Canton of Geneva | Wealth tax | Confiscatory taxation

Federal Court, Case 2C_826 / 2015 dated 5th January 2017

Canton of Geneva | Wealth tax | Confiscatory taxation

A taxation equivalent to 200% of taxable income over a tax period is not sufficient to conclude that the tax in question is confiscatory within the meaning of Swiss case law.

Within each taxation the cantons levy a wealth tax which is calculated on the market value on all the taxpayer’s assets.

In accordance with the Instructions of Swiss Tax Conference on the valuation of unlisted securities for wealth tax purposes (Instructions available here), shares in commercial companies are valued on the basis of the value of net asset value as well as the yield value capitalized value of the company. In sum, the yield value is obtained by the capitalization of the net profit of the company during the last two financial years.

The calculation of the yield value at the current capitalization rate leads to a high estimation of shares held by taxpayers.

In the context of taxation, the tax authorities of the canton of Geneva has estimated the shareholdings in a Swiss company held by a taxpayer at an amount exceeding CHF 40 million. The assessment of the tax administration was carried out according to the aforementioned Instructions.

As a result of this assessment of shares, the taxation of the taxpayer was equivalent of 200% of his taxable income.

The taxpayer challenged this taxation arguing that the estimation of his shares led to confiscatory taxation. A taxation equivalent to 200% of the taxable income would be contrary to the guarantee of the property as per the Swiss federal constitution (art. 26: the right to own property is guaranteed).

Ultimately, the Federal Court dismissed the taxpayer’s appeal on the basis of the following recitals:

The cantons shall follow the Instructions concerning the valuation of non listed securities for wealth tax purposes. These Instructions pursue an objective of horizontal tax harmonization and thus concretize art. 14 para. 1 LHID.

Taxes shall not undermine the very essence of private property. The legislator shall consider the substance of the taxpayer’s property and allow him the opportunity to increase it. In order to assess whether a taxation has a confiscatory effect, the tax rate expressed as a percentage is not alone decisive; It is necessary to examine the burden of taxation over a rather long period, ignoring extraordinary circumstances; To this end it is necessary to take into consideration all the concrete circumstances, the duration and the seriousness of the interference and the accumulation with other taxes or contributions and the possibility of deferring the tax on other persons.

A taxation equivalent to 200% of taxable income over a tax period is not sufficient to conclude that the tax in question is confiscatory within the meaning of Swiss case law.

It is only when the total tax burden exceeds persistently the income, including the income from capital, that it has to considered that the capital has been so greatly impaired that the taxation shall be described as confiscatory.

It can not be considered that the constitutional guarantee of ownership is violated when, over a single tax period, the tax burden exceeds the return on capital.

The taxpayer’s argument that he did not have a majority of shareholding allowing him to decide a distribution of dividends by the general assembly has no influence on the value of his shares.

Indeed, the taxation of the value of shares increases because the profits of the company are hoarded instead of being distributed. In this case, their intrinsic value increases without taxation on their yield, so that in such a case a tax burden, even if large, but which remains below the hoarded returns, can not be described as confiscatory.

Author: tb@brhpartners.ch

 

9 February 2017