The present article focuses on the taxation in Switzerland of a partnership incorporated under the laws of Guernsey in the hands of a general partner who is an individual resident in Switzerland (Geneva). The Swiss Supreme Court (Swiss Federal Tribunal) has dealt with this issue in a recent decision, dated 28 April 2014. Given that individuals resident in Switzerland are subject to unlimited tax liability in Switzerland for income and wealth tax purposes, the question at hand is whether the income and wealth of the Guernsey partnership have to be allocated to the Swiss resident individual and therefore subject to Swiss income and wealth taxation.
We will first present an overview of the treatment of such a partnership in Switzerland (see section I below) and then cover the Swiss tax consequences for the individual partner resident in Switzerland (section II) before concluding on this topic (section III).
I. Qualification of the Partnership in Switzerland
Prior to determining the tax consequences for the partner resident in Switzerland, the partnership itself has to be qualified from Swiss corporate law perspective. If the partnership has no legal personality under foreign laws, meaning that it is treated transparently, then income and wealth of the partnership have to be allocated fiscally to the partners resident in Switzerland, according to article 10 of the Swiss Federal Direct Tax Act, as far as the partners are individuals. If the partnership has legal personality, it has to be treated as a separate entity and therefore cannot be taxed in the hands of the partners directly. However, even if a partnership incorporated under foreign laws has legal personality, Swiss tax authorities may consider that the setting up of such a partnership, with no infrastructure in the foreign country (for example, no equipped office, no staff, etc.) as well as in case no meeting is held in said foreign country, could represent a case of tax evasion. In such circumstances, the partnership with legal personality would also be treated transparently, and the same result shall be reached as if the partnership had no legal personality.
In the case of a foreign partnership, such as a partnership incorporated under the laws of Guernsey, the question of whether the partnership has legal personality or not has to be analysed according to the laws of the country where the partnership has been incorporated. Therefore, the laws of Guernsey have to be taken into consideration. According to articles 9A and 9B of the Limited Partnerships (Guernsey) Law, a partnership shall have legal personality if, at the time of registration, the general partners so elect. The qualification under Guernsey laws shall also prevail under Swiss law, meaning that if the partnership has no legal personality under the laws of Guernsey, it shall be considered as having no legal personality under Swiss laws as well.
II. Swiss Tax Consequences
An individual resident in Switzerland is taxed on his worldwide income and wealth, including foreign source income and wealth, except for income and wealth deriving from enterprises, permanent establishments, or real estate located abroad (article 6 of the Swiss Federal Direct Tax Act). This tax treatment corresponds to cases where no double tax treaty has been concluded between Switzerland and the state of incorporation of the partnership, as is the case for Guernsey.
On this basis, it has to be determined if the income and wealth of the Guernsey partnership – presumably with no legal personality – are comprised in the taxable income and wealth of the Swiss resident individual, that is, if the partnership represents a foreign enterprise or a foreign permanent establishment.
In the situation at issue, the partnership cannot be considered a foreign permanent establishment, because this requires that there be a preexisting company in Switzerland, for which the foreign permanent establishment would represent a place where part of the business activity is carried out. Given the absence of any business activity in Switzerland, there can simply be no portion of the activity carried out abroad.
Regarding a possible foreign enterprise, a partnership that has no office and no staff abroad cannot be considered in itself as a foreign enterprise. An enterprise would be recognised if there were an entrepreneurial activity – that is, an active economic participation using capital and labour and recognisable as such for third parties.
Therefore, provided the foreign partnership – with no legal personality – cannot be considered a foreign enterprise or a foreign permanent establishment on the basis of the requirements aforementioned, income and wealth deriving therefrom shall be taxed in the hands of the partner resident in Switzerland.
According to the Federal Tribunal's reasoning, the main criterion influencing the taxation of the Swiss resident partner is the existence of substance in Guernsey (business activity, office premises, staff, etc.). This element will not only play a role if the partnership has legal personality but also if it has no legal personality. The Federal Tribunal's case law introduces tax guidelines, which should be taken into consideration when incorporating a foreign partnership, be it under the laws of Guernsey or of any other jurisdiction, subject to the particular features of each case.