Ramechhap residents have been bearing the brunt of having to pay double tax while purchasing construction materials in the district.

Due to procrastination on the part of District Development Committee and the Ministry of Local Development in calling tender, the DDC itself has been collecting revenue on the sale of construction materials, including boulders, gravel and sand, among others, this fiscal. As the office failed to develop a systematic way of collecting tax, the locals have had to pay double tax on these items.

The DDC did not receive any tender as per its criteria. It used its employees to sell construction materials targeting residents of the district headquarters. Since the office mobilised its employees in the main market areas, various local organisations have been collecting revenue on the extraction of such items on the banks of Tamakoshi River, said Santosh Karki of Manthali Municipality.

Consumers complained they had to pay tax to various organisations on the one hand, while on the other, they had to pay tax to the DDC, due to lack of timely tender process. The office has deployed only three employees, one each, at Bhaishweshwor Chowk, Traffic Chowk and Seleghat Chowk, citing manpower crunch for revenue collection. DDC Programme Office Narayan Subedi said the office failed to pay attention to the entire district.

According to consumers, a number of local clubs, organisations and groups have been imposing at least Rs 600 to Rs 3,000 per trip of sand at Rasnalu, Thoshe, Karambot, Khimti, Milti and Rajgaun, taking advantage of the DDC's failure.

Lok Bahadur Chaulagain, chief at Drinking Water and Sanitation Division Office, said construction projects are on the verge of closure due to the double taxation system on the purchase of construction materials.

A version of this article appears in print on April 08, 2016 of The Himalayan Times.

Federal Court considerations
Critical appraisal

The Federal Court recently issued a key decision on the fiscal treatment of a US limited liability company (LLC). The court ruled that the LLC should be qualified as a partnership from a Swiss tax perspective. This assessment was based mainly on fiscal pass-through treatment in the United States. Consequently, the LLCs payments to the Swiss partner were taxed as income derived from independent services in Switzerland.


A US LLC is a hybrid business entity with certain characteristics of both a corporation and a partnership. An LLC has legal personality and its partners benefit from limited liability. However, for US income tax purposes, the pass-through taxation of a partnership generally applies though the LLC may elect to be taxed as a corporation (known as check-the-box regulation).

Swiss civil law is not tailored to such hybrid entities. It is dominated by the dichotomy between partnerships on the one hand and corporations on the other, while only corporations are recognised as legal persons. The same applies to Swiss tax law, as it is generally based on civil law (known as the authoritative principle). Therefore, until now it has been uncertain which rules US LLCs should be qualified under.

This unclear legal situation persisted even after the Swiss Tax Conference (an association of the Swiss federal and cantonal tax administrations) issued guidelines in 2011 on the fiscal treatment of US LLCs because of their non-binding nature. Contrary to the Federal Court judgment, these guidelines state that, in principle, LLCs must be equated with Swiss corporations, regardless of the fiscal treatment in the United States. This leads to the conclusion that distributions from an LLC cannot be taxed as income derived from personal services. They qualify either as dividend income or as return on moveable assets (or, as the case may be, as a return of capital).

Federal Court considerations

Qualification of US LLC under Swiss law
The court initially outlined the general rules regarding the taxation of partnerships under Swiss law. As a matter of principle, partnerships are transparent for fiscal purposes. Therefore, each partner is taxed personally and proportionally on his or her share of the partnership profits (Article 10 of the Federal Income Tax Act). Thus, partners derive income from independent personal services even if they are not actively involved in the partnerships business.

With regards to foreign partnerships, Article 11 provides for a specific regulation, whereupon foreign partnerships with an economic link to Switzerland are taxed according to the rules applicable to corporations. However, in this case, the court denied the application of this regulation for lack of an economic link to Switzerland. Thus, the question of whether a US LLC could be qualified as a foreign partnership remains open.(1)

Because of the lack of legal precedents regarding the qualification of foreign entities without an economic link to Switzerland, the court had to develop general rules. In a previous judgment regarding the taxation of a general partnership incorporated in Guernsey, the court had stated that the civil law qualification is crucial. In that case, due to the lack of legal personality, the general partnership could not be recognised as a corporation for Swiss tax purposes. In the present case, the court clarified this statement insofar as the qualification under civil law cannot be decisive on its own. According to the court, a pragmatic mix of methods is appropriate. First, the foreign entity should be compared with the Swiss entities (partnerships and corporations). Second, the fiscal treatment abroad is decisive for the tax treatment in Switzerland. However, the court clarified that foreign entities without legal personality cannot be recognised as taxable entities.

In light of this, the court concluded that the relevant LLC qualified as a partnership for Swiss tax purposes. The decision was based both on the civil law elaboration of the LLC (eg, no share capital, distribution of profits via capital accounts) and on the fiscal treatment in the United States (pass-through taxation).

