Until the end of 2009 for VAT purposes the expression „closely related person“ even included employees. Therefore goods and services (without consideration) provided to employees had to meet the arm’s length test and the difference taxed. With Art. 3 lit. h the VAT Law narrowed the definition. So that the employees, and also foundations and associations, no longer counted as closely related persons.
This change in the law had the consequence that, if supplies from the founding firms were rendered to their pension funds without consideration, VAT was no longer imposed on a fictitious arm’s length consideration. In the context of recent revisions, the FTA has again questioned this important element of the VAT Law.
From the report on the consultative draft on the partial revision of the VAT Law published on 6 June 2014 it is also clear why. The tax savings potential had been recognized by (too) many pension funds, which thereby “avoid the tax charge foreseen in the VAT system by means of the non-deductible input taxes”.
This loophole is to be closed in the context of the revision of the VAT Law. Foundations and associations, to which a particularly close economic, contractual or personal relationship exists, are in future to qualify as closely related persons, with the foreseeable result that services provided to pension funds free of consideration are again to be taxed.
Until the revised VAT Law comes into force (probably not before 2017), it must not come to add-backs. With the consultative draft the Federal Council has taken a clear stance on the current practice. Procedures still pending must be concluded in favour of the taxpayers.