Swiss tax law – except VAT-legislation (see more in 1.1 Statutes and Regulations) – does not include an explicit definition of the terms “associated enterprises”, “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 understanding of the term “related parties”, direct or indirect 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 administrations tend to apply the definition of “associated entities” set forth by the OECD. Furthermore, according 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.

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 appropriate method” approach). However, according to the FTA circular of 2004, the cost plus method is, in general, not to be seen as an appropriate method for financial services or management functions.

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.

As Switzerland in general 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, meaning that the most appropriate method should be used according to the case at hand. In other rulings the FSC has held that the hierarchy of methods as stipulated in the OECD TPG should in fact be followed. In a recent decision by the Swiss Federal Administrative Court it was ruled that the FTA has to respect the hierarchy of methods according to the OECD’s TPG.

In practice, the three traditional methods – ie, the comparable uncontrolled price (CUP) method, the resale price method and the cost plus method – are still preferred by the tax administrations. Furthermore, the CUP method enjoys preference over the other two traditional methods in the case of comparability. However, the transactional net margin method (TNMM) is the most commonly used method in Switzerland for determining transfer prices for services (corporate services, contract manufacturing services, contract R&D services), and routine distribution, whereas the CUP method is the most commonly used method for intangible property licensing and financing.

The hierarchy of transfer pricing methods as stipulated in the older versions of the OECD TPG can still be of relevance. This is due to a static approach to the application of the TPG that means that the version of the TPG in effect at the time the transaction was settled is applied (see 1.1 Statutes and Regulations).

It is sometimes difficult, however, to assess whether an update of the OECD TPG can be considered merely a more detailed explanation of the existing principles or an actual change in the guiding principles. If the former is the case, a dynamic approach to the application of the TPG is permissible as well.

The use of statistical tools that consider central tendency, such as the interquartile range or other percentiles, is not required. However, in practice, such tools are usually used to narrow the range, in particular because the comparables in a benchmark study are usually not perfect.

For the determination of adequate transfer prices, the tax authorities generally consider the interquartile range as the arm’s length remuneration.

Swiss domestic tax laws do not provide specific guidance on comparability adjustments. However, the OECD TPG on how and when to apply comparability adjustments are applicable.

Swiss domestic tax laws do not provide specific guidance on the pricing of controlled transactions involving intangibles. Rather, the OECD TPG are to be consulted regarding transfer pricing of intangibles.

Officially, Switzerland did not adopt the hard-to-value intangibles (HTVI) approach as defined in Chapter VI of the OECD TPG as this approach seems to collide with long-standing case law and the tax laws themselves. In particular, the question is whether ex post data can influence open or final tax assessments.

However, in general, due to the adherence to the OECD TPG, the OECD’s approach regarding HTVI should be applicable in Switzerland.

Open Tax Assessments

If a tax assessment is not yet final, a transfer pricing adjustment requires, inter alia, an obvious mismatch between the value of the transferred intangible and the compensation received, and that this mismatch was recognisable for the persons in charge (see 1.1 Statutes and Regulations). This mismatch is evaluated ex ante, namely at the time the transaction was settled.

The hard-to-value intangibles (HTVI) approach, however, assesses the conditions of the transaction ex post and does not provide an answer to whether a potential mismatch was ex ante already obvious and, thus, recognisable. Hence, the HTVI approach – as mentioned above – does not seem to fit into pre-existing domestic law and the respective case law. So far, however, there is no precedent on this issue.

Final Tax Assessments

If a tax assessment is already final and legally binding, an adjustment is generally only possible if the tax administration becomes aware of new facts or evidence. As long as the taxpayer provided the tax administration with appropriate and correct transfer pricing documentation during the assessment relating to the ex ante valuation of the intangible in question, the administration is not entitled to come back to its own evaluation should ex post show that the value of the intangible is, in fact, higher. In this case, the ex post data would not qualify as new facts or evidence, and thus prohibit the final tax assessment from being reopened and changed.

