Zurich: Capital Tax Reduction Also for Short-term Loans

The Zurich Tax Appeals Court has issued a landmark decision overturning the practice of the Zurich Cantonal Tax Administration, which had previously granted capital tax reductions only for intercompany loans with a duration exceeding 12 months. Whilst Deloitte anticipates this decision may be appealed, it could nevertheless influence the practices of other cantons.

Following the most recent tax reform, the cantons were granted the power to provide partial or complete tax relief on capital tax for shareholdings, patents and intra-group loans (art. 29(3) Tax Harmonisation Act). The Canton of Zurich has made full use of this power (§ 82a Zurich Tax Act). However, the Zurich Cantonal Tax Administration had previously interpreted the term “loan” to encompass only those with a duration exceeding 12 months (circular, in German). In its decision 1 ST.2025.64 (in German, to be published), the Zurich Tax Appeals Court (“Steuerrekursgericht Zürich”) was asked to assess whether this 12-month threshold was legally permissible.

Case

Company A Ltd, domiciled in the Canton of Zurich, advanced funds to its affiliated company B Ltd, an intra-group financing entity. The treasury team determined the amount, duration, and timing of each advance, with no individual advance exceeding three months. Early repayment before maturity was permitted only upon payment of compensation. When A Ltd applied for a capital tax reduction on these short-term advances, the Zurich Cantonal Tax Administration rejected the application, with reference to its established practice.

Court Decision

The court established that the term “loan” is defined in neither the Zurich Tax Act nor the overarching Tax Harmonisation Act. As an indeterminate legal concept, it required interpretation. The court found that all recognised interpretative methods reached the same conclusion: there is no legal basis for limiting “loans” to durations exceeding 12 months. The court also conducted a detailed examination of the Tax Harmonisation Act’s overarching provisions, which likewise do not permit such a limitation.

One judge issued a dissenting opinion, arguing that these advances lacked the objective characteristics of a loan and therefore should not qualify for relief, regardless of the absence of a 12-month threshold. However, the court rejected this view.

The court therefore ruled that the Zurich Cantonal Tax Administration must grant company A Ltd the capital tax reduction, even for short-term advances.

Deloitte’s View

The Zurich Tax Appeals Court appears to be the first cantonal court in Switzerland to address this issue. The decision confirms that neither the Zurich Tax Act nor the Tax Harmonisation Act provides a legal basis for imposing a 12-month minimum duration requirement on loans for capital tax relief purposes.

To the extent that other cantons have adopted similar practices without an explicit statutory basis, this decision may also influence their administrative approach going forward. Given the potential practical significance of this case Deloitte expects the decision may be appealed to the Zurich Administrative Court and potentially ultimately to the Federal Supreme Court.

* Thomas Hug, Tax Partner of Deloitte, is also a member of the Zurich Tax Appeals Court.