Administrative Court

of the Canton of Zurich

2nd division

SB.2020.00011/12

SB.2020.00014/15

Judgment of the 2nd Chamber

of 29 September 2021

Participating: Division President Andreas Frei (Chair), Administrative Judge Viviane Sobotich, Substitute Judge Marco Greter, Clerk of the Court Jsabelle Mayer.

SB.2020.00011/12:

In the matter of

1st State of Zurich,

2. the Swiss Confederation,

both represented by the Cantonal Tax Office,

appellants,

against

A AG, represented by RA B and/or RA C,

Respondent,

concerning state and municipal taxes 01.01.-30.09.2011,

Direct Federal Tax 01.01.-30.09.2011,

and

SB.2020.00014/15:

In the matter of

A AG, represented by RA B and/or RA C,

appellant,

against

1. the State of Zurich,

2. the Swiss Confederation,

both represented by the Cantonal Tax Office,

Respondent,

concerning state and municipal taxes 01.01.-30.09.2011,

Direct Federal Tax 01.01.-30.09.2011,

has resulted:

I.

A AG (hereinafter: the obligated party), which was founded in 2000 by researchers from the University of Applied Sciences D, has as its object the development and distribution of ..., in particular in the areas of ..... It had its registered office in Zurich until the transfer of its registered office to Zug in 2021.

By contract dated 16 June 2011, it was taken over by Group E, Country Q, or by an acquisition company founded by it for this purpose, for a share purchase price of EUR .... On the same day, it concluded two contracts with E-Schweiz AG, which was in the process of being founded (entered in the Commercial Register on 7 September 2011), in which it undertook to provide general and administrative services on the one hand and research and development on the other. As of 30 September 2011, the obligated party sold all ''Intellectual Property Rights'' (IPR) and ''Non-Viral Contracts'' to E-Company, a company in U with tax domicile on the island of V, for a price of EUR ... for the IPR and EUR ... for the ''Non-Viral Contracts''. The prices corresponded to an (undated) transfer price study prepared by company I, which was submitted to the Cantonal Tax Office in a letter dated 1 March 2013.

After the takeover, the obligated party moved its balance sheet date forward to 30 September and reported a taxable net profit of Fr. ... (with a loss of Fr. ...) in its tax return for the shortened tax period from 01.01.-30.09.2011. As part of his investigation, the tax auditor sent the taxpayer, inter alia, various tables relating to a number of accounts by e-mail dated 28 February 2014, with the request to complete them. On 7 July 2014, he repeated this request in a formal request for additional documents according to an attached list. On 5 September 2014, the obligated party submitted a number of documents on two memory sticks.

In an email dated 3 December 2014, the tax auditor raised the prospect of hidden profit distributions. After a meeting, on 30 January 2015, the auditor reminded compliance with the requirement of 7 July 2014, and on 27 March 2015, he sent assessment proposals for the tax period 01.01.-30.09.2011, in which he envisaged, among other things, the calculations of a hidden profit distribution through the under-priced sale of intangible assets. On 21 April 2015, he revoked these proposals. After further discussion and correspondence, on 4 September 2015 the cantonal tax office assessed a taxable net profit of CHF ... for the tax period 01.01.-30.09.2011 for state and communal taxes and direct federal tax, as well as taxable equity of CHF ... for state and communal taxes. The assessed taxable net profit included a hidden profit distribution in the amount of CHF ... from the sale of the IPR and customer relationships to the E-Company. Because the obligated party had not complied with the requirement of 7 July 2014 despite a reminder, the calculations of profits was made as a discretionary estimate.

The obligated party lodged an objection to this on 7 October 2015. On 20 May 2016, the cantonal tax office sent out a notice of appeal, the content of which was explained in an accompanying letter. After further correspondence and a renewed meeting, the Tax Commissioner issued a further imposition on 24 February 2017 for the submission of documents for the purpose of assessment, which he replaced with a revised imposition on 24 March 2017. Following further submissions by the obligated party and a further meeting, the Cantonal Tax Office issued a reminder of its requirement on 18 December 2017, to which the obligated party responded on 12 January 2018. On 24 September 2018, the Cantonal Tax Office dismissed the objections and confirmed the tax factors set by the assessment decision or the assessment order.

II.

The appeals lodged against the objection decisions were partially upheld by the Tax Appeals Court on 20 December 2019. In assessing the hidden profit distribution, the Tax Appeals Court essentially distinguished - in line with the differentiation in the objection rulings - between transfers of identifiable intangible assets on the one hand and withdrawals as a result of function downgrading and relocation on the other. The appeals were dismissed with respect to the calculations of profits due to the sale of intangible assets at a lower price, but were upheld with respect to the downgrading and relocation of functions. According to the Tax Appeal Court, the hidden profit distribution was reduced to CHF ..., which, after deduction of the loss carry-forwards and a corresponding additional tax provision, resulted in a taxable net profit of CHF ... for state and municipal taxes as well as direct federal tax and taxable equity of CHF ... for state and municipal taxes.

III.

In appeals to the Administrative Court of 11 February 2020 (proceedings SB.2020.00011 and SB.2020.00012), the Cantonal Tax Office requested the annulment of the decision of the Tax Appeal Court with costs and confirmation of the objection decisions of 24 September 2018. The Federal Tax Administration commented on the appeals of the Cantonal Tax Office insofar as the direct federal tax was concerned and requested approval, while the Tax Appeal Court waived its right to a hearing.

