Voluntary disclosure is often presented as the ideal way to regularize undeclared assets in Switzerland. However, this approach is not without risks. The Federal Court ruling of June 20, 2023 (9C_39/2023) perfectly illustrates the disastrous financial consequences of a poorly prepared procedure. Commented on by Maître Cedric PANCHAUD, lawyer and certified tax expert, this textbook case demonstrates the crucial importance of the burden of proof and cooperation with the 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 reminder of the wealth tax, estimated at around 10% of the total amount, plus interest on arrears.
- However, the agent 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 Federal 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 Federal 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 Federal 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 recovery 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 Federal 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 AHV contributions.
- The AFC-GE should have spontaneously communicated this information to the AVS compensation fund.
- The additional financial burden, including AVS default 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 LPP buybacks to end the irregular situation without going through the reporting process.
However, these alternatives are strongly discouraged. Not only do they not regularize the past (the risk of a 10-year recall remains), but they expose the taxpayer to charges of money laundering and tax fraud under Article 305bis of the Criminal Code. In addition, any representative 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.
