Legal debate rages in EC-Swiss tax row

The legal issues between Switzerland and the EU are weighty (Imagepoint)

Switzerland has the stronger legal position in the dispute with the European Commission concerning the Swiss cantonal tax regime and trade, according to experts.

But they say the argument connecting tax breaks offered by cantons to attract foreign firms and “illegal” trade subsidies is more likely to be settled in political corridors than in the courts.

The EC last week moved the long running tax saga to a new level by issuing a 17-page document claiming that Switzerland’s tax regime unfairly discriminates in favour of certain foreign enterprises.

It says this violates the 1972 free trade agreement that regulates trade between the two parties.

Marc Dassesse, a European tax law expert at the Free University of Brussels, believes the EC’s legal argument is built on shaky foundations.

He argues that the foreign holding, management and mixed companies that are given tax advantages are not directly involved with trade, and so do not fall under the scope of the 1972 agreement.

“The EC is in a bind because these administrative companies have nothing to do with goods,” he told swissinfo.

“The commission says if you give a tax break to a company within a group then the benefit will percolate through the group all the way to the companies which are involved in manufacturing.

“You can discuss the merits of this argument until the cows come home, but at the end of the day there is no agreement regarding services.”

Double standards

Dassesse also takes issue with the EC objection to offering selected tax breaks on the basis that firms derive their income outside Switzerland.

“The French do just the same. If a French company does business by way of a branch outside of France it will not be tax influenced. It’s a case of the pot calling the kettle black,” he said.

Robert Waldburger, a professor at St Gallen University, questions the parallels the EC draws between the free trade agreement and a section of the European Treaty that outlaws state subsidies between EU member states.

Waldburger, who is Switzerland’s chief negotiator on international tax treaties, does not believe the dispute will go to court.

“The main weakness in the EC argument is that they are trying to impose European Union state aid rules onto Switzerland without a legal basis,” he told swissinfo.

“The EC knows that its legal arguments are very weak. This is why it is always stressing political solutions and why it is proposing to its member states to get a negotiation mandate.”

Simon Hirsbrunner, a Swiss lawyer based at the Brussels office of German legal firm Gleiss Lutz, also sees weak points in the EC argument.

But he is unimpressed with Switzerland’s insistence that its tax regime had been running for years alongside the free trade agreement without complaint until now.

“When Switzerland says subsidies cannot be applied to this agreement now because they have not been in the past, it does not convince me,” he said.

swissinfo, Matthew Allen

Key facts

Examples of foreign firms that have set up administrative centres in Switzerland:
In 2003, fashion label Polo Ralph Lauren consolidated its offices in several European countries into its new European HQ in Geneva.
Hygiene products company Colgate Palmolive moved its Europe, Middle East and Africa HQ from Paris to Geneva in 2004.
Kraft Foods announced in January 2007 that it would relocate its European headquarters from London and Vienna to Zurich.

In brief

The EC first raised the claim of Swiss cantonal tax violating the 1972 free trade agreement in September 2005, the day after the Swiss voted to extend open Swiss borders for EU workers to new member states in eastern Europe.

Subsequent meetings between both sides have failed to find a solution with both sides sticking firmly to their opposing views.

In the meantime several cantons – most notably Obwalden – have been busy further slashing their corporate levies.