SWITZERLAND Law and Practice Contributed by: René Matteotti, Monika Bieri, Daniel Schönenberger and Manuel Ulrich, Tax Partner AG
• controlled transactions between a company and related parties, other than its shareholders. The latter includes, in particular, transactions between group companies that are under the same manage - ment and control. In both situations, the arm’s length principle has to be applied. Under Swiss law, a tax authority may make an adjust - ment only if the following three conditions are met: • the company has evidently received no adequate compensation for its services or deliveries; • the compensation in question was in favour of the shareholder or a related party and would not have been provided to unrelated parties under the same conditions; and • the evident discrepancy between the service or delivery and the compensation was recognisable for the company or the persons representing the company. The first two conditions concern the question of whether the agreed transfer prices fall within the range of prices or margins that independent third parties would have agreed on for the respective intercompany transaction (services, goods, licensing, financing, etc). The third condition, however, is a Swiss peculiarity: the tax authority may only make an adjustment if the violation of the arm’s length principle is obvious and thus recognisable by the management or the board of directors. This has to be determined on the basis of the concrete facts and circumstances of the case at hand. If profits are shifted from the subsidiary to the par - ent company due to an obvious violation of the arm’s length principle, a deemed dividend is to be assumed and the tax authority is entitled to adjust the profit of the subsidiary. In addition, income is attributed to the shareholder to the extent of the deemed dividend. If, on the other hand, the violation of the arm’s length principle leads to an increase of income at the level of the subsidiary, there is a so-called informal capital contribution. The tax treatment of such an informal capital contribution at the level of the shareholder and the beneficiary company depends on the facts and circumstances of the case.
If the contracting parties of a transaction violating the arm’s length principle are sister companies, the so-called modified triangular theory applies. In a first step, the profit of the company that has distributed a deemed dividend is adjusted. In a second step, the benefit is attributed to the shareholder, which in turn makes a hidden capital contribution to the beneficiary Hidden profit distributions as described above, which result from a violation of the arm’s length principle, regularly also trigger withholding tax consequences for the distributing company. Under Swiss law, withholding tax of 35% must be passed on to the recipient of the deemed dividend. The taxable company must therefore, in principle, reclaim the withholding tax from the beneficiary com - pany. Unlike in the case of corporate income tax, it is not the triangular theory that applies, but the direct beneficiary theory. In the case of payments to sister companies, this means that the reimbursement must be requested by the benefiting sister company. If it is not possible to pass on the withholding tax, the deemed dividend is grossed up and the beneficiary is deemed to have effectively received only 65% of the deemed dividend. The corporation that provided the deemed dividend is therefore liable for the pay - ment of the remaining 35%. This gross-up results in an effective withholding tax rate of 53.8% of the tax adjustment. Political discussions on also applying the triangular theory for withholding tax purposes were rejected in December 2024, so the direct beneficiary theory will in principle continue to apply in the future. Foreign beneficiaries may request a full or partial refund of the withholding tax based on the applicable double taxation agreement (DTA). However, the appli - cation of the direct beneficiary theory regularly limits the treaty relief in cases where the direct beneficiary is not the direct shareholder. If specific conditions are met, the law entitles companies to fulfil the withhold - ing tax liability by notification instead of paying the tax. In the case of deemed dividends, however, the application of the notification procedure is granted only in limited circumstances. The notification proce - dure is not applicable in the case of deemed dividends sister company. Withholding tax
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