On 14 February 2020, the obligated party filed an appeal (proceedings SB.2020.00014 and SB.2020.00015) and requested the annulment of the decision of the Tax Appeals Court with costs and compensation. It requested the determination of a taxable net profit of CHF ... or, if necessary, referral back to the cantonal tax office for a new decision in the sense of the explanations and, if necessary, referral back to the lower court. It also requested the appointment of a court expert to determine the disputed transfer prices. The Cantonal Tax Office requested the dismissal of the complaints of the obligated parties, while the Tax Appeal Court waived its right to a hearing.

By Presidential Decree of 12 February 2020, the administrative court appeals of the Cantonal Tax Office concerning the state and communal taxes (SB.2020.00011) and the direct federal tax (SB.2020.00012) for the tax period from 01.01.-30.09.2011 were unified. By Presidential Decree of 19 February 2020, the corresponding appeals of the obligated party (SB.2020.00014 and SB.2020.00015) were unified for the same tax period.

In its response of 17 March 2020, the obligated party requested that the appeals of the Cantonal Tax Office be dismissed with costs and compensation. In its response of 19 March 2020, the Cantonal Tax Office requested the dismissal of the complaints of the obligated party and the annulment of the decision of the Tax Appeal Court and confirmation of the objection decisions with costs to be borne by the obligated party. From a procedural point of view, the cantonal tax office requested that the appeal proceedings initiated by the obligated party be merged with those initiated by the tax authorities in the same matter. The Tax Appeals Court waived its right to a hearing.

On 15 April 2020, the obligated party requested access to the file, which was granted by the Administrative Court. The obligated party submitted its comments within the extended deadline on 16 June 2020 and submitted an addendum on 31 July 2020, in which it corrected an oversight contained in the submission. The Cantonal Tax Office, for its part, commented on the obligated party's response to the appeal in its own proceedings on 27 April 2020, to which the obligated party responded with a duplicate on 31 July 2020.

The Board considers:

1.

1.1 The appeals SB.2020.00011 (State and communal taxes 01.01.-30.09.2011) and SB.2020.00012 (Direct federal tax 01.01.-30.09.2011) of the Cantonal Tax Office concern the same obligated party, the same facts and the same legal situation, which is why the unification of the proceedings by presidential order of 12 February 2020 was justified. The same applies mutatis mutandis to the appeals SB.2020.00014 (State and communal taxes 01.01.-30.09.2011) and SB.2020.00015 (Direct federal tax 01.01.-30.09.2011) filed by the obligated party.

1.2

1.2.1 The appeals SB.2020.00011/ SB.2020.00012 filed by the Cantonal Tax Office and the appeals SB.2020.00014/SB.2020.00015 filed by the obligated parties concern the same decision of the Tax Appeals Court and the same parties. The four appeal proceedings must therefore be combined.

1.2.2 However, in its letter of 15 June 2020, the obligated party is of the opinion that the appeal proceedings should remain separate in view of the different issues involved. This opinion cannot be accepted. Taxes on net profit and equity are determined and levied for each tax period (§ 83 para. 1 of the Tax Act of 8 June 1997 [StG] and Art. 79 para. 1 of the Federal Act of 14 December 1990 on Direct Federal Tax [DBG], respectively). Pursuant to § 139 para. 1 of the Tax Act and Art. 131 para. 1 of the Federal Act of 14 December 1990, the cantonal tax office determined the tax factors and the tax rate for the tax period in dispute. Tax procedural law does not provide for partial rulings for the determination of the tax factors. The separate legally binding determination of individual elements of the tax factors is also not possible because the tax claim is derived from the legally binding assessment or appeal decision, which always comprises the entire taxable factors (taxable net income and capital for legal entities) for the tax period in question. In the appeal proceedings, a decision must therefore be made in a single ruling.

2.

2.1 Pursuant to § 153 para. 3 of the Tax Act, a tax appeal to the Administrative Court regarding state and communal taxes may allege all violations of the law, including overstepping or abuse of discretion, and incorrect or incomplete determination of the legally relevant facts.

Consequently, the administrative court must limit itself to pure legal review; this also includes examining whether the lower courts have established the legally relevant facts in accordance with the law. The court is therefore precluded from reviewing the discretion exercised by the tax appeal court in accordance with the law for reasonableness and thus substituting its discretion for that of the tax appeal court. The administrative court's power of review extends only to errors of discretion that violate the law, i.e. to excess of discretion and abuse of discretion (FD 1999 No. 147).

2.2 According to Art. 145 para. 2 of the Federal Tax Act, appeals to the administrative court as a further cantonal authority independent of the administration are subject to the provisions of Art. 140 to 144 DBG on the appeal procedure before the cantonal appeal commission apply "mutatis mutandis", which, according to case law, is to be interpreted to the effect that the review power of the administrative court is limited to legal review, just as in the case of state and municipal taxes (BGE 131 II 548 E. 2.5; cf. RB 1999 No. 147).

2.3

2.3.1 In appeal proceedings before the administrative court, the prohibition of novelties applies to state and communal taxes as it does to direct federal tax (BGE 131 II 548 E. 2.2.2). Thus, the same file situation is decisive for the administrative court as for the tax appeal court. Facts or evidence that were not alleged, presented or invoked at the latest in the proceedings before the Tax Appeals Court may therefore not be introduced in the appeal proceedings before the Administrative Court (FD 1999 Nos. 149 and 150, confirmed in BGE 131 II 548 E. 2.3).