Qualification of US LLC under double taxation treaty
According to the court, the rules regarding the qualification of US LLCs are consistent with the double taxation treaty between Switzerland and the United States. Considering that the fiscal treatment of an LLC in the United States supports avoiding double taxation, it corresponds to the common intention of both contracting states.

Taxation of distributions
Based on the qualification as a partnership and the assumption of business activity conducted by the LLC, the court qualified the payments from the LLC to the Swiss resident partner as income derived from independent services under Swiss tax law. According to the court, this is consistent with the double taxation treaty. From a Swiss perspective, the distributions cannot be treated as dividend payments in terms of Article 10 of the treaty. Because of the pass-through taxation in the United States, no US withholding taxes have to be taken into account. However, income derived from independent services is taxable only in Switzerland, unless the business activity is carried on through a permanent establishment in the United States (cf Article 14(1) in connection with Article 7(1) of the treaty). In this case, the existence of a US permanent establishment was not evidenced.

Critical appraisal

Swiss tax law is generally based on civil law, even regarding the qualification of taxable entities. Article 49(3) of the Federal Income Tax Act provides that foreign legal entities are taxable as corporations under Swiss law. Thus, US LLCs, due to their legal personality, must be treated as corporations for Swiss tax purposes. Qualification as a partnership shall be precluded. Therefore, it is doubtful whether the courts pragmatic mix of methods approach is consistent with Swiss tax law. The Swiss Tax Conference guidelines seem to be more in line with Swiss domestic law, even if they no longer apply because of their non-binding nature.

The decision is also not convincing in other respects. If a US LLC is qualified as a partnership for Swiss tax purposes, its profits are, due to the pass-through treatment, directly taxable as income of the (Swiss resident) partners. Consequently, later distributions should be fiscally irrelevant. Nevertheless, in this case, the court qualified the payments from the LLC as taxable income. Apart from that, the legal basis of the LLCs payments remained unclear. The decision raises new questions that will have to be subject to future decisions and advance tax rulings of the Swiss authorities.


Even if a pragmatic mix of methods approach generally fails to stand for legal certainty, the courts first statement on fiscal treatment of US LLCs under Swiss tax law outlines the most important principles. The LLCs civil law elaboration and its fiscal treatment in the United States are crucial. Depending on this assessment, LLCs be can regarded as either partnerships or corporations under Swiss tax law.

Treatment of LLC as partnership for Swiss tax purposes
If an LLC qualifies as a partnership, its profits are attributed to the partners. Thus, the LLCs profits are taxable in Switzerland insofar as and provided that one or more partners reside in Switzerland. However, business profits attributable to a permanent establishment in the United States are exempt from taxation in Switzerland. The gain received by the LLC is taxable (due to the pass-through treatment). Later distributions should be fiscally irrelevant.

In the absence of a permanent establishment in the United States, the Swiss resident partners derive income from independent services, even if they are not actively engaged in the LLCs business. This leads to a relatively high tax burden of up to 46%, depending on their residence in Switzerland. Income from independent services is also subject to social contributions of approximately 10%, which are of a parafiscal nature when above a certain limit.

The profit of non-operative LLCs (ie, LLCs engaged in asset management activities only) should also be taxable in Switzerland (cf Article 21(1) of the double taxation treaty).

Treatment of LLC as corporation for Swiss tax purposes
The profit of an LLC classified as a corporation is generally taxable only in the United States. However, tax liability of the LLC in Switzerland may arise based on its place of effective management in Switzerland, the maintenance of a permanent establishment or the ownership of real estate in Switzerland.

Distributions received should be treated as dividend income. Under Swiss tax law, dividend income qualifies for partial taxation, provided that the resident partner owns a share of more than 10% in the LLCs capital. Under the double taxation treaty, the distributions are covered by Article 10(4). Thus, US withholding taxes should be partly recoverable or credited against the Swiss taxes on the dividends.

In light of the Federal Courts key decision, it is recommended that structures, including LLCs with a link to Switzerland, are carefully reviewed. The courts decision even invalidates existing rulings.

For further information on this topic please contact David Brouml;nimann or Andrea Opel at Meyerlustenberger Lachenal by telephone (+41 44 396 91 91) or email (This email address is being protected from spambots. You need JavaScript enabled to view it. or This email address is being protected from spambots. You need JavaScript enabled to view it.). The Meyerlustenberger Lachenal website can be accessed at www.mll-legal.com.


(1) According to the main doctrine, insofar as partners reside in Switzerland, the partnership is regarded as a Swiss partnership. A partnership may appear as both a foreign and Swiss partnership at the same time, based on the different residencies of its partners.

The words of Arthashastra ring through time: In the happiness of his subjects lies the kings happiness; in their welfare, his welfare. In modern times, likewise, an elected Government must think of peoples welfare as its own

The Budget is a powerful instrument of fiscal and economic policy. Its not a mere statement of accounts but it signals the policies to come and affords an opportunity to the Government to determine its socio-economic priorities and set the developmental direction and speed of the economy. The Budget presentation is a great Government festival celebrated, and the most important event, in Parliament. Ancient Indian texts on statecraft stress the importance of kosha or the treasury.