Switzerland recognises cost contribution arrangements and applies the OECD TPG correspondingly. However, Switzerland does not have special rules that apply to such arrangements.

Switzerland does not have specific rules regarding affirmative transfer pricing adjustments. Generally, pursuant to Swiss tax law, the financial statements prepared in accordance with commercial law are, in principle, binding for tax purposes. The tax administrations can only deviate from the financial statements in order to determine the taxable base if the statements violate accounting principles as set forth in the federal Code of Obligations, or if specific rules of the tax law require an adjustment.

However, as long as the tax return has not yet been filed by the taxpayer, the balance sheet can, in accordance with the Code of Obligations, be adjusted without further restrictions. Once the tax return has been filed, a balance sheet adjustment is only permissible if it violates commercial law. Hence, if a transfer pricing issue arises once the tax return has been filed, an adjustment, in principle, will only be allowed if the original transfer prices also violate commercial law.

However, as long as the adjustment increases the taxable profit, the tax administrations are likely to accept such adjustments, even if the original transfer prices were in line with the accounting principles as set forth in the Code of Obligations. This is due to the fact that if a transaction is not conducted according to the arm’s length principle, the tax administration can by law make the respective adjustments.

Neither transfer pricing-specific returns nor related-party disclosures are required to be filed with the corporate income tax return.

Exchange of Information on Request

In 2009, Switzerland committed to the internationally agreed standard regarding the exchange of information on request. By doing so, Switzerland renewed most of its more than 100 DTAs.

Moreover, in 2016, Switzerland ratified the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, extending the network of jurisdictions for exchange of information even further. Switzerland has implemented the legal basis for exchange of information on request with around 140 jurisdictions. In addition, Switzerland has signed ten tax information exchange agreements.

Under current law, administrative assistance may only be provided if the requesting state demonstrates in its request that the information requested is foreseeably relevant and confirms that it will treat the requested information confidentially. Administrative assistance may be refused if the information is to be used for taxation contrary to the DTA or if the requested information could not be obtained by the Swiss tax authorities under domestic tax procedural law.

Practice shows that foreign tax authorities are increasingly submitting requests for administrative assistance to Switzerland when auditing transfer prices, thereby requesting very comprehensive information and data. In this context, the Federal Tax Court (FTC) has – correctly in itself – decided that requested information for the verification of transfer prices must be exchanged. In doing so, the FTC referred in particular to the explanations of the OECD TPG in Chapter V regarding documentation (in the 2010 version). At the same time, the FTC stated that the OECD TPG are not binding for the court and merely represent an interpretative instrument. This means in the context of international exchange of information in tax matters that the provision of administrative assistance is not limited to the information required to apply a specific transfer pricing method. It is sufficient that there is merely a reasonable connection between the information requested and the facts described in the request for administrative assistance. As a result, the administrative assistance provided by Switzerland in transfer pricing cases can be very comprehensive and information is also transmitted that would not be required for the application of the methods defined in the OECD TPG

Spontaneous Exchange of Information on Specific Tax Rulings

Switzerland has implemented the spontaneous exchange of information on tax rulings into domestic law as of 1 January 2017. In particular, it has also committed to the spontaneous exchange of unilateral rulings on transfer pricing and permanent establishments with the state of the direct parent, the state of the group top company and, if available, the state of the counterparty of the transaction.

Automatic Exchange of Information on Country-by-Country Reports (CbCR)

As of 1 January 2017, Switzerland also signed the Multilateral Competent Authority Agreement on the Exchange of Country-by-Country Reports (MCAA CbCR). However, the MCAA CbCR will not be applicable between Switzerland and another state until the other state has also included Switzerland on its list.

Unilateral Rulings

Switzerland has a long-standing practice regarding the issuance of unilateral rulings. This practice also includes the issuance of unilateral transfer pricing rulings.

