Presentation of Bernard Vischer of Schellenberg at the ICAEW Switzerland event on 07 Feb 2018

1. Current Swiss regulatory
environment of not-for-profit
organizations
Bernard Vischer
ICAEW – February 7, 2018

2. Current Swiss regulatory environment of not-for-profit organizations 7 February 2018 Page 2/18
Table of Contents
1. Tax exemption – Recent legal developments
2. Tax exemption – Case law
3. VAT Reform
4. VAT – Federal Tax Administration’s practice
5. Remuneration of board members
6. AMLA and FATF-Act
7. CRS – classification of NPOs under Swiss law
8. Data protection – GDPR
9. GDPR’s implications for Swiss NPOs and upcoming reform in
Switzerland

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1. Tax exemption - Recent legal
developments
> Federal Act of March 20, 2015 introducing new Article 66a of the Federal Act
on the Federal Direct Tax (“LIFD”) and Article 26a of the Federal Act on
Harmonisation of Direct Taxes (“LHID”):
> Since January 1, 2018, legal persons that pursue ideal purposes are exempt from
profit tax provided that their profit does not exceed CHF 20’000.- (at federal level;
amount determined by the cantons at cantonal level) and is exclusively and
irrevocably dedicated to such ideal goals.
> “Ideal purpose”:
• non-economic purpose (however, economic purpose is admissible to qualify for the
exemption if of secondary importance);
• does not equate to the notion of “public interest” required for the ordinary tax
exemption (see Art. 56 lit. g LIFD and 23 lit. f LHID).
> For donors: voluntary contributions are deductible only if made to entities benefiting
from the ordinary tax exemption (Art. 33a and 59 lit. c LIFD; Art. 9 s. 2 lit. i LHID) ax
exemption

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2. Tax exemption – Case law
> Swiss Federal Supreme Court decision of March 21, 2017 (2C_835/2016)
> Facts:
• Not-for-profit tax exempt association whose purpose was to provide financial
support to individuals in economic distress.
• Revocation of the tax exemption by the tax authorities of the Canton of Thurgau
following distributions made to Israeli Jewish charities pursuing the same aim.
> The Swiss Federal Supreme Court confirmed the revocation of the association’s tax-
exempt status:
• as the funds were affected to the members of institutions and members of the same
religious community, they did not benefit an open circle of recipients → the
association did not satisfy the general public interest requirement;
• the association did not evidence that the funds actually reached its intended
beneficiaries and were not retained by the recipient charities → actual pursuit of
the public interest purpose not demonstrated.

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3. VAT Reform
> In force since January 1, 2018.
> Implications for NPOs:
> Foreign and Swiss based NPOs shall register for Swiss VAT purposes from the first
franc of turnover in Switzerland, where their worldwide taxable turnover - and not only
the Swiss turnover, as hitherto - exceeds CHF 150’000.- (Art. 10 s. 2 lit. c of the
Federal VAT Act, “VAT Act”). At or below this threshold, possibility to opt for voluntary
VAT registration for VAT recovery purposes, provided the NPO carries out
entrepreneurial activities.
> Foundations and associations which have a particularly close economic, contractual
or personal relationship with a supplier/ recipient of supplies are now regarded as
closely related persons (art. 3 lit. h VAT Act) → VAT tax base for the supply of goods/
services from or to such persons follows the arm's length principle (Art. 24 s. 2 VAT
Act).
> Contributions by patrons to NPOs are deemed to be donations – and, therefore,
non taxable for VAT purposes (Art. 18 s. 2 lit. d VAT Act) – if the concerned NPO
voluntarily grants its patrons advantages in terms of its articles provided it informs the
patron that they have no right to be granted such advantages (Art. 3 lit. i VAT Act).

