Voluntary disclosure is often presented as the best way to regularize undeclared assets in Switzerland. However, this process is not without risks. The Federal Supreme Court’s ruling of June 20, 2023 (9C_39/2023) perfectly illustrates the disastrous financial consequences of a poorly prepared proceeding: “This textbook case demonstrates the crucial importance of expert guidance in tax litigation from the very start of the case preparation.” Commented on by Maître Cedric PANCHAUD, attorney and certified tax expert, this textbook case demonstrates the crucial importance of the burden of proof and cooperation with tax authorities.
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The case: An offshore account with serious consequences
In 2018, a taxpayer voluntarily disclosed to the Geneva cantonal tax administration (AFC-GE) undeclared assets held through an offshore company between 2008 and 2017.
- The taxpayer was probably expecting a simple recapture of the wealth tax, estimated at around 10% of the total amount, plus interest on arrears.
- However, the taxpayers' representative provided only one bank statement dating from the end of 2017, showing a balance of €242,962.
- The taxpayer claimed to have inherited this account in 2008, but his father did not die until March 2009.
- In the absence of evidence and cooperation, the AFC-GE considered the entire account balance to be taxable income earned in 2008.
The result was disastrous for the taxpayer: the total tax liability, including back taxes, interest on arrears, and fines, amounted to approximately CHF 330,000. This amount was even higher than the balance of the undeclared account itself.
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The burden of proof: An inflexible principle
In Swiss tax law, the distribution of the burden of proof follows strict rules that do not forgive unpreparedness.
The general principles, derived from Article 8 of the Swiss Civil Code, require the tax authorities to prove facts that increase the tax burden. Conversely, it is up to the taxpayer to prove facts that reduce or eliminate this tax burden.
In this case, the taxpayer claimed that the funds came from an inheritance, which would have exempted them from income tax. However, he did not provide any will or advance inheritance agreement. Unable to prove the non-taxable origin of the funds, the taxpayer had to bear the tax consequences. The Swiss supreme Court upheld this approach, emphasizing that it was up to the taxpayer to provide such evidence or risk having his claims rejected.
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The devastating impact of late payment interest
Late payment interest is not a criminal penalty, but is intended to restore equal treatment among taxpayers. Those who pay their taxes late should be penalized financially compared to those who pay on time.
In this case, the administration classified the assets voluntarily disclosed as income earned in 2008. As a result, interest on arrears accrued for nearly ten years. This mechanism increased the bill exponentially, accounting for a massive portion of the total recovery, with 70% concentrated in 2008 alone.
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Statute of limitations and procedural tactics
The right of the tax authorities to issue a tax reassessment expires 15 years after the end of the tax period concerned.
- For the 2008 fiscal year, this right expired definitively on December 31, 2023.
- As the dispute mainly concerned this year (approximately CHF 250,000 at stake), the appeal to the Swiss supreme Court was a delaying tactic.
- If the proceedings had dragged on for a few more months, the tax for 2008 would have been time-barred.
- However, the Swiss supreme Court issued its ruling very quickly, in less than six months (on June 20, 2023), preventing the taxpayer from reaching this absolute statute of limitations.
In criminal matters (fines for tax evasion), the statute of limitations is 10 years. Thus, fines for 2008 and 2009 were already time-barred when the AFC-GE issued its decisions at the end of 2020, but those for 2010 and subsequent years remained valid.
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Rights of the defense: Article 6 ECHR
A fundamental aspect highlighted by our High Court concerns the procedural rights of taxpayers. A distinction must be made between tax reassessment proceedings and tax evasion proceedings.
Article 6 § 1 of the European Convention on Human Rights (ECHR) does not apply to tax recapture proceedings. However, as tax evasion proceedings are criminal in nature, this provision applies in full. This means that taxpayers have the right to be heard orally before a fine is imposed. However, this right is not automatic: taxpayers must make an express request, which they can do up to the last cantonal instance.
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The forgotten risk: Social Security
Although the Swiss supreme Court did not rule on this point due to lack of jurisdiction, the reclassification of assets as taxable income raises the question of social security contributions.
