[Continuation]
2. Case law of the Federal Supreme Court
The existing statutory provisions encouraged taxpayers to devise sophisticated systems and to organize their portfolio accordingly in order to convert inherently taxable capital earnings (interest, dividends) into tax-free capital gains. To remedy this unsatisfactory situation, the administrative authorities and the courts responded by stretching the concept of securities dealing by way of trade to an excessive degree.
As case law stands today, capital gains on an activity which "extends beyond asset management in the strict sense of the term" are treated as taxable income on gainful commercial business.
In answer to the question as to whether the purchase or sale of securities simply constitutes management of personal assets or represents a gainful (self-employed) activity, the Federal Supreme Court takes the view that a decision must be reached in the light of the overall circumstances of the particular case. The following criteria are pointers to commercial activity:
-
systematic or planned approach
-
efforts to exploit market trends to earn profits
-
frequency of the transactions
-
short period of ownership
-
close link between the transactions and the professional activity of the taxpayer
-
use of special professional knowledge
-
use of substantial borrowed funds to finance the transactions
-
significant risk-taking
-
reinvestment of the profits in similar assets
The existence of some of the above criteria is considered sufficient for a transaction to be qualified as securities dealing by way of trade. In particular, it is not necessary for an actual business or trade to be pursued. Everything which extends beyond asset management in the strict sense of the term is treated as a self-employed gainful activity and therefore taxable. The capital used for this purpose is qualified as business assets.
3. Assessment
The approach of the Federal Supreme Court and tax authority to the assessment of the exemption of capital gains from tax liability presents extensive problems from various points of view.
The first point to bear in mind is that private capital gains have repeatedly and advisedly been defined by the legislator as tax-exempt. There are several reasons for this, not least of an economic nature (see comments below). It cannot now be the responsibility of the tax authorities to attempt to place the state budget on a healthier footing by requalifying tax-free capital gains as taxable income. Subject to the correction of tax evasion arrangements, exemption from tax must be respected.
The distinguishing criterion put forward repeatedly (by the Federal Supreme Court and others) is that in cases where securities transactions involve trading designed to make a profit that trading constitutes a commercial activity. But this argument misses the point. An individual cannot be refused the right to manage his securities portfolio with the intention of making a profit. Quite the contrary. Nobody would take the risks involved in stock market transactions without the prospect of making a profit. And in the final analysis, the legislator did not exempt the transaction as such but specifically the capital gain from taxation.
The attitude of the authorities in the matter of taxation also has very regrettable consequences for the economy at large. Listed companies are dependent on constantly finding new investors who are willing to make their capital available to businesses. Without adequate compensation for the investment risk, i.e. without the prospect of profits, nobody will take this risk. Similar examples will be found in other economies. Only recently, the reduction of the decisive shareholding limit below which a capital gain can still be collected without tax liability from 10% to 1% decided in Germany resulted in a flight of capital abroad which had been underestimated by the politicians.
4. New practice adopted by the tax administration of the Canton of Bern
In April 2001, the tax administration of the Canton of Bern redefined its practice in respect of securities dealing by way of trade. Contrary to the practice of the Federal Supreme Court, the Bern tax administration sees no need to examine the overall circumstances if the small value of the securities holding or other indicators show that no self-employed gainful activity occurs.
If just one of the following conditions is met, this new definition of practice also points to the existence of private and therefore tax-exempt asset management in every case:
-
the average securities portfolio according to the securities register (excluding cash and cash equivalents) is less than CHF 200,000.-.
-
less than 100 transactions (buying or selling) occur every year. If no borrowed capital is used and no options are purchased, up to 200 transactions are permitted.
-
the volume of transactions amounts to less than three times the average securities holding. If no borrowed capital is used and no options are acquired, sales may amount to as much as five times the average securities holding.
-
In a majority of categories of securities, these securities must be held for more than six months. The categories of securities which represent the bulk of the securities portfolio are the determining criterion.
If these criteria are satisfied, no further investigation is made and no tax is levied on the capital gains as income from a self-employed gainful activity. If on the other hand none of the above conditions is satisfied, the suspicion of a taxable gainful activity must exist. In such cases, taxation can only be avoided if special circumstances exist and in the light of an assessment of the prevailing overall situation.
