The Swiss Federal Supreme Court recently decided a second case dealing with the question of beneficial ownership of dividends. The dividends were economically passed on to third parties in transactions involving cross-border derivatives. In the SMI Futures Case, the court denied a Danish bank a refund of dividend withholding taxes under Article 10 of the Switzerland/Denmark Double Taxation Convention (1973) as it did not regard the Danish bank as the beneficial owner of the dividends.
The Danish bank was the legal owner and physical holder of equity baskets comprising the twenty largest Swiss equities, which form the Swiss Market Index (SMI). The Danish bank was also the direct recipient of the dividends from these shares. The equity baskets were hedged with SMI futures. The Federal Supreme Court suggested that the Danish bank failed in its obligation to provide information and cooperate with the tax authorities. The resulting lack of information on the facts of the transactions could not be remedied. The court maintained that the Danish bank passed the dividends on by way of non-market standard purchase and disposal prices of the Swiss shares. It regarded the interposition of a broker acting as a principal in the share purchase and sale as an indicator of the circularity of the whole transaction. It further suggested that the Danish bank transferred all market risks in the transactions to its parent company and to third-party counterparty banks. The court concluded that there was an interdependence between obtaining the dividends and passing them on to the Swedish parent company and/or other counterparty banks.
After a critical analysis of the case, the article illustrates various examples of cash-futures arbitrage transactions (equities versus futures) with slight economic differences between the various forms of cash-futures arbitrage but potentially different taxation results. Beneficial ownership of the dividends may only be attributed to the physical holder (and legal owner) of the shares and direct recipient of the dividends in those cash-futures arbitrage transactions which are traded anonymously on exchange. Based on the decision of the Swiss Federal Supreme Court, beneficial ownership could be denied to the legal owner and physical holder of the shares (and direct recipient of the dividends) in cases where transactions are executed either over-the-counter (OTC) or as OTC-style block crosses on exchange.Intertax