Legal | Tax | Compliance
Legal | Tax | Compliance
The Swiss Federal Administrative Court has recently issued a decision concerning alleged dividend stripping transactions. The decision contains both «good» and «bad» news for taxpayers. Our comments.
We are pleased to provide below a summary of a recent decision of the Swiss Administrative Court (i.e., BVGer A-2267/2022), together with our comments on the decision.
The Swiss Federal Administrative Court (the «Court») issued a decision dated 1 July 2026 (the «Decision») regarding the refund of Swiss withholding tax («WHT») in the context of transactions involving dividend-paying shares. The Decision is the first ruling by a Swiss court on this issue following the leading decision of the Federal Court concerning the refund of WHT on interest from Swiss bonds held as a hedge for cross-currency swaps.
The Decision
TradeCo is a Swiss trading company incorporated in Switzerland which, in the ordinary course of its business, enters into transactions (the «Transactions») involving securities and derivative financial instruments («DFIs»), in particular options listed on Eurex. TradeCo held Swiss securities as hedges for (i) short put options and (ii) put options used in the context of «Calendar Spread» strategies. In the case of the short put options, TradeCo acquired Swiss shares and put options on the same Swiss dividend-paying stocks 30 days before the relevant dividend payment date. TradeCo received the dividend income and disposed of the shares one day after the dividend payment, following the exercise of the put options. Under the Calendar Spread strategy, TradeCo bought and sold two put options (i.e., «Put 1» and «Put 2») with the same exercise price but different expiration dates on Swiss dividend-paying shares, 10 days before the dividend payment. TradeCo acquired the Swiss shares eight days before the dividend payment following the exercise of Put 1. It received the dividend income and disposed of the shares one day after the dividend payment following the exercise of Put 2. TradeCo received gross dividend income of approximately CHF 1 million, including WHT of CHF 350,000.
In the Decision, the Court discussed (i) whether TradeCo is the beneficial owner of the dividends generated by the Swiss shares under the short put and Calendar Spread strategies and (ii) whether the Transactions constitute dividend-stripping strategies considered as being abusive for WHT purposes. The Court concluded that TradeCo was the beneficial owner of the dividends under both strategies because neither strategy involved a «bad» DFI. A «bad» DFI is typically a DFI that provides an explicit entitlement to an amount corresponding to, or reflecting, the amount of the dividend, such as a total return swap. In reaching this conclusion, the Court followed the rationale of the Federal Supreme Court in its decision concerning cross-currency swaps.
The Court then examined whether TradeCo’s Transactions constituted dividend-stripping strategies. It concluded that the claims for a refund of WHT in respect of both trading strategies are abusive. This is because (i) the Transactions were considered unusual and inappropriate, (ii) TradeCo entered into the Transactions with the clear intention of obtaining a full refund of the WHT and (iii) TradeCo would obtain a significant WHT benefit if the full amount of the WHT were refunded. Specifically, the Court considered that TradeCo should have recognised the tax-avoidance nature of the Transactions based on their pricing and on the proportion of the dividend amount in the net contribution of the Transactions. This conclusion was reached notwithstanding the fact that the Transactions were (i) conducted at arm’s length, (ii) executed through a broker on a regulated market, namely Eurex, and thus (iii) entered into with counterparties that were unknown to TradeCo.
MME comments
The good news is that the Court followed the rationale of the Federal Court in its decision concerning cross-currency swaps, even though parts of the reasoning suggest that the judges may not fully share the Federal Court’s approach.
The bad news is that the Court denied the claim for a refund of WHT on the basis of the anti-avoidance provisions. In our view, the Court’s reasoning is unconvincing and, in certain respects, particularly problematic. This is especially the case where the Court assumes that (i) tax avoidance arises where the net contribution of a transaction represents only 10% or 20% of the gross dividend income, (ii) transactions executed on the market through a broker cannot be regarded as genuine market transactions, and (iii) TradeCo’s intention to enter into the Transactions with the objective to obtaining a full refund of WHT can be inferred merely from the circumstances and economics of the Transactions.
These conclusions raise fundamental questions regarding the application of the anti-avoidance doctrine to transactions involving Swiss shares and DFI traded on regulated markets. In particular, the fact that the economic contribution of a transaction represents only a limited percentage of the underlying dividend does not, in itself, appear sufficient to establish tax avoidance. Similarly, the fact that a transaction is executed through a broker on Eurex should not, in our view, deprive the transaction of its character as a genuine market transaction. Finally, an intention to obtain a WHT refund should arguably not be inferred solely from the economic characteristics of the Transactions where those Transactions were entered into in the ordinary course of a taxpayer’s trading business.
We also analysed the Decision using several AI tools to assess whether the Court may have relied on AI in preparing the ruling, particularly given its unusual length (75 pages). While it is impossible to establish this with certainty, all tools assessed the likelihood that AI had been used to draft the Decision as very low. They considered it possible, however, that AI may have been used for limited purposes, such as improving the language or correcting typographical errors. Interestingly, with only a few prompts, the tools also identified several weaknesses in the Court’s reasoning. This further suggests that the judges likely did not rely on AI when developing the substantive reasoning. Had they done so, one might have expected those weaknesses to be addressed and, potentially, the conclusions reconsidered.
We hope this is helpful. Please do not hesitate to contact us if you would like to discuss the expected impact of this decision or if you have any questions in this respect.