2.3.2 However, genuine novelties are exempt from the prohibition of novelties, namely new factual allegations and evidence that are based on a ground for revision or subsequent taxation (§ 155 or § 160 StG and Art. 147 or Art. 151 DBG) or serve to support asserted violations of law that by their nature require new factual submissions or evidence. Finally, new legal claims filed for the first time before the administrative court are generally admissible, provided they are not based on facts and evidence that fall under the prohibition of novelty (FD 1999 No. 149).

2.3.3 On appeal, the obligated party requests the appointment of a court expert to determine the disputed transfer prices. The same request was already made in the proceedings before the court of first instance and rejected by the Tax Appeals Court, which can be assessed within the framework of legal review. Because the administrative court's power of review is limited to pure legal review, the same file situation is authoritative in the appeal proceedings as for the tax appeal court. New evidence is subject to the prohibition of novelty. The appointment of an expert in these proceedings is therefore excluded (see E. 5.4). The application does not require further consideration.

3.

The subject matter of the proceedings are reorganisation measures carried out after the change of shareholders, which were connected with the sale of assets of the obligated party to other group companies and the abandonment of traditional operating activities. The dispute revolves around the question of whether the obligated party provided services to related companies under conditions that do not comply with the principles of tax law regarding the appropriateness of performance and consideration between related parties and whether it therefore provided non-cash benefits or hidden profit distributions that are subject to profit tax.

3.1 The taxable net profit of legal entities is, according to § 64 para. 1 StG and Art. 58 para. 1 DBG, composed, among other things, of the balance of the profit and loss account, taking into account the balance carried forward from the previous year (para. 1 and lit. a), as well as ''all payments made prior to the calculation of the taxable profit''. a) as well as ''all parts of the business result eliminated before the calculation of the balance of the profit and loss account which are not used to cover expenses justified on business grounds, such as in particular open and hidden profit distributions and donations to third parties not justified on business grounds'' (§ 64 para. 1 item 2 lit. e StG and Art. 58 para. 1 lit. b 5th Lemma DBG).

3.2 A hidden distribution of profits must be assumed if a legal entity, by making itself rich, knowingly grants its shareholders or other persons close to it advantages that it would not grant to uninvolved third parties (VGr, 16 December 2015, SB.2015.00005, E. 3.2; RB 1985 No. 42 = StE 1985 B 72.13.22 No. 4, with references). As the Tax Appeals Court correctly considered, this also includes non-cash benefits in the form of waivers of income in favour of the shareholder or a person close to him. This form of pecuniary benefit - also referred to as anticipation of profits - exists if the company waives all or part of the income to which it is entitled and the corresponding income accrues directly to the shareholder or persons closely associated with him or if they do not provide the consideration that the company would demand from an uninvolved third party (Federal Supreme Court, 22 September 2011, 2C_180/2011 and 2C_181/2011, E. 3.2). According to case law, performance and consideration must stand up to a so-called third-party or arm's length comparison. The company that concludes a legal transaction with a shareholder or a related party must therefore do so under the same conditions as it would with an independent third party (BGr, 3. May 2021, 2C_548/2020 and 2C_551/2020, E. 2.2; Martin Zweifel/Silvia Hunziker, Steuerverfahrensrecht, Beweislast, Drittvergleich, ''dealing at arm's length'', Art. 29 para. 2 BV, Art. 58 DBG, ASA 77, p. 657 et seqq, p. 673 with references).

3.3 As far as the allocation of the burden of proof is concerned, the basic rule is that the tax authority bears the burden of proof for facts justifying and increasing the tax and the taxpayer bears the burden of proof for facts nullifying or reducing the tax (BGE 140 II 248 E. 3.5; BGE 121 II 257 E. 4c/aa). In the case of pecuniary benefits, it is generally up to the tax authority to prove that there is no or no adequate consideration for a benefit provided by the company. If it does not succeed in doing so, it bears the consequences of the lack of evidence (see [instead of many] BGr, 1 September 2009, 2C_265/2009, E. 2.4; BGr, 23 July 2009, 2C_76/2009, E. 2.2 with reference). However, in connection with so-called hidden profit distributions (see E. 4.5), it should be noted that if the tax authority provides sufficient indications that the consideration is inappropriate, it is up to the taxpayer to provide evidence to support its claim to the contrary (BGr, 27 September 2019, 2C_343/2009, E. 2.2 with reference). September 2019, 2C_343/2019, E. 5.2; BGr, 23 April 2019, 2C_49/2018 and 2C_70/2018, E. 4.2.4).

4.

4.1 According to the undisputed findings of the Tax Appeals Court, the E Group, Country Q, had purchased all of the shares of the Obligated party through an acquisition company at a price of EUR ... (Fr. ...) by way of a contract dated 16 June 2011. At that time, according to the findings of the lower court, the obligated party employed its own staff with 57.9 full-time positions. It also had around 100 local partners under contract as ... under contract. Furthermore, it held a German subsidiary based in O and a branch in P, which provided research, development and marketing services and in turn employed the equivalent of 46.4 full-time staff. In addition, it held further subsidiaries in Q, R, S and T, which sold licences for the obligated party. The customer base included well-known large companies such as K, L, M, N etc.

