Tax representation for purposes of Swiss Value Added Tax (VAT)

on behalf of foreign companies

Fiscal representation of foreign companies registered in Switzerland for Swiss VAT implies that the Swiss tax authorities do not send their correspondence and administrative decisions directly to the company abroad, but instead to a person or company in Switzerland that has been authorised by the foreign company to represent it in dealings with the Swiss tax authorities.

Why tax representation?

The basic principle¹ of international law, along with administrative law, is that states can only levy taxes within their own territory. This means that states can only perform the administrative acts necessary for levying or collecting taxes within the borders of their territory.

One consequence of this principle is that a third state (i.e. not the state in which the foreign company is established) may not perform administrative acts, that are in the nature of or support taxation or tax collection, on the territory of the state in which a foreign company is established. An appropriate solution for this aspect of sovereignty is for a state to impose the obligation on foreign companies to appoint a tax representative established within the territory of that state. In this way, a state can also levy taxes from foreign companies that are registered for Swiss VAT.

Only when a treaty under international law applies, in which Switzerland and the other state in which a foreign company is established are both parties, and in which that treaty regulates the cross-border service of documents with regard to administrative matters, can there be an exception to the first principle mentioned above.

If a foreign company does not have a tax representative, nor is it subject to an international treaty on the cross-border service of documents concerning administrative matters in Switzerland and the other state, then Switzerland has no choice but to send the administrative documents to the foreign company via diplomatic channels (i.e. the Swiss Ministry of Foreign Affairs to the Ministry of Foreign Affairs of the other state in question).

Failure to comply with this (so-called ‘fictitious service abroad’)² will result in administrative, civil and criminal consequences. These legal consequences are based on international law as well as the law of the state in which the foreign company is established.

Under international law, natural persons or legal entities can only directly turn to an international court in a limited number of cases. Foreign companies that are confronted with a fictitious service of documents with an administrative law character - done by a Swiss government public body - in their country of residence are advised to inquire about suitable legal measures in their country of residence.

VAT plus can assist your company if it is approached directly by the Swiss government in administrative matters via an unlawful route.

Tax representation: a necessary evil?

Every company strives to keep costs as low as possible. From that point of view, the obligation to appoint a tax representative is often seen as an unwelcome expense. However, practical experience shows that foreign companies often have difficulty understanding Swiss VAT.

On the one hand, this is to blame for the fact that the level of technical knowledge of VAT in many foreign companies is generally too low or non-existent, or has become lower – a trend that has been visible for some years now. Often, people do not know what VAT is all about and forget that VAT technique and common parlance are two different things.

On the other hand, the fact that Swiss VAT has its own character is a major source of misunderstanding. Embedded in its own legal or public-law culture, several terms or concepts within Swiss VAT have a content that differs from what is customary in VAT systems in other countries. Depending on the situation, these differences can have major consequences.

Legal nature of tax representation

The basis for fiscal representation is the power of attorney. Three parties are involved in the power of attorney: ^a) the principal, i.e. the foreign company; ^b) the attorney, i.e. the person or entity that declares itself willing to act as the attorney's representative; and ^c) the Swiss government in the capacity of the Swiss tax authorities, Main VAT Department (Eidg. Steuerverwaltung, Hauptabteilung MWST).

The power of attorney must be dated and signed by both the principal and the authorised representative (tax representative), and must then be sent to the Swiss tax authorities. As a rule, this submission will take place by uploading the power of attorney when the foreign company is registered via the online procedure for the application of a Swiss VAT number.

In (Swiss) case law, the nature of representation in administrative law cases is described as follows:³

"The legal relationship between the appointed representative and the represented party is generally governed by civil law. The appointment of a representative is done by his or her power of attorney. This is a unilateral legal act, to be received by the other party in order to have legal effect, which authorises the representative to represent the represented party in dealings with third parties. The representation means that the actions or omissions of the representative on behalf of the represented party are directly valid for or against the represented party as if the latter had acted itself. Knowledge of the representative is considered to be known by or attributed to the represented party".

