SWITZERLAND Law and Practice Contributed by: René Matteotti, Monika Bieri, Daniel Schönenberger and Caterina Colling-Russo, Tax Partner AG
same management and control. In both situ - ations, the arm’s length principle has to be applied. Under Swiss law, a tax authority may make an adjustment 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 ser - vice 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 respec - tive 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 parent 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 infor - mal capital contribution at the level of the share - holder and the beneficiary company depends on the facts and circumstances of the case. If the contracting parties of a transaction vio - lating the arm’s length principle are sister com - panies, the so-called modified triangular theory applies. In a first step, the profit of the company that has distributed a deemed divided is adjust - ed. In a second step, the benefit is attributed to the shareholder, which in turn makes a hid - den capital contribution to the beneficiary sister company. Withholding tax 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 company. Unlike in the case of cor - porate 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 ben - eficiary is deemed to have effectively received only 65% of the deemed dividend. The corpora - tion that provided the deemed dividend is there - fore liable for the payment 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 theo -
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