SWITZERLAND Trends and Developments Contributed by: René Matteotti, Monika Bieri, Daniel Schönenberger and Caterina Colling-Russo, Tax Partner AG
the FSC rejected the lower court’s conclusion that the hidden dividend should be limited to the difference between the applied interest rate and the safe harbour maximum interest rate (2.0% per annum for 2014 and 1.5% per annum for 2015). Instead, it held that if a taxpayer applies rates above the published maximum safe har - bour interest rates and cannot substantiate their arm’s length nature, the authority may adopt a lower rate based on objective benchmarking. As a result, there is no entitlement to safe harbour protection when applying interest rates above the published maximum safe harbour interest rate. As a result, the position of the Zurich Tax Admin - istration was upheld to the extent that the par - ent company’s refinancing rate could serve as the basis for determining the arm’s length inter - est rate. However, the Court also ruled that the margin has to comply with the arm’s length principle. In particular, the Court scrutinised the 0.25% margin added by the Zurich Tax Admin - istration, noting that its application was derived from safe harbour circular for loans granted by related parties (ie, from the lender’s perspective). The Federal Supreme Court argued that while the refinancing rate of 0.83% was a valid starting point, the additional margin must be indepen - dently evaluated for its market conformity and risk compensation. Consequently, the case was remanded to the Zurich Administrative Court to reassess whether this margin is substantiated by a credible benchmarking study and accurately reflects the underlying risk and service costs associated with the financing arrangement. The court decision delivers further guidance to taxpayers engaging in intra-group financ - ing. Applying interest rates above safe harbour thresholds without substantiating their market conformity exposes the taxpayer to adjustments
and the risk of requalification into hidden divi - dend distributions with corresponding corporate income tax (and further, in a different procedure, Swiss withholding tax (WHT)) implications. Authorities may but need not assess lower rates if they substantiate the lower rate. In the present case, the taxpayer’s failure to provide a defensi - ble benchmarking study aligned with OECD TP Guidelines significantly undermined its position. The ruling reinforces the importance of robust transfer pricing documentation and provides nuanced guidance for taxpayers deviating from safe harbour interest rate thresholds. Based on feedback from the SFTA on this court decision, tax authorities can still apply corrections based on the safe harbour interest rates, if the taxpayer fails to prove higher rates. They can but are not forced to perform a benchmark study. Recent Federal Supreme Court Decision Regarding Penal Risks for Employees and Tax Advisers (BGer 6B_90/2024 and 6B_93/2024) In 2011, a Swiss real estate company belonging to a multinational enterprise received a long-term loan of CHF93 million from an Irish group com - pany, carrying an annual interest rate of 3.15% per annum. During a 2014 cantonal tax audit for corporate income tax purposes, this inter - est rate was deemed excessive – even though it fell within the interquartile range of a bench - marking study prepared retrospectively as part of the audit proceedings. To resolve the matter, the company and the cantonal tax authorities agreed to a revised arm’s length interest rate of 2.5% per annum. This implied that the excess interest paid – 0.65% per annum – constituted a hidden dividend distribution resulting in an increase of the taxable profit.
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