SWITZERLAND Law and Practice Contributed by: René Matteotti, Monika Bieri, Daniel Schönenberger and Manuel Ulrich, Tax Partner AG
to sister companies. In these cases, the full WHT has to be paid to the SFTA, the WHT has to be shifted (invoiced) to the beneficiary and the beneficiary has the right to get a (partial) refund if the respective con - ditions based on the respective DTA are met. If the notification procedure is not available, not only the full withholding tax but also interest on late payment of 5% per annum will be due. However, there are ongo - ing discussions about extending the notification pro - cedure for Swiss WHT on deemed dividends within an international group. Stamp tax duty Regarding stamp duties, the arm’s length principle is only applied in certain cases. In principle, as in the case of withholding tax, the direct beneficiary theory also applies to the stamp duty, which means that only hidden capital contributions made directly by share - holders to the corporation are subject to the 1% stamp duty. In particular, this has the consequence that contributions to sister companies do not trigger stamp duty. Also, no stamp duty is triggered for so- called benefits periodically granted to the subsidiary, as is the case, for example, where the shareholder charges an interest rate that is too low according to the arm’s length principle for the loan granted to the subsidiary. Value added tax (VAT) The Federal VAT Act, in contrast to the above-men - tioned legislation, explicitly states that transactions between related parties have to be at arm’s length. For VAT purposes, a related party is to be assumed if a shareholder holds at least 20% of the nominal share capital or an equivalent participation, or in the case of foundations and associations with which there is a particularly close economic, contractual or personal relationship. Regarding the determination of the arm’s length trans - fer prices for VAT purposes, it can generally be referred to the principles applicable for corporate income tax. However, according to administrative practice in spe - cific cases, the arm’s length price can be calculated on a lump-sum basis. If, for example, a holding company does not have its own personnel to effectively manage the holding company and that management is carried out by personnel of its subsidiaries, the arm’s length
remuneration can be set at 2% or 3% of the average total assets held by the holding company. Furthermore, it should be noted that in relation to VAT, the SFTA, according to case law and in contrast to corporate income tax, can challenge the prices deter - mined between related parties without first having to prove that the agreed remuneration violates the arm’s length principle and that such a violation was obvious (see above comments on corporate income tax). If the SFTA does not agree with the prices set by the taxpayer and the self-declaration respectively, the tax - payer has to prove that the prices nonetheless comply with the arm’s length principle and are determined by using the appropriate transfer pricing method. Con - cerning the selection of the method, the FSC noted in a ruling concerning VAT that the selection of the method is regarded as a legal question that the FSC is free to review. The result of the selected method, however, is regarded as a question of fact that can only be reviewed by the FSC for obvious incorrectness or arbitrariness. In practice, challenging the selected method, and establishing obvious incorrectness or arbitrariness, typically requires robust transfer pricing documentation, even though such documentation is not legally mandatory. Administrative Guidelines As already set out, the SFTA instructed the cantonal tax administrations by a circular letter of 1997, which was renewed in 2004, to directly apply the OECD TPG. The circular explicitly states that the profit margins for service companies must be determined in accordance with the arm’s length principle – ie, for each individual case on the basis of comparable uncontrolled trans - actions and with reference to the range of appropriate margins. The most relevant administrative guidelines in Swit - zerland in the area of transfer pricing can be seen in the circulars published by the SFTA providing safe harbour rules for thin capitalisation and for intra-group interest rates (see 11.1 Transfer Pricing Safe Har- bours ) where the arm’s length principle is not neces - sarily reflected in the published rates.
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