The Mahabharat (Shantiparva), Samhitas, Smritis, rock inscriptions containing the sacred laws, (the Dharamshastras), deal with taxation and the treasury and mention at length the sources of revenue of the state and the manner and scale of revenue collection. According to a verse in Mahabharat (XII 88,7-8), the king should gather the tax from the state in the manner the bee collects honey without hurting the flower. The text also enjoins that taxes should be levied at the proper time, place and form, and realised in a pleasing manner as the calf suckles the udders of the mother.

According to AL Basham, the author of the magisterial work on the history of ancient India, The Mauryans had evolved a fairly regular system of taxation. Smriti literature and Jatakas refer to diverse sources of revenue and numerous exemptions and remissions. For example, land brought under the plough was not taxed fully for five years (an early variant of tax holiday), while the tax might be wholly or partially remitted in times of bad harvest. Women, children students, learned people (read Brahmins) and ascetics were tax-exempted. The Arthashastra, a masterly treatise on statecraft by Kautilya, says that the chancellor shall first estimate for the year the revenue from each place and sphere of activity under the different heads of account and then arrive at a grand total after adding the delayed receipts of previous year received in the current year. The expenditure on the king, standard rations for essential services, exemptions granted by the king and authorised postponement of payments into the treasury, were to be excluded from the estimates of the revenue akin to the charged expenditure under Article 112(3) of the Constitution, which is shown in the Budget but which cannot be voted by Parliament. The Arthashastra classifies taxes both in cash and kind.

The imperial injunction was that officers shall not start work without authorisation, and were not to collude or quarrel so as to prevent swallowing the revenue due to the kingdom. Taxation should be such that it did not act as a negative check on trade and industry. The obvious intension was to promote freedom of trade and intercourse throughout the realm. Here, there is an early indication of the intent which is behind the Good and Services Tax legislation, yet to be enacted by Parliament.

Kautilya cautions that, if the tax structure is repressive or unbearable, the business community may take flight to neighbouring kingdoms. In todays globalised world, marked by the increasing predominance of transnational corporations, this is a real danger as the TMCs engineer swift flight of their capital and resources, obliterating national boundaries. Kautilya also draws the analogy of the unhurtful manner in which the bee collects honey. Taxes were to be fixed so as always to allow profit to the taxpayer, while having regard to cost of production, capital employed, risks incurred,etc. Notably, profit and not the lsquo;capital was to be taxed. Imports harmful to the state and luxurious goods were to be discouraged by imposing taxes. The rates of taxation varied depending upon the king, though the injunction of the Dharamshastras was that one who pleases the subject is called a king (lsquo;Ranjitascha prajah sarvasteva rajeti).

The welfare of the subjects, as it ought to be in a democracy, has remained the core philosophy of successive Governments post-independence. The Budget of 1991 ushered in the era of economic reforms, signalling a tectonic shift in Budget formulation, with a view to spur economic growth and development. The Budget of 2016-17, while following the path of economic liberalisation in a guarded manner, makes a paradigm shift in the allocation of resources with far greater focus on growth with equity with the clear objective to bridge the yawning rural-urban hiatus, improve healthcare, stimulate investment and bring massive infrastructure development to transform India.

The words of Arthashastra ring through time: In the happiness of his subjects lies the kings happiness; in their welfare, his welfare. He shall not consider as good only that which pleases him but treat as beneficial to him whatever pleases his subjects.

(The writer is Additional Secretary, Lok Sabha. Views expressed here are personal)

Katy Pitch -

On March 22, 2016, the Liberal Government delivered its first budget which focuses on the growth of the middle class. As outlined in aprevious poston Canadian Mamp;A Law, the Liberals, as part of their election platform, promised to change the taxation of stock options.

Currently, if the required conditions are met, when an executive exercises a stock option, a one-half deduction is available to allow for capital gains-like tax treatment on exercise. The Liberal platform promised to introduce a cap of $100,000 on the amount that can be claimed through this stock option deduction. The Liberals also stated that stock options are a useful tool for start-up companies. Finance Minister Bill Morneau offered some reassurance when he stated in November 2015 that stock options issued under the old regime would continue to be taxed under the old tax regime.

Interestingly, Budget 2016 is silent regarding the taxation of stock options. This means that the stock option deduction will, for the time being, remain the status quo, with no caps or specific exceptions for technology companies or start-ups. On this issue, at least, executives can breathe a sigh of relief (for now). Query whether the promised changes will be announced in Budget 2017 in an effort to reduce the federal deficit from the Finance Ministers forecast of $29.4 billion for the upcoming year.However, asked if his government might increase options taxes in future budgets, the Finance Minister said: Its not in our plan.

A PDF version of this post can be downloaded here.