Beneficial Ownership and Derivatives: An Analysis of the Decision of the Swiss Federal Supreme Court Concerning Total Return Swaps (Swiss Swaps Case)

Abstract

The recent decision of the Swiss Federal Supreme Court in the Swiss Swaps Case dealt with the question of beneficial ownership in relation to dividends which were economically passed on to third parties by way of derivatives. The court denied a Danish bank, which was the physical holder of the shares and the recipient of the dividends, a withholding tax refund under the Switzerland/Denmark Double Taxation Convention (1973) on the basis that it was not the beneficial owner of the dividends. The court assumes a factual obligation of the Danish bank to pass on the dividends to the total-returns-waps counterparties and suggests an ‘interdependence’ between the receipt of the dividends and passing on the dividends to the swaps counterparties. The court’s decision raises the question whether beneficial ownership should be denied to a person who is the physical holder of the shares and the recipient of the dividends but passes on the benefits of the dividends in the context of a derivatives transaction. After an in-depth analysis of the case, this article illustrates the legal and practical difficulties in attributing beneficial ownership of the dividends to a derivatives counterparty which is neither the legal owner of the shares nor the direct recipient of the dividends beyond clear-cut cases of nominees, agents and conduit companies.