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4. VAT - Federal Tax Administration’s practice
> Change of practice:
> Reminder: the input VAT tax can only be recovered if incurred in relation to
entrepreneurial activities (as opposed to non-entrepreneurial activities).
> Since January 1, 2017, the FTA no longer applies its 25/75% practice on input tax
recovery where a NPO has both entrepreneurial and non-entrepreneurial activities:
the input tax shall now be allocated based on the actual type of activities
> Info VAT 02, 1.1 and 7; Info VAT 09, 1.4.2.4 and 11.5, available at
https://www.estv.admin.ch/estv/fr/home/mehrwertsteuer/fachinformationen/publikation
en/mwstg-ab-2010/archiv-mwst-info.html#734199002

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5. Remuneration of board members
> Altruistic activity is still generally required for NPOs to benefit from the tax-
exemption (Swiss Tax Conference’s information of 18.01.2008, para. 10)→As
a rule, no compensation for board members. Nevertheless:
> expenses incurred in the performance of their duties may be reimbursed;
> attendance fees, if modest, are permissible;
> tasks or mandates exceeding the board members’ usual functions may be
remunerated.
> Criticisms:
> Swiss Foundation Code 2015, Recommendation 7:“ If foundation board members
waive their entitlements to remuneration, this shall not be at the cost of
professionalism”.
> Luginbühl’s parliamentary initiative 14.470 “Further strengthening the Swiss location
for foundations”, pending before the National Council: the adequate remuneration of
the board members complies with the Swiss Civil Code and should not result in the
refusal or loss of the foundation’s tax-exempt status.

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5. Remuneration of board members
> Swiss GAAP FER 21 “Accounting for charitable NPOs” (as amended and in
force since January 1, 2016) requires to disclose in the notes to the annual
financial statements the following information:
> total of the remuneration paid to board members and to members of the executive
management;
> mandates to board members (to be recorded as transactions with related parties).
> ZEWO Standards:
> Swiss GAAP FER 21 +
> remuneration paid to the Chairperson to be shown separately (ZEWO Norm 8.7);
> individual payments to board members and executive director to be disclosed
separately to ZEWO (ZEWO Norm 8.9).

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6. AMLA and FATF-Act
> As a reminder, the Anti-money Laundering Act (“AMLA”) does not apply to:
> Foundations’ board members who act on an honorary basis since they do not act on a
professional basis (see Art. 2 s. 3 AMLA)
> Foundations which pursue political, religious, scientific, artistic, charitable, social or
similar purposes are not regarded as financial intermediaries (see Art. 6 s. 3 lit. a of
the Anti-money Laundering Ordinance, “AMLO”).
> However, the “foundation board refuses to accept assets that it knows breach
national legislation or international treaties. This applies in particular to assets
with a connection to terrorism, money laundering, corruption and other criminal
offences” (Swiss Foundation Code 2015, Recommendation 23).

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6. AMLA and FATF-Act
> Federal Act for Implementing the Revised FATF Recommendations
("FATF Act") having introduced, as of January 1, 2016, the qualified tax
fraud as a new predicate offence to money laundering:
> According to Art. 305bis para. 1bis of the revised Swiss Criminal Code (“SCC”), both
of the following conditions need to be met in order to be in presence of a qualified tax
offence:
• a tax fraud within the meaning of Art. 186 LIFD or Art. 59 s. 1 LHID has been
committed;
• the amount of tax evaded exceeds CHF 300’000.- per tax period.
> A tax fraud can only be committed in relation to:
• Income tax and wealth tax (natural persons);
• Profit tax and capital tax (legal entities);
• Tax on real estate gains (natural persons and legal entities).

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6. AMLA and FATF-Act
> This "tax fraud" punishes the mere use of forged, falsified or incorrect document, and
not the action of forging, falsifying or making incorrect a document. The offence is
perfected by the mere transmission of the forged, falsified, or incorrect document to the
relevant tax authorities.
> The tax fraud is not committed by the use of any forged, falsified or incorrect
document. Rather, the document must be a qualified document which satisfies a
heightened standard of reliability, such as financial statements, accounts, salary
certificates or forms A (declaration of beneficial ownership). A tax return is not
considered a qualified document.

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7. CRS – classification of NPOs under Swiss
law
> According to the Federal Act on the Automatic Exchange of Information in Tax
Matters (“AEOI Act”), a NPO either qualifies as a “financial institution” (“FI”)
or as a “non-financial entity” (“NFE”).
> A FI is defined as a “custodial institution”, a “depositary institution”, an
“investment entity” (“IE”) or a “specified insurance company”.
> A NPO falls under the definition of an IE if (i) more than 50% of its gross
income is derived from financial assets and (ii) is managed by another FI under
a discretionary investment mandate. If this is the case:
> According to the Ordinance on the Automatic Exchange of Information in Tax
Matters (“AEOI-O”):
> Nonprofit associations that are established and organized in Switzerland are treated
as non reporting FIs (Art. 5 AEOI-O) → No reporting obligations

