There is no special transfer pricing legislation in Switzerland. A circular letter from the Swiss FTA (issue 4, 2004) confirms that the Organisation for Economic Cooperation and Development’s (OECD) transfer pricing guidelines for multinational enterprises and tax administrations must be considered as regards their taxation. So, as regards financial transactions, a tax payer can either follow the arm’s length standard (market prices) or follow the safe-harbour regulations as provided by the Swiss FTA.
How is the arm’s length nature of an inter-company loan evaluated?
Switzerland provides guidance on permitted tax-deductible interest rates on loans. The FTA annually issues instructions (in a circular letter) on the safe-harbour maximum and minimum interest rates, set by reference to prevailing interest rates in the Swiss market. Interest rates for a loan in Swiss francs (CHF) depend on the qualification of the underlying loan. In its circular letter of 25 February 2013 the FTA published the safe-harbour interest rates applicable to shareholders and inter-company loans denominated in CHF applicable for 2013.
For loans in foreign currencies, a Swiss resident borrower can either apply the relevant market interest rates or the safe-harbour interest rates applicable for 2013 (circular letter of 26 February 2013). These are detailed below:
For loans made to affiliated parties, the minimum interest rates that a Swiss resident receives are as follows:
- Loans financed through equity: loans to affiliated parties at least carry the safe-harbour interest rate for loans denominated in CHF – i.e., 1.5%.
- Loans financed through debt: actual borrowing costs plus 0.5%; however, at least the safe-harbour rates listed above.
If companies deviate from the safe-harbour rates, they are strongly advised to maintain documentation to support the arm’s length nature of the rates applied as there have been an increasing number of audits in this area.
How is the arm’s length nature of the specific terms and conditions of an inter-company loan evaluated?
There is no specific guidance on how the arm’s length nature of specific terms and conditions of an intercompany loan should be evaluated.
What transfer pricing methodologies are preferred/generally accepted in substantiating the arm’s length interest rate?
In general, the burden of proof within Switzerland lies with the taxpayer regarding the justification of tax deductible expenses (the burden of proof lies with the tax authorities regarding adjustments which increase taxable income).
Under certain circumstances, it may be beneficial to obtain an advanced ruling with Swiss tax authorities where they give generally binding information on the taxation of a future transaction.
The credit rating may be obtained through binding banking offers or is estimated by assessing the probability of default of a given borrower on a stand-alone basis. The stand-alone credit rating determines the credit worthiness of a borrower as if it were an independent entity and were to obtain borrowings from the market (on an arm’s length basis). Under certain circumstances, it may be beneficial to obtain an advanced ruling with Swiss tax authorities.
How is passive association/implicit support taken into account in substantiating the arm’s length interest rate?
In general, the credit rating (and hence the interest rate) is determined on a stand-alone basis, not taking into account any implicit parental support. However, it may be the case that implicit support is taken into consideration. Although there is no formal position on this matter, the credit rating of the borrowing entity that is established on a stand-alone basis may be adjusted in order to account for the implicit guarantee.
Are foreign comparables accepted?
In practice yes, but depending on the case and provided the key terms – such as currency and base rate – are sufficiently comparable or can be adjusted for comparability.
How is the arm’s length nature of the specific terms and conditions of borrowings/deposits within a cash pool evaluated?
The arm’s length principle applies to the interest and deposit rates charged within inter-company cash pools. The terms and conditions of the deposits and borrowings need to be at arm’s length for both the cash pool leader and the cash pool participants. Long-term borrowings within the cash pool risk being re-characterised into long- term loans.
What transfer-pricing methodologies are preferred/generally accepted in substantiating the arm’s length interest rate on borrowings/deposits within a cash pool?
Borrowing and deposit rates should be established based on the specific facts and circumstances of the cash pool and corresponding inter-company transactions. The transfer pricing methodology applied in this respect is the comparable uncontrolled price (CUP) method, similar to the transfer pricing methodologies generally applied in establishing the arm’s length interest rates on inter-company loans.
What transfer pricing methodologies are preferred/generally accepted in substantiating the arm’s length remuneration for the cash pool leader?
The safe-harbour rules for loans to related parties as provided by the tax authorities can be applied. For funds of up to CHF10m, the safe-harbour margin for the cash pool leader is 0.5%; for funds exceeding CHF10m the applicable margin is 0.25%.
In general, a tax payer should choose the most appropriate transfer pricing method in order to determine the arm’s length remuneration for the cash pool leader. The transfer pricing method chosen should depend on the functions performed and risks assumed by the cash pool leader (for example, routine administrative functions and limited risks at the level of the cash pool leader vs. the cash pool leader bearing the foreign exchange risk and taking on additional functions in relation to investment decisions). The transfer pricing method applied in practice therefore ranges from the cost-plus method on a transactional net margin method (TNMM) basis to the profit split method. In cases where the cash pool leader performs major investment decisions in addition to its activities as a cash pool leader, it might be appropriate to determine the remuneration using alternative methods.
What is your tax authority’s approach towards recognising guarantees?
There are no rules in Switzerland relating to inter-company credit ratings and rating approaches. As a standard rule, all cantonal tax administrations follow OECD guidelines and the separate legal entity approach. A stand-alone rating for each of the group companies involved should therefore be acceptable. However, there have been discussions with the tax authorities and the taxpayers where a subsidiary has asked for a better rating because it is part of the group. In addition, there is a clear trend with the Swiss tax authorities expecting guarantee fees where a Swiss HoldCo grants guarantees to group companies, irrespective of the rating of the companies involved.
How is passive association/implicit support taken into account in substantiating the arm’s length guarantee fee?
There is no specific guidance or formal position on implicit guarantees. The same applies as for inter-company loans.
How is the arm’s length nature of the specific terms and conditions of an inter-company guarantee evaluated?
Where a stand-alone credit rating is applied, the specific terms and conditions of the guarantee are taken into account (duration, default risks, etc.). That is, the guarantee fee payment must correspond to the arm’s length principle and be proportionate to the risks assumed by the guarantor. However, in practice and depending on the case, the safe-harbour regulations for inter-company loans might be applied if a guarantor provides guarantees (i.e., for up to CHF10m the safe-harbour margin applicable for the guarantor is 0.5%; exceeding CHF10m the applicable margin is 0.25%). In such cases, the specific terms and conditions of the guarantee are not completely taken into consideration.
What transfer pricing methodologies are preferred/generally accepted in substantiating the arm’s length guarantee fee?
1. With this approach the benefits achieved as a result of the guarantee is split between the guarantor and the guarantee/beneficiary.
2. With this approach, the guarantor is remunerated with a fee by the guarantee/beneficiary on the basis of a return on its capital required to support the risk of a potential claim on the basis of the guarantee.
There is no formal guidance in relation to the use of the benefit approach, cost of capital approach, cup approach or credit default swap approach. The cup approach or the benefit approach is used most commonly used in practice. Under certain circumstances, it may be worth obtaining an advanced ruling with Swiss tax authorities.
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