4.2 Immediately after the takeover, according to the findings of the Tax Appeal Court, the obligated party concluded two contracts with E-Schweiz AG (which had not yet been established). In addition, it sold all ''Intellectual Property Rights'' and ''Non-Viral Contracts'' (hereinafter: intangible assets) to a foreign group company as of 30 September 2011. Furthermore, by contract dated 2 November 2011, it transferred the remaining business assets and the employees still employed at that time to E-Schweiz AG with retroactive effect from 1 October 2011. The obligated party paid the latter additional compensation of CHF ... because the book values of the liabilities exceeded those of the assets. As the Tax Appeal Court found without contradiction, the obligated party had neither identifiable operating activities nor personnel substance in the financial year from 01.10.2011-30.09.2012 following the shareholding transaction. According to the findings of the Tax Appeals Court, the transfer of the tangible and intangible business assets and the personnel of the obligated party to other companies of the E group corresponded to an integration plan that had already been set out in a draft power point presentation of the E group prior to the acquisition of the participation.

4.3 The intra-group reorganisation measures were partly carried out against compensation, the appropriateness of which is disputed. The enterprise value of CHF ... existing at the time of the acquisition of the participation - derived from the share purchase price - had decreased massively as a result of the intra-group transfers of assets and personnel as well as the changes in the area of responsibility of the obligated party stipulated by the competent bodies. According to the findings of the lower court, the compensation received by the obligated party in this context was significantly lower than the loss in value of the participation. The finding of the Tax Appeal Court that the fact that the share price was only just calculated by an (alleged) value of CHF ... for the intangible assets and that the remaining business was even only transferred to the sister company against payment of compensation by the obligated party calls for an explanation is well-founded. In addition, further information on the transaction emerged from the group's documents, which could be viewed on the internet, which raised doubts about the purchase price agreed for the intangible assets. The tax auditor had in his possession an annual report of the listed group E, which had been filed with the United States Securities and Exchange Commission. This document contained, among other things, a ''Purchase Price Allocation'' (PPA) under the chapter ''Acquisitions'', which broke down the purchase price paid for the obligated party from the group's point of view. According to the findings of the lower court, to which reference can be made, a purchase price share of USD ... was allocated to customer relationships and USD ... to goodwill. As the Tax Appeals Court correctly found, against this background there was good cause to conduct an investigation into whether there was a disproportion between performance and consideration. The order for a tax audit was therefore justified and in accordance with the law.

4.4 The tax auditor requested numerous documents from the then representative of the obligated party, first in an email and then in a formal request dated 7 July 2014, relating to the 2011 and 2012 tax periods, including intra-group pricing, transferred assets, hidden reserves and valuation models for intangible assets. According to the findings of the lower court, he also requested, among other things, the completion of a table regarding the intangible assets, broken down into categories, with the individual components and with the greatest possible degree of detail, as well as indicating the valuation models. However, the documents subsequently submitted by the obligated party digitally on a memory stick mainly concerned other points of requirements. According to the undisputed findings of the Court of Appeal, the taxpayer failed to complete the required table and the required information was not available in the other documents. On 30 January 2015, the auditor sent an unsuccessful reminder to comply with the requirement and also requested delivery of the valuation models that had been used in the preparation of the US consolidated financial statements with respect to the intangible assets. In the response of 27 February 2015, the duty bearer only explained the valuation according to the transfer pricing studies of company I in more detail and commented on the reasons why, in its view, the valuation according to the PPA was not decisive for the third-party comparison. However, it did not submit the completed table (requested several times) or the bases and details of the valuation according to the PPA.

4.5 According to the correct findings of the Tax Appeals Court, to which reference can be made, the large discrepancy between the values according to the transfer price study of company I and the share purchase price and the result of the PPA was suitable to cast doubt on the correctness of the transfer price study. Even if the objections to the comparability with the PPA were true, the relevance of the PPA (wrongly disputed by the obligated party) could not be verified without the data used in its preparation. The share purchase price was agreed among independent third parties and therefore corresponded to the enterprise value at the time of the acquisition of the shareholding. According to the findings of the lower court, the transfer price study was only subsequently prepared in 2012 and is incomplete in various respects, which was not refuted by the obligated party. The Tax Appeals Court therefore concluded that the requirement had not been fulfilled and that the facts of the case had remained unclear. In particular, there had been uncertainty about the actual value of the intangible rights sold after the investigation had been completed. The Cantonal Tax Office's assertion that the agreed purchase price for the intangible rights was too low had not been refuted and, based on the comparison with the PPA and the share purchase price, this assertion appeared very likely. The Cantonal Tax Office had therefore provided the main evidence incumbent upon it. Because the cantonal tax office had not been able to carry out its own valuation due to the lack of data, it had rightly proceeded to an estimate. According to the decision of the lower court, the discretionary assessments regarding the profit from the sale of the intangible assets were rightly made.

4.6 This finding of the Tax Appeals Court proves to be correct and in accordance with the law. Despite the exhaustion of the means of investigation on the part of the cantonal tax office, the facts relevant for tax purposes had remained unreliable. It was therefore appropriate to carry out a discretionary assessment with regard to the calculations of profits in dispute.

5.

5.1 Discretionary assessments can only be challenged on the grounds of obvious incorrectness according to Art. 132, para. 3, sentence 1 DBG and § 140, para. 2, sentence 1 StG. This special feature limits the power of audit (Martin Zweifel/Silvia Hunziker in: Martin Zweifel/Michael Beusch [eds.], Kommentar zum Schweizerischen Steuerrecht, Bundesgesetz über die Harmonisierung der direkten Steuern der Kantone und Gemeinden [StHG], 3rd ed., Basel 2017 [hereinafter: Kommentar StHG], Art. 48 N. 42; Martin Zweifel/Silvia Hunziker in: Martin Zweifel/Michael Beusch [eds.], Bundesgesetz über die direkte Bundessteuer [DBG], 3rd A., Basel 2017 [hereinafter: Commentary DBG], Art. 132 N. 33; Martin Zweifel et al., Schweizerisches Steuerverfahrensrecht, Direkte Steuern, 2nd A., Zurich etc. 2018, § 20 Rz. 19; see also Felix Richner et al., Handkommentar zum DBG, 3rd A., Zurich 2016, Art. 140 N. 51; Felix Richner et al., Kommentar zum Zürcher Steuergesetz, 4th A., Zurich 2021, § 140 N. 73). This premise also applies in appeal and appeal proceedings (Zweifel/Hunziker, Kommentar StHG, Art. 48 N. 62; dieselben, Kommentar DBG, Art. 132 N. 55).

