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Print articleDeemed Professional Trade in Securities –Good News and Bad News!
August, 2010 - Tina Shih-Thurnheer
Professional trade in securities under the case
law of the Swiss Federal Supreme Court…
Under the Swiss Federal Supreme Court’s prior case
law, capital gains derived from the sale of assets –
in particular real estate, securities, precious metals
and foreign currencies – are subject to federal income
tax if such activity, taken as a whole, qualifies
as self-employment. Private capital gains remain
tax-exempt only if they are derived in the context of
private asset management or an opportunity that
has arisen unexpectedly.
Under its prior case law, the Swiss Federal Supreme
Court determined that trade in securities constituted
self-employed activity if each of the following criteria
were, or, under certain circumstances, just one of
the following criteria was present:
– systematic or methodical investment;
– multiple and frequent transactions and short
holding periods;
– close connection to the taxpayer’s professional
background and use of special skills;
– leverage by substantial debt financing; and
– reinvestment of gains in similar assets.
…and the differing case law in Zurich
For the purpose of Zurich cantonal and municipal
taxes, the Zurich Administrative Court refused to
follow the Swiss Federal Supreme Court’s case law
for the federal tax; rather it set higher standards
for income to be considered as stemming from selfemployment.
Notwithstanding the aforementioned
Swiss Federal Supreme Court criteria, the Zurich
Administrative Court held that only an externally
perceived market presence would cause taxpayers
to be treated as self-employed. Taxpayers who merely
instructed professional asset managers to manage
their portfolios at the stock exchange or over the
counter were not taxed at the Zurich municipal and
cantonal levels with respect to their capital gains since
such taxpayers lacked a market presence.
Notwithstanding the confirmation of its prior
case law, the Swiss Federal Supreme Court provides
for tax predictability.
The unpredictable criteria of self-employed activity
under the Swiss Federal Supreme Court’s practice led
to an intolerable harmonization conflict between
federal and cantonal income tax laws. In its decision
of 23 October 2009 (2C_868 / 2008), the Swiss
Federal Supreme Court made clear that the criteria
for self-employment applicable for federal income
tax purposes apply to the cantonal and municipal
taxes as well. Accordingly, the taxpayer’s own market
presence is no longer a condition for a qualification
of self-employed activity and, therefore, for the
taxation of capital gains.
With its decision, the Swiss Federal Supreme Court
basically affirmed its prior case law regarding trade in
securities, but, at the same time, took into account
criticisms raised by legal authors with respect to the
criteria used by the court.
On the basis of the Swiss Federal Supreme Court’s recent
decision, the following criteria are now crucial:
– transaction volumes and frequencies;
– length of holding periods; and
– leverage by debt financing.
The former criteria of systematic or methodical behaviour
and use of special skills were specifically
stated to be “obsolete” and therefore abandoned.
In particular, the use of options, futures and other
derivatives or the application of a state-of-the-art
investment strategy is no longer relevant when
attempting to distinguish between capital gains that
are tax-free and those that are taxable.
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