Walder Wyss Ltd.
  August 1, 2010 - Switzerland

Deemed Professional Trade in Securities –Good News and Bad News!
  by 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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