SWITZERLAND Law and Practice Contributed by: René Matteotti, Monika Bieri, Daniel Schönenberger and Caterina Colling-Russo, Tax Partner AG
the taxpayer cannot justify its higher than the maximum safe haven interest rate. However, the federal supreme court argued, in addition, that the margin has to be determined through consideration of the arm’s length prin - ciple and not by referencing the safe haven cir - cular margin. Overall, this ruling reaffirms the importance of robust documentation for market-based interest rates, particularly when the interest rates applied on intercompany financing transactions deviate from the safe haven guidelines. See the Swiss Trends & Developments chapter in this guide for further discussion of these FSC cases. Decision of the Zug Administrative Court (A 2023 1) A legal entity based in the Canton of Zug, which is part of an international pharmaceutical group, acted as limited risk distributor as of 2018. For 2018, the company reported a negative operat - ing margin of –21.8%. The cantonal tax admin - istration objected to this margin as being non– arm’s length and instead assessed the company with a margin of 1.1% which was the lowest value of the interquartile range of the bench - marking study. As a result, a profit adjustment in the amount of around CHF9 million resulted. The taxpayer filed an objection and countered that the three-year average (2016–18) stood at 1.2%, which would compensate for the low 2018 margin. During court proceedings, the taxpayer referred to the OECD TP guidelines, which allow the use of multi-year data to determine appro - priate transfer prices. The taxpayer concluded from this statement that it could also smooth the margin over several years.
The Administrative Court in the Canton of Zug did not accept the line of reasoning provided by the taxpayer. It emphasised the principle of periodicity, which requires taxes to be assessed separately for each tax year. A subsequent “smoothing” of the margin over multiple years was deemed impermissible, especially as there were no extraordinary circumstances substan - tiating the negative result in 2018. According to the court’s ruling, it is in line with the funda - mentals of transfer pricing law that each busi - ness unit be taxed according to the economic substance of the value it adds. This analysis is carried out anew every year. 15. Foreign Payment Restrictions 15.1 Restrictions on Outbound Payments Relating to Uncontrolled Transactions Switzerland does not have any specific rules or even restrictions regarding uncontrolled out - bound transactions. Switzerland does not have any specific rules or even restrictions regarding controlled outbound transactions. However, as for all transactions, the payments have to be commercially justified in order to be effectively deductible for corporate income tax purposes. Furthermore, according to the FSC, “particularly qualified” duty to co-operate with the tax authorities in the case of cross-border legal relationships has to be taken into account. This increased duty especially applies to out - bound payments to a non-DTA foreign country or to a DTA foreign country to the extent that 15.2 Restrictions on Outbound Payments Relating to Controlled Transactions
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