Federal Supreme Court, 05.11.2025, 9C_301/2025
Facts
A Geneva-based company, A. Geneva, has been paying royalties since 1989 to a Luxembourg-based sister company, A. Luxembourg, for a software license. In 2000, the Geneva Cantonal Tax Administration (AFC) audited the 1995-1998 tax periods, reviewed the royalty agreement, and closed its proceedings without making any adjustments.
In 2011, the AFC assessed the 2010 tax period without questioning the deductibility of the royalties. The assessment became final. Following a new audit in 2013 covering the 2011 period, the AFC initiated a back-tax procedure in 2014 for the years 2004 to 2010, taking the view that the royalties paid to A. Luxembourg were excessive and constituted a hidden profit distribution.
After several proceedings regarding the statute of limitations and access to the file, the Cantonal Court of Justice upheld the back-tax assessment for the 2010 period, ruling that the AFC had discovered new facts after the assessment—namely, that the two companies were related parties within a group. A. Geneva appealed to the Federal Supreme Court.
Legal Analysis
The Federal Supreme Court reiterates the distinction between an ordinary tax assessment procedure and a back-tax procedure. While tax authorities are not bound by their previous assessments for future tax periods (the principle of the independence of tax periods), they may only revisit a final tax assessment under the strict conditions governing back-tax assessments (Art. 151 para. 1 LIFD; Art. 53 para. 1 LHID).
A back-tax assessment requires an incomplete assessment and a valid ground for reassessment. One such ground is the discovery of "evidence or facts previously unknown" to the tax authority. Case law specifies that this ground is not met if the authority should have been aware of the incomplete state of affairs due to gross negligence.
Crucially, a new legal assessment of facts or evidence already known to the tax authority does not constitute a ground for a back-tax assessment. Reclassifying an expense, initially accepted as a commercially justified charge, as a hidden profit distribution is a question of law. Such a change in legal classification cannot justify a back-tax assessment based on facts that were already available to the authority at the time of the initial assessment.
Application to the Case
The Federal Supreme Court rules that the AFC had no valid grounds for a back-tax assessment. The Court of Justice's argument that the AFC had only belatedly discovered that the two companies were "related parties" is dismissed.
The Federal Supreme Court finds that the AFC had been aware of the relationship between the two companies and the royalty agreement since its 2000 audit. The similar company names, shared directors, and the very nature of the audit (verifying the commercial justification of the royalties) demonstrate that the AFC could not have been unaware that the companies were related entities. The fact that a subsequent audit in 2013 specifically aimed to examine "transfer pricing between group companies" corroborates this knowledge.
Consequently, by initiating the back-tax procedure, the AFC did not discover any new facts or evidence. It simply performed a new legal assessment of facts it already knew and had accepted during previous tax assessments. Such a legal re-evaluation does not constitute a ground for back-taxation under Art. 151 para. 1 LIFD.
Outcome
The Federal Supreme Court allows the appeal. It sets aside the judgment of the Court of Justice and, consequently, the federal, cantonal, and municipal back-tax assessments for the 2010 tax period. The case is remanded to the cantonal authority for a new decision regarding costs and legal fees for the previous proceedings.
Silex Tax Newsletter published in collaboration with Anna Vladau, Attorney at Law
