SWITZERLAND Law and Practice Contributed by: René Matteotti, Monika Bieri, Daniel Schönenberger and Manuel Ulrich, Tax Partner AG
1.2 Current Regime and Recent Changes Overview As Switzerland adheres to the OECD TPG and has not established specific transfer pricing rules, the current regime and its development are, in general, reflected in the OECD TPG. However, the arm’s length princi - ple was already acknowledged before the first OECD TPG were published. Namely, in the matter of Bellatrix SA, the FSC confirmed in 1981 that for withholding tax purposes, the arm’s length principle is applicable with regard to transactions concerning the company’s shareholders. Recent Changes Prior to the progression of the OECD’s base erosion and profit shifting (BEPS) project, core transfer pricing issues were seldom touched on by the tax adminis - trations. However, transfer pricing issues increasingly form part of routine audits today. Hence, taxpayers are more often confronted with detailed questions regard - ing transfer pricing matters (eg, requests regarding detailed transfer pricing documentation and explana - tions concerning comparables). Switzerland itself also seems to be increasingly confronted with requests for administrative assistance in transfer pricing cases. In international cases, the main focus is on the trans - fer of functions, the transfer or licensing of intellec - tual property rights, the renumeration for the use of intellectual property, financial transactions, corporate management services and asset management ser - vices. Another main focus lies on transactions with foreign companies in low-tax jurisdictions. Recently, the OECD TPG were also referred to in a purely nation - al, inter-cantonal FSC case where one company was domiciled in a high-tax and one in a low-tax canton. In another purely domestic FSC case the OECD TPG were cited by the court in connection with the inter- cantonal value attribution of an intangible. 2. Definition of Control/Related Parties 2.1 Application of Transfer Pricing Rules Swiss tax law – except VAT-legislation (see more in 1.1 Statutes and Regulations ) – does not include an explicit definition of the terms “associated enterpris - es”, “related parties” or “controlled transactions”.
According to the FSC, for income tax purposes, related parties are to be considered as entities with close commercial or personal relationships, where any close relationship between the parties involved in the transaction is enough. According to the Swiss under - standing of the term “related parties”, direct or indi - rect control (participation in management or capital) in itself is not decisive. The crucial question is whether the tested transaction was conducted under the given conditions only as a consequence of the associated relationship. In practice, some cantonal tax admin - istrations tend to apply the definition of “associated entities” set forth by the OECD. Furthermore, accord - ing to the FSC, “associated enterprises” or “related parties” can be assumed if the conditions agreed upon by the involved parties apparently do not meet the arm’s length standard. 3. Methods and Method Selection and Application 3.1 Transfer Pricing Methods Swiss domestic tax laws or practices do not provide specific transfer pricing methods. Nevertheless, as Switzerland adheres to the OECD TPG, all the usual transfer pricing methods are admissible (“most appro - priate method” approach). However, according to the SFTA circular of 2004, the cost plus method is, in general, not to be seen as an appropriate method for financial services or management functions. 3.2 Unspecified Methods As Switzerland adheres to the OECD TPG, and these do not exclude the use of unspecified methods, such methods can indeed be applied. However, if an unspecified method is intended to be applied, as the TPG specify, it should be explained why the methods described by the TPG themselves are not considered appropriate for the case at hand. 3.3 Hierarchy of Methods As Switzerland generally follows the OECD TPG, the hierarchy of the transfer pricing methods as stipulated in the OECD TPG is also applicable in Switzerland. However, in individual decisions, the FSC has held that there is no fixed hierarchy of methods, mean -
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