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7. CRS – classification of NPOs under Swiss
law
> Foundations that are established and organized in Switzerland are treated as non
reporting FIs (Art. 6 AEOI-O) if they: (i) pursue a public interest purpose and
exclusively and irrevocably use any profits towards such purpose or if they (ii) pursue
a non-commercial purpose and exclusively and irrevocably use any profits, which
must be less than or equal to CHF 20’000, toward such purpose → No reporting
obligations.
> If the NPO does not qualify as an FI, it will then qualify as a NFE.
> According the Swiss Guidelines on the automatic exchange of information,
such NFE will qualify as an active NFE, if the following cumulative conditions
are met:
> it is exclusively established and operated for religious, charitable, scientific, artistic,
cultural, sports or educational purposes;
> it is exempt from income tax;

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7. CRS – classification of NPOs under Swiss
law
> it has no shareholders/members having ownership or user rights to the income/
assets;
> it may not distribute the income/ assets to a private person or a non-profit Entity,
except when carrying out the charitable activity of the NFE, and paying an adequate
remuneration for services rendered or as a market-value payment for an asset
acquired from the NFE;
> it shall distribute all of its assets to a governmental entity or other NPO in the event of
a reorganisation or dissolution.
> If the NPO qualifies as an active NFE, no reporting obligations.
> If the NPO does not qualify as an active NFE, it will be regarded as a passive
NFE → the NPO will have to identify and report its “controlling persons”.

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8. Data protection - GDPR
> On May 25, 2018, the EU General Data Protection Regulation 2016/679
(“GDPR”) will enter into force.
> Objectives:
> to harmonise the data privacy laws of the Member States;
> to give individuals within the EU more control over their personal data;
> to increase the accountability of organisations processing personal data of EU
individuals;
> to strengthen the role of data protection authorities.
> GDPR will apply to the processing of personal data of data subjects in the EU
> in the context of the activities of an establishment of a controller/processor in the EU,
regardless of whether the processing takes place in the EU or not (Art. 3 s. 1 GDPR);
or
> by a controller or a processor outside the EU where the processing activities are
related to: (a) the offering of goods or services (no payment required) to the data
subjects or (b) to the monitoring of their behaviour (Art. 3 s. 2 GDPR).

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8. Data protection - GDPR
Principles (Art. 5 GDPR) For controllers/processors For data subjects
Lawfulness, fairness and
transparency
Obligation to obtain consent/ to
prove exemption
Right to be informed, right to
access, right to data portability
Purpose limitation Right to be forgotten
Data minimisation Obligation to ensure privacy by
design and by default
Right to restriction of processing
Accuracy Obligation to process to periodic
reviews
Right to rectification
Storage limitation Right to object
Integrity and
confidentiality
Obligation to notify data breach
within 72 hours to regulator
Right to be informed w/o undue
delay
Accountability Obligations to maintain records of
processing activities;to appoint a
data protection officer and, if note
established in the EU, a
representative
Right not to be subject to a
decision based solely on
automated processing, including
profiling

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9. GDPR’s implications for Swiss NPOs and
upcoming reform in Switzerland
> NPOs will fall within GDPR’s territorial scope and have to comply with its requirements if:
> they process personal data of EU individuals (donors, beneficiaries, job applicants,
etc.); and
> have an establishment in the EU (→ for Swiss based NPOs, beware if data
processing is outsourced to EU service provider); or
> process the data in connection with the offering of goods or services to such
individuals (→ beware if Swiss based NPO carries out entrepreneurial activities)/
monitor their behaviour (e.g. cookies).
> On September 15, 2017, the Swiss Federal Council issued a draft legislation
for the revision of the Federal Act on Data Protection (“DPA”). The proposed
reform is largely in line with the EU legislation and may enter into force by
the end of 2018 (Message du Conseil fédéral du 15.9.2017 concernant la loi fédérale
sur la protection des données etsur la modification d’autres lois fédérales, FF 2017
6783).

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Bernard Vischer
bernard.vischer@swlegal.ch
Schellenberg Wittmer Ltd / Attorneys at Law
15bis, rue des Alpes / P.O. Box 2088 / 1211 Geneva 1 / Switzerland
T +41 22 707 8000 / F +41 22 707 8001
www.swlegal.ch
Thank you for your attention.
GENEVA / ZURICH / SINGAPORE