5.2 Moreover, the burden of proving the obvious incorrectness of the discretionary assessment is placed on the taxpayer, which is not to be equated with a "reversal of the burden of proof" (on the whole Zweifel/Hunziker, Kommentar StHG, Art. 48 N. 44; diesel, Kommentar DBG, Art. 132 N. 37; Zweifel et al., Schweizerisches Steuerverfahrensrecht, § 20 Rz. 22).

5.3 The taxpayer can prove the obvious incorrectness of the discretionary assessment in two ways: He can demonstrate and prove the true facts of the case, whereby the prerequisites of a discretionary assessment cease to apply because the tax factors can be determined perfectly. If this is not possible, the assessment remains discretionary, but the taxpayer can still prove that the assessment made was obviously too high (Zweifel/Hunziker, Kommentar StHG, Art. 48 N. 46; dieselben, Kommentar DBG, Art. 132 N. 39). An estimate is "obviously incorrect" if it cannot be objectively justified, in particular if it is recognisably motivated by penalties or fiscal considerations, if it is based on improper bases, methods or aids for estimation or if it cannot otherwise be reasonably reconciled with the circumstances of the individual case as known from the experience of life. Obviously incorrect is therefore an estimate that is based on an abusive use of the estimation discretion, i.e. is arbitrary (Zweifel/Hunziker, Kommentar StHG, Art. 48 N. 59; dieselben, Kommentar DBG, Art. 132 N. 52).

5.4 The Tax Appeals Court correctly stated - to which reference can be made - that the obligated party had not made up for the omitted actions either in the objection or in the appeal proceedings, which is why the discretionary assessment was still valid. Because no further investigative actions take place within the scope of a discretionary assessment, the Tax Appeals Court rightly rejected the request for an expert opinion. The tax authorities' estimate of the intangible assets at CHF ... was based on the PPA. As the Tax Appeals Court correctly and extensively explains (to which reference can be made), the valuation of the intangible assets can be easily derived and understood from the figures in the PPA and the information provided by the obligated party. The conclusion of the lower court that the resulting tax assessment or its result is not arbitrary is therefore well-founded and must be confirmed.

5.5 In the appeals, the obligated party disputes the legality of the discretionary assessment. It justifies this, on the one hand, with the violation of the principle of proportionality and, on the other hand, with the fact that the reminder of 30 January 2015 was extremely extensive, unstructured and, in part, hardly understandable or comprehensible. However, the fact that the reminder was extensive says nothing about its admissibility. As the Tax Appeals Court rightly found, the reminder for the completion of a prepared table - which was already required by the condition - was correct. Other requirements were marked in colour in the reminder as fulfilled, with the indication that the reminder only concerned the unmarked items that had not yet been fulfilled or not completely fulfilled. It was therefore very easy to recognise the incompleteness of the fulfilment. Furthermore, the obligated party does not explain to what extent and for what reasons this reminder was hardly understandable and comprehensible, which is why it is unnecessary to deal with it. As the obligated party herself explains, various correspondence was exchanged with the tax auditor, telephone conversations were held and a hearing took place before the reminder was served. In addition, in an email dated 3 December 2014, the tax auditor had sent the then representative a written proposal regarding the valuation of the assets transferred to U, which he derived in a comprehensible manner from the values taken from the PPA and in which he provided for a calculation of USD .... Based on the numerous correspondences, telephone calls and oral negotiations, as well as in the knowledge of the valuation proposal of the tax office auditor, it must have been clear to the obligated party that the cantonal tax office did not consider the results of the submitted transfer price study to be accurate or at least extremely doubtful due to the overall circumstances and that the condition was specifically intended to clarify the contradictions with the valuation according to the PPA and the reasons for the rapid, significant loss in value of the company. On the basis of the valuation proposal, the obligated party could easily recognise the extent to which the facts of the case were highly unclear according to the findings of the cantonal tax office and the purpose of the requirement and reminder was to bring about clarification. The fact that the obligated party had submitted several hundred pages of documents on an electronic data carrier in the imposition procedure in no way meant that the imposition had been fulfilled.

5.6 What is proportionate and reasonable in the procedure for imposing an obligation depends on the circumstances of the individual case. If, as here, the case involves complex intra-group transactions carried out according to plan in an international context, as a result of which the Swiss group company is subject to a short-term devaluation in the double-digit millions, and if there are unexplained, significant differences between the information published by the group in the PPA and a transfer price study commissioned by the obligated party, even an extensive condition requiring the completion of factual tables is proportionate and reasonable. The purpose of the tables was to summarise the figures and additional information relevant to the determination of the tax-relevant facts in a clear manner. The obligated party refrained from doing so and did not submit the information requested in this regard in a comparable list of its own. The duty to cooperate cannot be fulfilled in a legally sufficient manner with the mere submission of several hundred pages on an electronic data carrier if this leaves it up to the cantonal tax office to pick out the requested information itself from the extensive documents. According to the findings of the Tax Appeals Court, which were not refuted, the required information could not be found in the documents anyway. The requirement thus proves to be in accordance with the law.

