A Swiss personal investment company has recently fallen foul of an international tax rule in a case that will prompt the wealth management sector to pay more heed to the jurisdiction in which decisions are actually taken.

Paragraph 3 of Article 4 of the OECD Model Tax Convention states that a non-individual “shall be deemed to be a resident only of the state in which its place of effective management is situated”. A Swiss personal investment company, set up for the benefit of a Swiss citizen and his family, has just collided with this rule in a landmark case.

The Zurich tax appeals court has found that a Guernsey-registered underlying company of a trust that only benefited a family domiciled in Switzerland whose personal and business interests were centred there. The head of the family was the settlor. The arrangement had been in place since the 1990s. Another Jersey company acted as trustee and provided the underlying company with directors, all presumably from Jersey.

The settlor relied heavily on the presence of the trustee company in the organisation in his attempt to argue that the whole arrangement was "Jersey-flavoured" rather than "Swiss-flavoured".  The court held, however, that the company that underlay the trust was not truly performing the function of a personal investment company and instead was delegating the job to banks and asset managers in Zurich and that the trust's assets were held in Swiss accounts. Its infrastructure in Jersey, the court decided, was rather anorexic. Switzerland, therefore, was the place of effective management.

According to the Organisation for Economic Co-operation and Development, an entity may have more than one place of management but it can have only one "place of effective management" at any one time. The Zurich court, moreover, appeared to agree with the principles laid down in the English courts in Commissioner for HMRC v Smallwood and Anor [2010] EWCA Civ 778, which considered it to be the place where the key management and commercial decisions that are necessary for the conduct of the entity's business are in substance made, no matter where the board meets. All such cases around the world are necessarily judged on an evidential basis.

The court therefore found the beneficiary to be the direct shareholder of the personal investment company, which was therefore a Swiss company and taxable under Swiss law. Years of arrears are in order. The case is now on appeal.