Tax Treaty Case Law around the Globe 2019

S. 1121. Introduction

This contribution refers to a decision of the Swiss Federal Supreme Court (hereinafter: Court) rendered on 23 March 2018 and involving the application of the double tax convention concluded between Switzerland and Germany, which is based on the OECD Model. It will focus on two important aspects of the decision, firstly on the new requirements for the recognition of a foreign permanent establishment according to the Germany-Switzerland Tax Treaty by Switzerland, secondly on the uniform interpretation of tax treaties by courts at the international level (so-called convergence; in other terms “requirement for a common application and interpretation” or – according to the term initially established by Klaus Vogel – “Entscheidungsharmonie”).

The definition of permanent establishment (hereinafter: PE) is central in determining whether a non-resident enterprise must pay income tax in another state. In its ruling, the Court decided that a PE must at least have an entrepreneurial activity and hence, that a mere private asset management activity through a partnership does not suffice to trigger a PE qualification for the foreign entity.

The purpose of the “Entscheidungsharmonie” concept is for courts to search for the interpretation that is most likely to be accepted by both contracting states. This concept is a promising way to avoid the outcome of an identical case differing under the jurisdiction of one state from that of another.