5.7 The obligated party also claims that the cantonal tax office sent a reminder three days after the hearing on 27 January 2015 was an abuse of rights. It is clear, however, that the relevant facts could not be clarified by mutual agreement at the hearing and that no agreement was reached on the consequences of the taxation. Because the facts of the case were still unclear, the sending of the reminder violated neither the prohibition of abuse of rights nor the law. Thus, the obligated party could by no means assume that the reminder had become invalid or had been revoked by the cantonal tax office due to a telephone conversation between company I and the cantonal tax office after the reminder had been sent. The fact that the cantonal tax office provided for different profit calculations in different taxation proposals is also not objectionable. There are no indications that the tax authority had behaved in this way for improper reasons or that it had even intended to harass the obligated party. Rather, these attempts and the endeavour to find a solution with estimates confirm that the real facts of the case remained unclear. The finding of the Tax Appeals Court that the tax authority had not acted unlawfully in terms of procedural law must therefore be confirmed.

5.8 The obligated party further asserts that the findings of fact were contrary to the record, in particular in connection with the lower court's finding that no improved study had been submitted. It claims to have done so with the submission of the so-called settlement offer of H AG of 17 November 2017. However, the contested finding of the Tax Appeal Court is - as is clear from the reasoning - directly related to the finding that the transfer price study of company I was deficient and could not serve as a reliable basis. The obligated party did not claim that it had submitted the transfer price study, which was described as defective, in an improved form, which is why there is no evidence of an inconsistency in the file. It is undisputed that the so-called settlement offer of H AG had been submitted in the objection procedure. However, the cantonal tax office had come to the conclusion that the obligated party had thus not proven that the contested discretionary assessment was obviously incorrect. In this regard, the Tax Appeal Court stated that the obligated party had not complied with various requests for information from the tax authorities during the objection procedure, which was why the ambiguity in the facts of the case had not been removed with the objection. In the letter from H AG dated 17 November 2017, it is claimed that the enterprise value of the obligated party (apparently at the time of the acquisition of the participation) was only CHF .... However, it is obvious from the figures that the valuation method on which the letter from H AG is based differs significantly from that of the PPA published by the group, because the latter assumed a much higher enterprise value - determined among third parties - corresponding to the purchase price of CHF .... The purpose of the tax authorities' requirements and reminders was precisely - as the Tax Appeals Court rightly states - to establish the reasons for this massive difference in value. Contrary to the assertion of the obligated parties, this question is certainly relevant for the assessment of the service relationships among the affiliated companies, because the subsequently prepared valuation of H AG, which shows less than a quarter of the company value confirmed in the sale transaction among third parties, appears to be very unusual indeed and is not suitable to refute the tax office estimate. For this reason, there is no serious violation of the right to be heard by the lower instance, which obviously did not take any notice of the said study. Under these circumstances, the lower court's finding that the submitted documents did not provide proof of incorrectness is not objectionable.

5.9 The Tax Appeals Court's finding that there was uncertainty about the value of the intangible assets sold even after the conclusion of the tax investigation, which is why the amount had to be estimated and the discretionary assessments were correct, must therefore be upheld. Since the proof of incorrectness was not properly raised either in the objection or in the appeal proceedings, the continued existence of the discretionary assessment or assessment determined by the lower court must also be confirmed. The amount of the assessment was examined by the Tax Appeals Court and confirmed as comprehensible, in any case not as arbitrary. The administrative court examines the result of an assessment or valuation only cautiously, i.e. for obvious errors and mistakes. The obligated party does not present any valid reasons that indicate an uninformed, arbitrarily too high valuation. On the basis of the share price paid and taking into account the information according to the PPA, the official tax estimate is certainly within the realm of possibility. The Tax Appeals Court therefore rightly dispensed with further investigative measures and confirmed the amount of the official tax estimate of the intangible assets sold. The hidden profit distribution in the amount of CHF ... calculated in the contested decision must therefore be confirmed. The amount of the additional tax provision allowed for deduction was not contested. The complaints of the obligated parties are therefore to be dismissed. In view of this outcome, there is no need for further discussion of the extremely extensive and - for appeal proceedings before the administrative court - in some cases not useful explanations of the facts by the obligated parties. The hearing of witness J, ..., requested by the obligated party for a better understanding of the technical aspects and the effective benefit of the A AG technology - which is not further relevant here - for the E group can also be omitted.

6.

6.1 The subject of the appeal filed by the Cantonal Tax Office is the partial annulment of the objection decisions by the Tax Appeals Court. In the assessment and objection proceedings, further hidden profit distributions in the amount of CHF ... were calculated - also within the framework of discretionary assessments and assessments. These were justified by the lack of compensation for the demotion of the duty bearers to contract researcher and sales support as well as for the relocation of functions within the group (with corresponding staff reductions). Until the sale of the shares, the obligated party, which was founded by researchers from the D University of Applied Sciences, was active in research with its own qualified personnel or with qualified personnel employed by subsidiaries and developed ..., which it also marketed itself. According to the findings of the Tax Appeal Court, the assets necessary for operations and the essential research, development and marketing activities of the obligated party were transferred to other group companies in the months following the acquisition of the shareholding - in accordance with the previously developed integration plan mentioned above (see E. 4.2 above). The reorganisation thus went far beyond the mere sale of intangible rights and appears overall as a far-reaching withdrawal of the traditional operating activities, combined with the sale of the essential business assets and a practically complete reduction in personnel. In the business year following the takeover, according to the undisputed findings of the Tax Appeals Court, the obligated party no longer exercised any operational function and no longer had any personnel substance. Under these circumstances, it is not objectionable that the tax assessment of the cantonal tax office was not limited to the review of the appropriateness of the transfer prices in individual transactions, but examined whether there was an overall disproportion between performance and consideration, analogous to the sale of a business operation with the tangible and intangible assets necessary for the operation and the staff.

