How the principal tax domicile of legal entities is determined

Personal affiliation and main tax domicile

The prerequisite for tax liability is that a legal entity is subject to unlimited tax liability (personal affiliation) in accordance with Art. 50 DBG, i.e. its registered office or actual place of management is located in the canton. In principle, it is naturally assumed that the registered office and the actual place of management are located in the same place. The registered office or place of actual management is the socalled main tax domicile, whereby a mere registered office without actual management is not sufficient according to case law. The main tax domicile is the place with which a legal entity has a particularly close relationship, i.e., the actual center of its business activities. Tax liability covers all tax factors that are not assigned to a secondary tax domicile in another canton.

Economic affiliation and limited tax liability

A legal entity may also become subject to limited tax liability in another canton on the basis of economic affiliation in accordance with Art. 51 DBG if, for example, a business operation (permanent establishment) or real estate is located there. In this case, we refer to limited tax liability, as the registered office or actual administration of the company is located elsewhere. A permanent establishment is generally defined as a fixed place of business where all or part of a company's business activities are carried out.

Place of actual administration

Unless otherwise specified in the articles of association, the registered office of a legal entity is located at the place where its administration is conducted. The place of actual administration is an alternative connecting factor for personal affiliation if the "actual administration" is not located at the registered office specified in the articles of association. The place of effective management takes precedence over the registered office if these are not located in the same place.

Criteria for determining the actual place of management

According to tax principles, the actual place of management is where the center of "economic" existence is located, which can be divided into strategic, operational, and administrative existence. The location of the management where the management and execution of day-to-day business (i.e., operational management) takes place is central to assessing the location of actual management. This must be distinguished from the activities of the highest corporate bodies (e.g., board of directors) on the one hand and those of a purely administrative nature on the other.

Disagreement between cantons and burden of proof

If there is disagreement between two cantons regarding the main tax domicile, the location of the business infrastructure and personnel is often relevant for determining the actual management of an operating company. However, the overall circumstances are always decisive. For example, the place of residence of a controlling shareholder may mean that the main tax domicile is not located at the company's registered office under civil law. According to the Federal Supreme Court, however, the shareholder's place of residence cannot serve as a fallback criterion for the company's main tax domicile if there is insufficient evidence. In the event of disagreement between two cantons as to the location of the actual administration, the burden of proof is likely to lie with the tax authorities in most cases, as this is a fact that gives rise to tax liability, although the Federal Supreme Court has reduced the standard of proof from "strict proof" to "highly probable".

Conclusion

In summary, it can be said that tax liability can be established on the basis of both personal and economic affiliation. The main tax domicile is usually where the place of effective management is located. The place of effective management takes precedence over the registered office if these are not identical.