Wells Fargo, an American multinational financial services company, had claimed foreign tax credits in the amount of $350 based on a “Structured Trust Advantaged Repackaged Securities” (STARS) scheme. The STARS foreign tax credit scheme has two components — a trust structure which produces the foreign tax credits and a loan structure which generates interest deductions. Wells Fargo was of the opinion that the STARS arrangement was a single, integrated transaction that resulted in low-cost funding. In 2016, a jury found that the trust and loan structure were two independent transactions and that the trust transaction failed both the objective and subjective test of the “economic substance” analysis. With respect to the loan transaction the jury found that the transaction passed the objective test by providing a reasonable possibility of a pre-tax profit, but failed the subjective test as the transaction had been entered into “solely for tax-related reasons.” The federal court ruled that Wells Fargo had not been entitled to foreign tax credits. The transaction lacked both economic substance and a non-tax business purpose. (The economic substance doctrine in the US had an objective and a subjective prong . The objective prong of the analysis considered whether a transaction had a real potential to produce an economic profit after consideration of transaction costs and without consideration of potential tax benefits. The subjective prong of the analysis considered whether the taxpayer had a non-tax business purpose for the transaction. The relationship between the two prongs had long been debated.  Some argued for application of the prongs disjunctively and others argued for application of the prongs conjunctively. When the US Congress codified the economic substance doctrine in 2010, it adopted a conjunctive formulation—denying tax benefits to a transaction if it failed to satisfy either prong.) ...

The deduction of losses resulting from a reorganisation involving a merger with a company in liquidation is not allowed if the sole reason for the merger was the deduction of such losses. In the present case, the Swiss Federal Supreme Court allowed the deduction of losses resulting from a merger with a company in liquidation after finding that the main reason for the merger was the acquisition of intellectual property owned by the company in liquidation. Excerpts from the Judgement “3.4 Furthermore, the offsetting of losses according to Art. 67 of the Federal Tax Act is – as is generally the case with any exercise of rights – subject to the prohibition of abuse (cf . Art. 2 para. 2 of the Civil Code). Thus, it is excluded in particular where there is tax avoidance or so-called shell company trading (cf. Brülisauer/Helbing, in: Kommentar zum Schweizerischen Steuerrecht, Bundesgesetz über die direkte Bundessteuer, 2nd ed. 2008, n. 15 on art. 67 DBG). According to the circular no. 5 “Restructuring” of the Federal Tax Administration of 1 June 2004 (no. 4.1.2.2.4), a tax avoidance exists in particular if the company to be transferred has been economically liquidated or put into liquid form (shell merger). According to some doctrine, however, there must always be tax avoidance for the refusal to offset losses (Höhn/Waldburger, loc. cit., § 48 para. 193 p. 544 f.; Glauser/Oberson, loc. cit., n. 20 i.f. on Art. 61 DBG; Spori/Gerber, loc. cit., ASA 71 p. 699). However, the question of tax avoidance only arises when the scope of application of the tax norm interpreted lege artis has been defined. According to the case law of the Federal Supreme Court, tax norms with economic connecting factors must be interpreted according to economic criteria. Only if the correct interpretation and application of the norm cannot prevent an abusive legal arrangement or an abusive use of rights does the question of tax avoidance arise…” (…) “4.4 The conclusion of the lower court that no economic continuity of the former Z.________ AG could be discerned in the appellant cannot therefore be upheld. The further factual findings of the lower court do not lead to a different result. The fact that the complainant did not show in detail how the expertise in the D.________factory and the remaining know-how in production had been transferred to the complainant does not invalidate the fact that a considerable increase in turnover had taken place. The argument also proves to be groundless in view of the complainant’s very detailed factual presentation in the proceedings before the court. The complainant has also comprehensibly explained why there were delays between the merger decision in 2002 and the merger (including legal disputes with third parties). This explains why Z.________ AG made its intangible assets available to the complainant free of charge as early as 2003. The aim of the merger was to combine the legal predecessor of the complainant, which was active in the field of F.________technik (construction sector), with Z.________ AG, which was also active in this field after the structural adjustment and sale of the non-profitable areas. This bundling of forces made perfect sense from an economic point of view. The various measures in the group are based on objective considerations to maintain the strengthening of the Y.________ group. The fact that tax planning aspects also played a role is legitimate and does not make the restructuring appear to be an abuse of rights. 4.5 The loss offset must therefore be recognised.”  Click here for English translation Click here for other translation ...