6.2 However, the Tax Appeals Court did not review the hidden profit distributions calculated in the objection decisions regarding the relocation and downgrading of functions because it concluded that a claim for compensation in this regard was only to be allocated to the subsequent financial year from 1 October 2011. In the objection proceedings, the cantonal tax office had attempted to clarify the temporal allocation of the corresponding compensation and, on appeal, claimed that the transfer and downgrading of functions had taken place on 30 September 2011 at the latest. This is justified by the fact that the obligated party sold all intangible rights as of 30 September 2011 and that a substantial reduction of the previous business activity had already been implemented with the two contracts concluded with the sister company on 16 June 2011. Because the obligated party had disposed of its business-related assets in the 2011 business year, the tax-relevant transfer and downgrading of functions had been completed by 30 September 2011 at the latest.

6.3 The Tax Appeals Court bases its conclusion that the transfer of functions only took place in the 2011/12 business year on the assumption that the remaining business operations with employment contracts were only transferred to the sister company (retroactively to 1 October 2011) with the Asset Sale and Transfer Agreement of 2 November 2011. However, it had not carried out an investigation - beyond this determination - into the time of realisation relevant under tax law. In contrast, the cantonal tax office had attempted to clarify, by means of a requirement and reminder in the objection proceedings, whether the goodwill components associated with the previous functions had been transferred at the same time as the sale of the intangible rights as at 30 September 2011 or whether they should have been settled with remuneration to be expected at a later date. Because the requirement was not properly fulfilled (according to the information provided by the cantonal tax office), it remained unclear whether any goodwill components at all, and if so which, had remained with the obligated party after the transfer of the intangible rights as of 30 September 2011. The assumption made by the Tax Appeals Court in this context that the two contracts concluded with the sister company on 16 June 2011 had only served to regulate the short interim period until the definitive reorganisation in the following financial year is not comprehensible on the basis of the state of the file. The contracts were concluded for an indefinite period and contain a termination provision. The compensation provision in the Service Agreement was for an indefinite number of financial years from 1 October to 30 September (Section 2). The agreements contain no further indication that they were merely intended to regulate the short interim period until a final reorganisation. The Tax Appeals Tribunal did not investigate or determine whether the agreements were later cancelled or replaced. Rather, the texts of the agreements and the actual execution (as far as can be seen from the files) indicate that the two legal transactions had been an essential conceptual component of the entire reorganisation.

6.4 If a company acquires assets from shareholders or related parties or intends to make such acquisitions in kind, the articles of association must state the subject matter, the name of the seller and the consideration paid by the company (Art. 628 para. 2 of the Code of Obligations [CO]). In 2011, the newly founded E-Schweiz AG had entered into agreements with its sister company which, among other things, also provided for the acquisition of assets, without the articles of association containing a corresponding acquisition-in-kind clause. The cantonal tax office did not argue that such a provision in the articles of association was required and that the agreements concluded among the sister companies suffered from a legal defect. In view of the outcome of the proceedings, this question can in any case be left open here.

6.5 In the 2011/12 business year, the obligated party had neither identifiable operational activities nor personnel substance (cf. E. 4.2 above). According to the findings of the lower court, in the abbreviated tax period 2011 (until 30 September 2011) - in addition to the completion of the aforementioned transactions - there was also a considerable reduction in staff, which was entirely in line with the integration concept of the E-Group (see E. 4.2). In addition, it can be seen from the commercial register that the board of directors of the obligated party was newly appointed after the acquisition of the shareholding by the E-Group. The fact that the two contracts concluded with the sister company being formed on 16 June 2011 were signed by the same person for both contracting parties indicates that the management functions were filled immediately by the new shareholders and that the obligated party was quickly oriented towards higher-level goals. This leads to the assumption that the decisions of the new corporate bodies as of 16 June 2011 were primarily made in the interest of Group E and not the duty bearers. In particular, the intra-group sale of the intangible assets meant a serious change for the obligated party or the extensive liquidation of its previously established operational activities in the area of self-determined research and development, and also with regard to trademark and patent management, know-how development and licence exploitation. The circumstance mentioned by the Tax Appeal Court that the Service Agreement did not contain an express prohibition of future self-determined research is irrelevant in this respect. After the sale of the intangible assets and the management integration into the group, the obligated party was neither in a position to continue its previous research and development activities due to a lack of technical and human resources, nor are there any indications that its executive bodies intended to establish its own research in new areas.

6.6 According to the letter of 13 July 2017 submitted by the then representative in the objection proceedings, there were no detailed multi-year financial plans of the duty bearer and its sister company. Moreover, according to its own information (apart from the submitted agreements), there were no management resolutions dealing with the takeover, the reorganisation and the future strategy of the Obligated party and no ''management and control/administration minutes'' exist for the period after the reorganisation. It is notorious that the aforementioned documents are important for the management of a company and that especially in a company which - like the obligated party - is in a phase of profound change, financial planning and strategy issues are central tasks of corporate management. The lack of documents in this regard can probably only be explained by the fact that the essential entrepreneurial decisions were not made by the obligated party, but at the group level. This also speaks in favour of the assumption that the essential decisions were primarily made in the interest of the group and that the financial interests of the obligated party were given little consideration.