- Since the tax authorities were unable to link this income to movable assets or salaried employment, it should theoretically be classified as income from self-employment.
- This qualification entails the obligation to pay Swiss social contributions (AVS/AHV).
- The AFC-GE should have spontaneously communicated this information to the AVS compensation fund.
- The additional financial burden, including AVS late payment interest, could have represented an additional cost of around CHF 66,000 for the taxpayer.
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Are there alternatives to voluntary disclosure?
Faced with such risks, a taxpayer might be tempted to simply spend the hidden money, donate it, or make a buyback in his Swiss ocupational pension fund to end the irregular situation without going through the Voluntary disclosure process.
However, these alternatives are strongly discouraged. Not only do they not regularize the past (the risk of a 10-year tax recapture remains), but they expose the taxpayer to charges of money laundering and tax fraud under Article 305bis of the Criminal Code. In addition, anyone advising such maneuvers would be liable to criminal prosecution for complicity and joint and several liability for the payment of the evaded tax.
Once tax evasion has been committed, the only legal and safe way to rectify the situation is through voluntary disclosure.
Voluntary disclosure is a process whereby a taxpayer voluntarily reports undeclared assets or income to the tax authorities. When done for the first time, on the taxpayer’s own initiative, and where the relevant information was not previously known to the tax authorities, it allows the taxpayer to avoid a penalty for tax evasion. The taxpayer remains, however, obligated to pay the taxes owed as well as late payment interest, and must cooperate fully with the tax authorities.
The process must be initiated by the taxpayer (not triggered by an audit, investigation, or proceedings already underway), be complete (all unreported items must be disclosed), and be accompanied by the taxpayer’s active cooperation, who must provide all requested supporting documents and make every effort to pay the taxes owed. It is valid only if the tax authorities are not already aware of the relevant facts. Exemption from criminal penalties is granted only once in a taxpayer’s lifetime, subject to compliance with all legal conditions.
The consequences can be particularly severe. In the case discussed (TF 9C_39/2023), the taxpayer believed he was limiting his voluntary disclosure to wealth tax. However, since he was unable to prove that the funds were from a non-taxable source (inheritance, gift, or statute of limitations on income tax having expired), the tax authority also assessed additional income tax. This resulted in a significant financial burden, including back taxes, a fine, and interest on arrears accumulated over several years. The total amount exceeded the value of the undeclared assets.
As in any tax proceeding, the burden of proof is shared. The tax authority must prove the facts that increase the tax liability. The taxpayer, for their part, must prove the facts that reduce or eliminate it, such as the non-taxable source of funds (inheritance, gift).
The right to initiate a tax assessment proceeding expires ten years after the end of the relevant tax period (statute of limitations). Once the proceeding has been initiated, the right to assess additional taxes expires fifteen years after the end of the relevant tax period (statute of limitations). The statute of limitations for fines for tax evasion is ten years.
In the case in question, the taxpayer appealed all the way to the Federal Supreme Court, specifically in the hope of reaching the fifteen-year statute of limitations, but without success, as the decision was rendered with unusual speed, within six months.
No. Spending the assets, donating them, or making LPP redemptions to circumvent the situation are practices that are strongly discouraged. Not only do they fail to rectify past violations, but they also expose the taxpayer to prosecution for money laundering and tax evasion (Art. 305bis of the Swiss Criminal Code), and anyone assisting them to joint and several liability for the payment of the evaded tax.
Yes. The right to be heard orally, guaranteed by Article 6(1) of the ECHR in criminal proceedings (such as proceedings for tax evasion), is not automatic. A taxpayer wishing to exercise this right must make an express request to that effect, which may be done up to the final cantonal instance. However, this right does not apply to tax reassessment proceedings, which are not of a criminal nature. In practice, a hearing of the taxpayer may backfire. It is therefore advisable to weigh the interests involved before making any request.
If the tax authorities are unable to link voluntarily disclosed assets to income from movable property or income from employment, they would have to reclassify them as income from self-employment, resulting in liability for AVS contributions. In the case discussed, this additional issue could have resulted in an extra burden of approximately CHF 66,000—a consequence rarely anticipated by taxpayers and their representatives.
