SWITZERLAND Trends and Developments Contributed by: René Matteotti, Monika Bieri, Daniel Schönenberger and Caterina Colling-Russo, Tax Partner AG
priate adjustments are made to ensure compa - rability. Transition from LIBOR Addressing the cessation of LIBOR, the SFTA recommends adopting alternative reference rates, such as the Swiss Average Rate Overnight (SARON) for Swiss franc-denominated loans. It advises that any modifications to existing loan agreements should adhere to the arm’s length principle and not be used to alter other unrelated terms without proper justification. Recent Federal Supreme Court Decision Regarding Safe Harbour Interest Rates (BGer 9C_690/2022) In a landmark decision, the Federal Supreme Court (FSC) addressed the determination of an arm’s length interest rate for intra-group financ - ing transactions and clarified the interplay between market-based individual assessments and the SFTA’s safe harbour interest rates. The case involved a Swiss operating company which was partially tax-liable in the Canton of Zurich due to local permanent establishments. The company had entered into a framework loan agreement with its foreign parent which granted access to credit facilities of up to CHF1 bil - lion. Based on this agreement, the parent entity granted a fixed-term unsecured loan of CHF500 million with an interest rate of 2.5% per annum and a current account facility ( “Kontokorrent” ) for the remaining amount, carrying a 3% per annum interest rate. The interest rates applied in 2014 and 2015 were not supported by a comprehensive benchmark - ing study. Instead, the taxpayer derived the 2.5% rate by building up from a base rate of 0.75%, adding a 0.25% commission for handling and
administrative functions, and a 150 basis point risk premium. The Zurich Tax Administration, following a tax audit, rejected this methodology. It performed its own benchmarking analysis and set the allow - able interest rate at 1.08%, comprising a 0.83% refinancing rate derived from a bond issued by the parent company and an additional 0.25% margin, analogous to the mark-up prescribed in the SFTA’s safe harbour circulars for related- party financing. The tax authority treated the excess interest (above 1.08%) paid by the Swiss entity as a hidden dividend distribution subject to a correction of the taxable profit (in effect, an increase in the taxable profit). The Zurich Administrative Court ruled that only the interest rate exceeding the safe harbour maximum interest rates of 2% per annum (2014) and 1.5% per annum (2015) constituted a hid - den dividend distribution subject to a correction of the taxable profit. Accordingly, the interest rates, as stated in the SFTA circular, served as the lower limit for the adjustment. The core issue before the FSC was whether tax authorities are bound by the SFTA’s published safe harbour interest rates when assessing intra- group financing arrangements if taxpayers devi - ate from these safe harbour rates, or whether they may apply lower market-based rates where warranted. First, the court ruled that the safe harbour rates are rebuttable presumptions. The interest rate thresholds published annually by the SFTA are intended to simplify adminis - tration and provide legal certainty. Taxpayers adhering to them benefit from a presumption of arm’s length pricing. However, when a taxpayer deviates from these safe harbour rates, the bur- den of proof shifts, and the tax administration is entitled to verify market conformity. Second,
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