6.7 An independent company in the ...industry would hardly have agreed to such drastic restrictions of its operational activities and the massive reduction of qualified personnel that this would inevitably entail, if it had not received, or at least been promised, at the latest upon conclusion of the agreement on the sale of all ''Intellectual Property Rights'' and ''Non-Viral Contracts'', an adequate compensation, which would also have compensated for the extensive liquidation of the previous business operations inevitably associated with the sale. Among independent third parties, the compensation would probably not have been agreed only after the sale of the essential business assets, but already at an earlier point in time, when there was still freedom of action and thus a good negotiating position could be taken.

6.8 The Tax Appeals Court did not conduct an investigation into this matter and the parties did not have the opportunity to comment on it. Consequently, there was also no examination of whether (also) in this respect the requirements of the discretionary assessments were met and whether they were valid. The admissibility of the discretionary assessment must therefore be reviewed by the lower court in the area of the transfer and demotion of functions. The matter must therefore be referred back to the Tax Appeals Court in accordance with the recitals and for a new decision.

6.9 In its reply of 15 June 2020, the obligated party criticises the submission of the Cantonal Tax Office of 19 March 2020 with enclosures. However, in accordance with the foregoing, the tax office submission in question does not form the basis for the referral back to the lower instance. It is therefore not necessary to examine in these proceedings whether and to what extent the documents submitted by the cantonal tax office are to be taken into account. The criticism of the obligated party is therefore irrelevant.

7.

A remittal with an open outcome is deemed to be a victory for the cantonal tax office (BGr, 28 April 2014, 2C_845/2013, E. 3). Accordingly, the court costs of the proceedings SB.2020.00011, SB.2020.00012, SB.2020.00014 and SB.2020.00015 are to be imposed on the losing taxpayer (§ 151 para. 1 in conjunction with § 153 para. 4 StG as well as Art. 144 para. 1 in conjunction with Art. 145 para. 2 DBG). It is not entitled to compensation for the loss suffered by the party (§ 17 para. 2 of the Administrative Procedure Act of 24 May 1959 [VRG] in conjunction with § 152 and § 153 para. 4 StG and Art. 64 of the Administrative Procedure Act of 20 December 1968 [VwVG] in conjunction with Art. 144 para. 4 and Art. 145 para. 2 DBG).

The lower court must decide on the consequences of costs and compensation in the proceedings before the tax appeal court in the new decision.

8.

Final cantonal remittal decisions that leave the lower instance a margin of discretion are generally to be qualified as interim decisions within the meaning of Art. 93 of the Federal Supreme Court Act of 17 June 2005 (FCA) (BGE 134 II 124 E. 1.3). Interlocutory decisions are only directly appealable before the Federal Supreme Court if they can cause irreparable disadvantage (lit. a) or if the approval of the appeal would immediately lead to a final decision and thus save a significant amount of time or costs for extensive evidentiary proceedings (lit. b). If the lower instance to which the case is referred back no longer has any room for manoeuvre in its decision and if the referral only serves to (arithmetically) implement the order of the higher instance, referral decisions are treated as final decisions according to Federal Supreme Court case law (BGE 134 II 124 E. 1.3).

Accordingly, the Board finds:

1. the appeals of the Cantonal Tax Office (SB.2020.00011 and SB.2020.00012) and of A AG (SB.2020.00014 and SB.2020.00015) are united.

2) The appeal of the Cantonal Tax Office regarding state and municipal taxes 01.01.-30.09.2011 (SB.2020.00011) is partially approved. The matter is remanded to the lower court for further investigation and a new decision in accordance with the recitals. 3.

The appeal of the Cantonal Tax Office regarding direct federal tax 01.01.-30.09.2011 (SB.2020.00012) is partially upheld. The matter is remanded to the lower court for further investigation and a new decision in accordance with the recitals. 4.

4. the appeal of A AG concerning state and municipal taxes 01.01.-30.09.2011 (SB.2020.00014) was dismissed.

5. the appeal of A AG concerning direct federal tax 01.01.-30.09.2011 (SB.2020.00015) is dismissed.

(6) The Tax Appeal Court shall rule on the consequences of the appeal proceedings and the first instance appeal proceedings in terms of costs and compensation in its new decision.

7. the court fee in the proceedings SB.2020.00011 shall be fixed at

Fr. 25,000; the other costs amount to:

Fr. 43.75 Service costs,

Fr. 25,043.75 total costs.

8. the court fee in the procedure SB.2020.00012 is set at

Fr. 25'000.--; the other costs amount to:

Fr. 26.25 Service costs,

Fr. 25,026.25 total costs.

9. the court fee in the proceedings SB.2020.00014 shall be set at

Fr. 25'000.--; the other costs amount to:

Fr. 43.75 Service costs,

Fr. 25,043.75 total costs.

10. the court fee in the procedure SB.2020.00015 is set at

Fr. 25'000.--; the other costs amount to:

Fr. 26.25 Service costs,

Fr. 25,026.25 total costs.

(11) All court costs are ordered to be paid by A AG.

(12) No compensation shall be awarded to the parties.

(13) An appeal may be lodged against this judgment in accordance with the recitals. The appeal must be lodged with the Federal Supreme Court, 1000 Lausanne 14, within 30 days from the date of service. 14.

14. notification to ...