Mutual agreement procedures help to avoid international double taxation

• Corporate, Company Law
• SME
• Tax Law

Despite Switzerland’s double taxation agreements with numerous countries, international circumstances can lead to the income of an individual or the profits of a company being taxed in more than one country. Most agreements provide the instrument of the mutual agreement procedure for such cases. This allows a solution to be reached by agreement between the competent authorities of the states concerned.

International double taxation

Switzerland has concluded double taxation agreements with numerous states. Their allocation rules are intended to prevent the same income of a person (e.g. due to a change of residence) or the same profit component of a company (e.g. due to different transfer prices) from being taxed by more than one state. Nevertheless, it happens time and again that, for example, two states, applying their national law, consider a person to be resident in their country and thus liable to tax.

Mutual agreement procedure as a solution

In such a case, legal remedies against an assessment in Switzerland often do not help, as the national law has not been violated; on the other hand, a so-called mutual agreement procedure may be the solution. Mutual agreement procedures are intergovernmental procedures. The aim is to reach an agreement between the competent authorities in individual cases in accordance with the double taxation agreement in order to eliminate the multiple tax burden or to avoid taxation that does not comply with the agreement. The mutual agreement procedure does not include an obligation to reach an agreement. There is only a duty on the part of the authorities to use the remedy; they must seek a solution.

Procedure of understanding

The application for a mutual agreement procedure is usually submitted by the taxable person to the competent authority of the state in which he or she is resident. The applicant does not have the status of a party, but must submit the information and evidence necessary to conduct the procedure. According to most double taxation agreements, the application must be submitted within three years of the official act which first indicates double taxation. In the case of a conflict, for example, concerning residence, this is the taxation by the second state. If the authority is of the opinion that Switzerland’s tax claim is not justified, it attempts to have the competent canton correct the taxation. If the authority considers Switzerland’s tax claim to be justified, it contacts the foreign competent authority and seeks a correction from it.

Conclusion and result

The taxpayer shall be informed of the outcome of the mutual agreement procedure and may – if an agreement is envisaged – accept or reject it within 30 days. A prerequisite for acceptance is that no further appeals are filed or withdrawn. An assessment that is already legally binding must be revoked by way of revision.

In practice, the mutual agreement procedure repeatedly leads to good solutions in international double taxation cases. In view of the special features of the procedure and for the purpose of coordination with appeal procedures, representation and support experienced in litigation is recommended .

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