's estimate was based on objective data, whereas the company had not cooperated with the valuation office nor produced expert reports or data on comparable transactions. The Chamber further noted that the more favourable price had been obtained by the company thanks to the purchase from the bankruptcy of the previous owner.

By public law appeal and subsidiary constitutional appeal of 21 January 2019, the company requested the annulment of the judgment and remittal to the cantonal court for the taking of the requested evidence, complaining in particular of a violation of the right to be heard (refusal of an expert report) and of insufficient reasoning. The tax authority and the Federal Tax Administration requested dismissal of the appeal.

The Federal Supreme Court was called upon to determine whether the estimate of the market value of the PPP, in particular the third value calculated on the basis of the mortgage deeds, complied with federal law on hidden profit distribution.

Considerations

The Federal Supreme Court admitted the public law appeal, consequently dismissing the subsidiary constitutional appeal. It recognised its full power of review in matters of direct federal tax and harmonised law, while observing the burden of allegation and reasoning under Arts. 42 para. 1 and 2 and 106 para. 2 FSCA. It further recalled that the facts are binding save for arbitrariness or violation of law within the meaning of Arts. 97 and 105 para. 1 FSCA, and that new evidence is admissible only under the conditions of Art. 99 para. 1 FSCA. It declared inadmissible, for lack of findings in the challenged judgment, the costs of CHF 143'517.-- that [C.] would have covered directly, since the tax authority had contested them and they were not documented.

On the formal complaints, the Federal Supreme Court excluded a violation of the right to be heard under Art. 29 para. 2 Cst. The company had never formally requested an expert report in the cantonal appeal and the procedure before the Chamber is written (Art. 227 LT/TI and 140 DFTA); moreover, the reasoning of the cantonal judgment allowed the reasons for the decision to be understood, and any disagreement concerns the merits and not the right to be heard.

On the merits, the Federal Supreme Court recalled the notion of hidden profit distribution under Art. 58 para. 1 let. b DFTA (benefit without adequate counter-performance, in favour of a shareholder or a person close to them, recognisable to the corporate bodies). The sale of a property at a price below market value clearly falls within this case, and the company did not contest the principle but the amount of the correction. To determine market value, the method of effective comparison applies, if a free market exists, or comparison with comparable transactions between third parties, or, in the absence of these, hypothetical methods such as the cost-plus or resale price…