With respect to corporate income tax, cantons have the authority not only to assess cantonal and municipal taxes but also federal corporate income taxes. This means that the cantons can issue advance (tax) rulings not only regarding cantonal and municipal taxes but also regarding federal income taxes. However, the FTA still exercises an important supervisory function over the cantons and can also intervene in individual cases. In practice, the FTA is becoming increasingly involved in discussions, especially in large transfer pricing cases.

It should be noted that it is important to provide the competent tax administration with comprehensive documentation to keep the tax administration updated regarding the underlying facts of the unilateral transfer pricing ruling at all times, as the tax administration could challenge the validity of the ruling if the relevant facts have not been fully disclosed or new developments not communicated. Once a ruling has been granted, the facts on which it is based must be continuously monitored and changes must be identified, analysed and, if necessary, reported to the tax authorities.

Advance Pricing Agreements

In Switzerland, advance pricing agreements (APAs) are available. APAs have become a favoured option for Swiss-based international groups with complex or high-volume transactions. In practice, the procedure starts with a presentation of the facts and a formal request to the State Secretariat for International Finance (Staatssekretariat für internationale Finanzfragen, or SIF), the competent authority in Switzerland.

In 2020, 85 APA proceedings were opened, and 55 of the 304 pending APA proceedings have been closed. The SIF has published guidance on APAs.

With regard to bilateral and multilateral APA procedures, the competent authority in Switzerland is the SIF.

Concerning unilateral transfer pricing rulings for corporate income tax purposes, the cantonal tax administrations and the FTA will be the competent authorities.

Since the SIF is also the competent authority for mutual agreement procedures (MAPs), co-ordination between APA procedures and MAPs is ensured.

In principle, the APA programme is open for all taxpayers that engage in cross-border intra-group transactions.

The application for an APA procedure can be filed at any given time.

Under current practice, APA procedures are free of charge. However, the implementation costs in connection with a mutual agreement can in individual cases be charged to the taxpayer (Article 23, Federal Law on the Implementation of International Agreements in the Tax Field).

In practice, an APA will cover three to five years. However, Switzerland does not have specific time limitations that an APA may or may not cover. Rather, the time period to be covered by an APA has to be decided depending on the characteristics of the case at hand and is subject to negotiations. Hence, the duration is typically a trade-off between administrative-economical reasoning and the uncertainty concerning future developments of the transactions that are the subject of the APA.

Basically, unilateral rulings cannot have retroactive effect, as ruling requests can only be accepted if they concern future affairs.

However, as bilateral and multilateral APAs are based on the MAP provision of the respective tax treaty, the aforementioned restriction does not apply. Hence, APAs can, depending on the involved countries, have retroactive effect. However, the retroactive reach is limited to ten years by Swiss domestic law. In practice, Switzerland seeks to limit the retroactive effect of APAs to five years. The limiting factor in practice is often the legislation in the country of the counterparty, as only certain foreign tax authorities allow a roll-back period.

Transfer Pricing Penalties

Switzerland does not impose penalties that apply specifically in the transfer pricing context, except for violations of the CbCR requirements.

As a general rule, tax adjustments to values that are determined on a discretionary basis – as is the case with transfer pricing – have no criminal consequences. This principle only applies, though, to the extent that the provisions of commercial law have not been violated and the relevant transactions have been presented correctly in accordance with commercial law. However, violations of the arm’s length principle can, under certain circumstances, still be qualified as unlawful tax evasion (or tax fraud) and as such be subject to penalties. This is the case if basic principles of transfer pricing have been grossly neglected and, thus, the violation of the arm’s length principle is not only recognisable by the company or the persons in charge, respectively, but downright obvious. In such cases, it can be assumed that the transfer prices were deliberately set in violation of the arm’s length principle. Furthermore, ignoring an earlier correction by the tax authorities could also give rise to a violation of the arm’s length principle that could lead to prosecution. This would be the case, for example, if the tax authority had rightly objected to an assessment in previous tax periods and the taxpayer deliberately stuck to the original estimate or approach, respectively, without disclosing it to the tax authority.

