Tax Decision On Total Return Swaps – How Will Derivatives Market Take It?


On May 5 2015 the Federal Supreme Court rendered its long-awaited decision on a withholding tax reimbursement claim related to total return swaps.


A Danish bank entered into swap contracts with clients in England, France, Germany and the United States. Pursuant to these agreements, the clients undertook to trade the entire return (particularly dividends and capital gain) of a specific underlying asset (in this case, a basket of Swiss shares) against a fixed stream of payments. In consideration of this total return swap, the Danish bank was entitled to a variable interest (London Interbank Offered Rate) and a margin. This allowed the clients to build up a synthetic stake in an underlying asset (basket of Swiss shares) without having to invest directly in the related basket of shares. The Danish bank hedged its obligations arising under the total return swap (ie, payment of the aggregate return at a particular due date) by purchasing the related basket of Swiss shares. Dividends were paid by the Swiss enterprises to the Danish bank net of withholding tax.

Subsequently, the Danish bank sought reimbursement of withholding tax from the Federal Tax Administration of approximately Sfr50 million. The administration denied reimbursement, arguing:

a lack of beneficial ownership of the dividend on the bank's part; and abuse of the double tax treaty between Switzerland and Denmark. According to the Federal Tax Administration, entering into the total return swap on the one hand and the simultaneous purchase of related shares on the other hand resulted in a transfer of all financial opportunities and risks to the clients. The administration argued that the structure could not be justified on economic grounds and had been purely tax driven.

The administration's decision was appealed...

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