A valid power of attorney has legal consequences for all parties involved (principal, attorney and Swiss tax authorities).

For example, a principal who has terminated his legal relationship with his authorised representative but remains liable for Swiss sales tax will not only have to inform the authorised representative of the termination of the authorisation, but will also have to send a new authorisation to the Swiss tax authorities via the new authorised representative.

In turn, upon termination of the power of representation, the authorised representative will have to inform the principal that if the latter wishes to remain liable for Swiss sales tax, will have to appoint a new authorised representative whose appointment will have to seamlessly follow on from the terminated legal relationship - at least if the principal does not want to become liable for damages if, despite the termination of the power of attorney, the principal nevertheless lets the old representation continue vis-à-vis the Swiss tax authorities.

The existence of a valid power of attorney means that the Swiss tax authorities will have to have their communications and administrative acts transmitted to the foreign company via the authorised representative. It is therefore not permitted for the Swiss tax authorities to directly approach the foreign entrepreneur (who is also the authorising party) via diplomatic channels (i.e. the Swiss Ministry of Foreign Affairs to the Ministry of Foreign Affairs of the other state in question) instead of notifying the authorised representative. If, despite the existence of a representation relationship, an administrative act is served exclusively on the principal, the service is defective and no disadvantages may arise for the principal as a result⁴.

Profesional tax representation

With regard to the legal position of the tax representative, a distinction can be made between the legal relationship with regard to the ^athe principal, ^b the Swiss government (in particular the tax authorities/customs), as well as to ^c third parties.

The tax representative must inform the foreign company/principal about its rights and obligations with respect to Swiss VAT liability. Furthermore, the tax representative will observe the rights of the foreign company/principal as best as possible, as well as support the foreign company/principal in fulfilling the obligations that arise from the VAT liability. Both tasks have the character of a best-efforts obligation.

The tax representative must fulfil his duties in accordance with the legal regulations of the Swiss tax authorities and must also keep an eye on the interests of the Swiss state without neglecting or subordinating the interests of the principal. Where appropriate, the tax representative will have to initiate legal measures if he believes the Swiss tax authorities are violating the rights of the principal.

The tax representative must know where the limits of his responsibilities lie. From the perspective of corporate governance or company law regulations in jurisdictions to which the foreign company is subject, the principal should be a superuser for the e-portal on which the Swiss VAT returns are submitted. In addition, the principal will have to file the VAT returns himself or, in the case of outsourcing, his local accountant or tax advisor will have to file the VAT returns. It is not necessary for the tax representative to be a superuser, but instead an access level with fewer rights, for example preparer, will suffice. A tax representative who takes away all responsibility from the principal is not fulfilling his role properly.

Legal and technical VAT support by the tax representative

In accordance with the Swiss VAT Act foreign entrepreneurs who are registered as taxpayers for Swiss VAT must appoint a tax representative in Switzerland. A distinction must be made between foreign accountancy or tax consultancy firms that pretend to have an office in Switzerland with a Swiss letterbox company, but actually do all their work from abroad, and real professional legal service providers in the field of indirect taxes, among others, who actually physically practice in Switzerland.

In order to successfully offer services of a legal or taxation-technical nature, one must not only be familiar with the culture and administrative law practice of the country in question, in this case Switzerland, but also be occupied with the relevant areas of Swiss law on a daily basis. Only under these conditions can one speak of professional legal and fiscal-technical support in the area of Swiss VAT and related legal areas.

A professional tax representative knows when and how to assert himself. For example, if clients' transport companies approach the tax representative with questions, he must be able to point them unerringly in the right direction when they are working on the basis of incorrect assumptions - something that happens regularly. A professional service provider knows from experience that a foreign company cannot rely on a tax representative if the tax representative is not also able to provide the foreign company with help and active support in related areas of law. Customs law, market regulation, labour law (posting of foreign employees to Switzerland), relevant company, trade and civil law are just a few of the areas that a foreign company that is doing business in Switzerland will have to deal with. VAT registration and preparation of VAT returns is an important facet of tax representation, but not the only aspect of that task.