In the case of tax evasion (or tax fraud), penalties may be imposed for all taxes involved. For instance, a transfer price-induced adjustment by the tax administration concerning corporate income tax may trigger respective consequences regarding withholding tax or VAT. In the case of corporate income tax, the penalties are determined based on the unlawfully evaded tax amount, whereas – if the respective year has already been finally assessed – the potential penalty ranges from one third of the evaded tax to three times that amount. In general, the fine is equal to the amount of the evaded tax. Mitigating circumstances, such as full co-operation, are taken into account when determining the fine for tax evasion – as shown by the only tax evasion case in the context of transfer pricing decided by the FSC to date. In this case, the evasion fine was set at 75% of the evaded tax due to full co-operation.

If the tax has not yet been definitively assessed, there may a case of attempted tax evasion, which reduces the penalty by one third. It is important to note that for the purposes of corporate income tax the fine is imposed on the company. Regarding withholding tax and VAT, however, the fine is directly imposed on the person(s) responsible for the violation. At least in these cases, the fine is not determined based on the amount of tax evaded, but according to a fixed fine range.

Documentation Obligations

Swiss tax laws – apart from the Federal Act on the international automatic exchange of country-by-country reports of multinational groups – do not define specific documentation requirements with respect to transfer pricing. However, taxpayers must provide all documents necessary in order to enable the tax administration to conduct a proper assessment of the taxable base. This legal obligation is based on the principle that the taxpayer and the tax administration jointly determine the relevant facts to ensure a complete and correct assessment as far as corporate income tax is concerned. In particular, taxpayers are obliged to provide the tax authorities with any information on transactions between associated companies upon request. As a consequence, despite the lack of specific documentation rules, taxpayers are strongly advised to have full and state-of-the-art transfer pricing documentation at hand that can, if requested by the tax administration, be disclosed. This also includes intercompany agreements with respect to the controlled transactions. Such documentation will also be helpful in the defence of potential tax evasion charges. Such documentation should also include sound and updated benchmarking studies. In addition, it should be noted, that with regard to MAPs and APAs, the master and local file as well as any other relevant information for the resolution usually have to be presented by the taxpayer.

If no appropriate transfer pricing documentation can be presented and the taxable base subsequently cannot be properly determined, the tax administration might need to estimate the transfer prices. Even though that estimate has to be dutiful and based on experience, such estimates are rarely in favour of the taxpayer. Although such an estimate is not to be considered as a penalty, it still has to be taken into consideration as a potential negative impact. The reason for that is that the courts will reject such an estimate only if the taxpayer can demonstrate that the transfer prices set by the tax administration are obviously flawed or arbitrary.

Penalty Relief

Federal and cantonal Swiss tax laws provide for a one-time voluntary disclosure, which leads to a complete penalty relief if specific statutory conditions are met. Outside the voluntary disclosure procedures, penalties charged are lower in the case of ordinary negligence and higher in the case of gross negligence. Collaboration with the tax administration in the course of a tax criminal investigation will usually result in a lower penalty. Regarding the question of culpability, the importance of state-of-the-art transfer pricing documentation should be emphasised. If a company does have such documentation, it will be difficult for the tax administrations to substantiate culpability. However, as indicated above, many disputes can be prevented or settled by negotiations with the tax authorities during a tax assessment or tax audit process (by filing formal complaints).

Back Taxes

It is worthwhile noting that criminally relevant violations of the arm’s length principle may also trigger back taxes. This is the case if the tax administration becomes aware of new facts or pieces of evidence that have not been disclosed to the tax administration with the tax return or during the ordinary tax assessment procedure. In order to levy back taxes the tax administration can reopen tax assessments as far back as for the last ten fiscal years.

Concerning transfer pricing documentation, Switzerland legally only requires preparing a CbCR. There is no legal obligation to prepare a master or local file.