2. Case law of the Federal Supreme Court
The existing statutory provisions encouraged taxpayers to devise sophisticated systems and to organize their portfolio accordingly in order to convert inherently taxable capital earnings (interest, dividends) into tax-free capital gains. To remedy this unsatisfactory situation, the administrative authorities and the courts responded by stretching the concept of securities dealing by way of trade to an excessive degree.
As case law stands today, capital gains on an activity which "extends beyond asset management in the strict sense of the term" are treated as taxable income on gainful commercial business.
In answer to the question as to whether the purchase or sale of securities simply constitutes management of personal assets or represents a gainful (self-employed) activity, the Federal Supreme Court takes the view that a decision must be reached in the light of the overall circumstances of the particular case. The following criteria are pointers to commercial activity:
-
systematic or planned approach
-
efforts to exploit market trends to earn profits
-
frequency of the transactions
-
short period of ownership
-
close link between the transactions and the professional activity of the taxpayer
-
use of special professional knowledge
-
use of substantial borrowed funds to finance the transactions
-
significant risk-taking
-
reinvestment of the profits in similar assets
The existence of some of the above criteria is considered sufficient for a transaction to be qualified as securities dealing by way of trade. In particular, it is not necessary for an actual business or trade to be pursued. Everything which extends beyond asset management in the strict sense of the term is treated as a self-employed gainful activity and therefore taxable. The capital used for this purpose is qualified as business assets.
3. Assessment
The approach of the Federal Supreme Court and tax authority to the assessment of the exemption of capital gains from tax liability presents extensive problems from various points of view.
The first point to bear in mind is that private capital gains have repeatedly and advisedly been defined by the legislator as tax-exempt. There are several reasons for this, not least of an economic nature (see comments below). It cannot now be the responsibility of the tax authorities to attempt to place the state budget on a healthier footing by requalifying tax-free capital gains as taxable income. Subject to the correction of tax evasion arrangements, exemption from tax must be respected.
The distinguishing criterion put forward repeatedly (by the Federal Supreme Court and others) is that in cases where securities transactions involve trading designed to make a profit that trading constitutes a commercial activity. But this argument misses the point. An individual cannot be refused the right to manage his securities portfolio with the intention of making a profit. Quite the contrary. Nobody would take the risks involved in stock market transactions without the prospect of making a profit. And in the final analysis, the legislator did not exempt the transaction as such but specifically the capital gain from taxation.
The attitude of the authorities in the matter of taxation also has very regrettable consequences for the economy at large. Listed companies are dependent on constantly finding new investors who are willing to make their capital available to businesses. Without adequate compensation for the investment risk, i.e. without the prospect of profits, nobody will take this risk. Similar examples will be found in other economies. Only recently, the reduction of the decisive shareholding limit below which a capital gain can still be collected without tax liability from 10% to 1% decided in Germany resulted in a flight of capital abroad which had been underestimated by the politicians.
4. New practice adopted by the tax administration of the Canton of Bern
In April 2001, the tax administration of the Canton of Bern redefined its practice in respect of securities dealing by way of trade. Contrary to the practice of the Federal Supreme Court, the Bern tax administration sees no need to examine the overall circumstances if the small value of the securities holding or other indicators show that no self-employed gainful activity occurs.
If just one of the following conditions is met, this new definition of practice also points to the existence of private and therefore tax-exempt asset management in every case:
-
the average securities portfolio according to the securities register (excluding cash and cash equivalents) is less than CHF 200,000.-.
-
less than 100 transactions (buying or selling) occur every year. If no borrowed capital is used and no options are purchased, up to 200 transactions are permitted.
-
the volume of transactions amounts to less than three times the average securities holding. If no borrowed capital is used and no options are acquired, sales may amount to as much as five times the average securities holding.
-
In a majority of categories of securities, these securities must be held for more than six months. The categories of securities which represent the bulk of the securities portfolio are the determining criterion.
If these criteria are satisfied, no further investigation is made and no tax is levied on the capital gains as income from a self-employed gainful activity. If on the other hand none of the above conditions is satisfied, the suspicion of a taxable gainful activity must exist. In such cases, taxation can only be avoided if special circumstances exist and in the light of an assessment of the prevailing overall situation.
