Tax treatment of the use of vehicles by legal entities according to the practice of the tax authority of the Canton of Ticino

In a communication dated 20 June 2023, the Tax Division of the Canton of Ticino communicated the new, immediately applicable cantonal practice on the tax treatment of vehicles registered in the name of legal entities and their use by shareholders and/or their related parties for the purposes of federal and cantonal profit taxes.

Pursuant to Article 58 para. 1 of the Federal Direct Tax Act (FDTA) and Article 67 para. 1 of the Tax Law of the Canton of Ticino (TL), the profit tax of legal entities is levied on their taxable net profit, consisting of the balance of the profit and loss account, after deduction of the previous year's carry-over, and all withdrawals made before the profit and loss account balance is calculated and not intended to cover expenses recognized by business use, namely overt or hidden profit distributions.

According to Art. 20 para. 1 lit. c FDTA and Art. 19 para. 1 lit. c LT, assessable cash benefits deriving from participations are taxable as income from movable assets in the hands of shareholders (hidden profit distributions). An assessable cash benefit occurs when the following conditions are jointly met:

• The company provides a benefit without receiving a consideration.
• The benefit is granted to a shareholder or a related party.
• The same benefit would not have been provided to a third party.
• The disproportion between performance and counter-performance is manifest and recognizable, such that the organs of the company could have become aware of the advantage granted.

In its Memo No. 1/2007 on the estimation of in-kind and private contributions to the overheads of business owners, the Federal Tax Administration (FTA) clarified that in the presence of a logbook, it is possible to divide the actual car expenses proportionally according to the kilometers driven for business and private purposes. In its absence, on the other hand, this apportionment is determined on a lump-sum basis, declaring 0.9% (0.8% until 31 December 2021) of the purchase price (excluding VAT) per month, but at least CHF 150.

In its decisions of 3 October 2022 (80.2022.109) and 28 March 2022 (80.2021.133), the Tax Chamber of Ticino pointed out that:

• In the presence of a benefit of the company to the shareholder or to a related party, in order to determine whether there is a hidden distribution of profits, one must ask whether this benefit was provided for purely commercial reasons or in view of the shareholding relationship in the company of the beneficiary.
• Since the cost reduces the debt to the tax authorities, it is up to the taxpayer to prove that it is commercially justified.
• A luxury good can only be partially recognized as a business asset: expenses related to an image appropriate to personal status have no connection to the purpose of the business, even though they may have a positive effect on the business.
• The shareholder must consider a fee for the private use of the company vehicle, unless he proves its exclusively professional use.

The Tax Division has introduced a 'luxury threshold' of CHF 120,000 (excluding VAT).

When a shareholder uses a company vehicle for private purposes, the tax authority will calculate the consideration owed by the shareholder and check whether there is a difference between this amount and the private share stated in the shareholder's salary certificate. If there is a difference, this will be regarded as a hidden profit distribution and will be taxed accordingly on the shareholder.

Without claiming to be exhaustive and for illustrative purposes only, the communication also provides examples for the calculation of the resulting cash assessable benefits in the hands of the shareholder in the following cases:

1. Purely private use

If a company vehicle is used only for private purposes and no consideration is provided for such use, the tax authority considers this to be a chargeable cash benefit and taxes the total costs for the vehicle.

2. Predominantly private use

If a company vehicle is used primarily for private purposes, but occasionally for commercial purposes, the tax authority considers most of the costs as a disguised distribution of profit, unless a market value for the commercial use can be demonstrated.

3. Both commercial and private use

If a vehicle is used for both commercial and private purposes, but no logbook is kept, the tax authority applies a "luxury fee" on the cost of the vehicle that exceeds a certain amount (CHF 120,000 above).

4. Two vehicles in the company's name

If a company owns two vehicles but cannot justify the need for both for business purposes, the tax authority considers one of the vehicles to be used exclusively for private purposes and taxes it accordingly.

The communication has the merit of clarifying the new cantonal practice on the tax treatment of company vehicles, thus preventing shareholders and their related parties from using such assets for private purposes by formally registering them with legal entities for tax purposes only.

If you have questions or need assistance with tax matters, please do not hesitate to contact our specialists in Geneva, Lugano or Zurich. We will be happy to assist you.