5 May 2022
artist painting

Decision of Federal Supreme Court on VAT: Tax avoidance when importing works of art

By Benno Suter

Partner, Indirect Tax | EY Switzerland

Leads the Indirect Tax Practice at EY Switzerland and has more than 25 years of experience in business tax advisory and in-house tax director roles.

5 May 2022

In its decision of 10 December 2021 (2C_263/2020), the Federal Supreme Court generally considers a company whose activity in Switzerland is limited to the leasing of works of art to its beneficial owner to have an entrepreneurial activity. In the specific case, however, the Federal Supreme Court considered the conditions for tax avoidance to be met and denied the company its VAT liability in Switzerland.

A company domiciled in the British Channel Islands (Ltd.) maintains an extensive collection of contemporary art and sees its business purpose in holding, trading and renting out these works of art. The Ltd. has neither a registered office nor a permanent establishment in Switzerland. In the period from 2002 to 2015, the Ltd. regularly provided works of art to its beneficial owner domiciled in Switzerland who frequently used them to re-furnish his private properties. The works of art were imported into Switzerland from abroad. As early as 2002, the Ltd. applied for a declaration of subordination with the Swiss Federal Tax Administration (SFTA), has since acted as importer of record for the import of art objects, has Swiss VAT registered and has accounted for Swiss VAT on the rental turnover. Since the import value of the works of art exceeded the rental fee, the Ltd. regularly declared an excess of input VAT.

The SFTA and the Federal Administrative Court questioned the VAT liability of the Ltd. in Switzerland for the tax periods 2009 to 2015, which led to additional VAT assessments of approximately CHF 7.5 million. The Federal Supreme Court had to clarify whether the Ltd. operated a business during this period, rendered supplies in Switzerland, was therefore liable to VAT and entitled to deduct input VAT – namely import VAT on the importation of art objects – or whether it should be denied its VAT liability and the right to deduct input VAT due to tax avoidance.   

Assessment of the Federal Supreme Court

The Federal Supreme Court recognizes the rental of art by the Ltd. to its beneficial owner as an entrepreneurial activity.

Turnover from the rental of goods that are brought to Switzerland from abroad, however, is VAT-wise deemed to be generated abroad and is therefore not subject to Swiss VAT. Companies with their registered office abroad are not entitled to be entered in the Swiss VAT register without generating supplies in Switzerland (under both the old and the new VAT law). With a so-called declaration of subordination abroad, the lessor may generally shift the place of the rental supply from abroad to Switzerland. In this case, the lessor becomes Swiss VAT liable.

In the present case, however, in the opinion of the Federal Supreme Court, the arrangement chosen by the Ltd. bears all the characteristics of tax avoidance: the legal arrangement chosen is unusual, was made solely to save taxes and has actually led to a significant tax saving. The accusation of tax avoidance is specifically directed against the shifting of the place of supply by means of a declaration of subordination.

The Federal Supreme Court considers it obvious that the VAT liability of the Ltd. voluntarily established via the declaration of subordination served solely to recover import VAT from the importation of art objects, which would otherwise have finally burdened the beneficial owner. No economic motives were apparent for the Ltd. applying for a declaration of subordination. The Ltd. could not invoke the protection of legitimate expectations.

Only additional VAT assessments relating to the tax period 2010 were rejected by the Federal Supreme Court due to the statute of limitations. The other tax periods, including 2009, were not time-barred.

Summary

According to the Federal Supreme Court, tax avoidance “only comes into question in very exceptional situations, namely if the chosen legal arrangement – apart from tax aspects – is beyond what is economically reasonable”. Nevertheless, accuses of tax avoidance are regularly subject of legal proceedings, especially in connection with works of art and aircraft. Against this background, it is important to justify and document the economic reason, especially of structures in which high-priced goods are transferred; at best already at the time of their implementation.

In our opinion, it would also be interesting to see how a situation otherwise comparable to the dispute would be assessed if the company leasing art had not exclusively acquired the art objects abroad, but also in Switzerland, and had directly leased them for consideration to its beneficial owner. In this case, the VAT liability would not have been “artificially” induced but would have been obligatory provided an entrepreneurial business activity was recognized. In this respect, the input VAT on the works of art acquired in Switzerland should be deductible; It would therefore be of interest to know whether works of art already located in Switzerland when the rental agreement was concluded would be taxable according to the ordinary rules of the VAT Act.

About this article

By Benno Suter

Partner, Indirect Tax | EY Switzerland

Leads the Indirect Tax Practice at EY Switzerland and has more than 25 years of experience in business tax advisory and in-house tax director roles.