However, in view of a potential challenge of the transfer prices by the tax authorities, it is nonetheless advisable to have master and local files (or similar documentation) at hand. In practice, tax authorities increasingly expect local files (at last broadly in line with the OECD TPG) for Swiss companies to be prepared by taxpayers in the event of a tax audit.

Though the OECD TPG are not implemented into domestic law, the administrative practice has declared the OECD TPG as applicable. The importance of the OECD TPG for administrative practice is underpinned by the paper on transfer pricing recently published by the FTA, which makes strong reference to the OECD TPG.

Nonetheless, a caveat is made regarding the application of thin capitalisation rules and the determination of intra-group interest rates for loan receivables and loan payables both in Swiss francs and in foreign currencies. In this regard, the FTA annually publishes safe haven interest rates that deviate from the arm’s length principle as defined and agreed upon in the OECD TPG (see 11.1 Transfer Pricing Safe Harbours).

There is a long tradition in Swiss tax law of applying the formulary apportionment method for the profit allocation between the Swiss head office of an enterprise and its foreign permanent establishments. However, Switzerland now follows the OECD-authorised approach for the attribution of profits of permanent establishments (AOA). The FSC has, in its ruling in the matter of Swiss International Airlines, even shown sympathy for the application of the AOA also in domestic matters, but ultimately left the question open. In this respect, it should be noted that Switzerland has numerous DTAs in force that are still based on the OECD Model Convention, where the application of the formulary apportionment method for the allocation of profits to permanent establishments was considered permissible. However, Switzerland tends to follow the AOA even if a tax treaty has not yet been updated regarding the new Article 7.

Besides the above-mentioned exceptions, deviations from the arm’s length principle can be seen in the implementation of the patent box and the notional interest deduction, which were introduced in connection with the corporate tax reform that came into force on 1 January 2020.

In line with BEPS Action 5, cantons are allowed to exempt income from patents and similar rights from taxation up to 90%. To determine the qualifying income, a top-down approach is used. Thereby, income from routine activities and trade marks is to be excluded, thus being subject to ordinary taxation. According to the FTA, it is not necessary to determine the income for routine activities and brand use by means of transfer pricing studies. Instead, for reasons of practicability, the law provides for fixed margins. For the income of routine functions, a mark-up of cost plus 6% is defined, and concerning the income of trade marks, as a rule of thumb, 1% of the turnover of the patent box is regarded as appropriate. However, the right to prove higher or lower income from trade marks based on the arm’s length principle is reserved.

The law also provides for simplifications in connection with the notional interest deduction (only available in the canton of Zurich). The special feature of the Swiss notional interest deduction is that it is only possible on the so-called security equity. For this purpose, core and security equity must be determined in a first step. The law does not require the preparation of a transfer pricing study for this purpose.

For reasons of practicability, the regulation rather provides for equity backing rates for the individual assets, following the circular on thin capitalisation and its inversed maximum safe haven debt capacity rates (for example, for intercompany loans, a minimum equity rate of 15% is required). If these rates are exceeded, there is security capital on which an imputed equity interest deduction can be claimed. In general, this interest is also not determined on the basis of the arm’s length principle. Rather, the law provides for the interest rate for ten-year federal bonds. However, to the extent the security capital is attributable to receivables from related parties, an interest rate corresponding to the arm’s length principle may be applied.

In general, the BEPS project had a major impact on the Swiss tax law landscape. Based on BEPS Action 5, Switzerland agreed to spontaneously exchange certain tax rulings, and based on BEPS Action 13, to the exchange of country-by-country reports (see 6.1 Sharing Taxpayer Information).

Moreover, Switzerland abolished the administrative practices on Swiss finance branches and principal companies (see 1.2 Current Regime and Recent Changes). The BEPS project raised the awareness of transfer pricing considerably, prompting the tax administrations – at cantonal and federal level – to address this issue more frequently and persistently (see 1.2 Current Regime and Recent Changes).

Switzerland is in favour of long-term, broad-based multilateral solutions instead of a multitude of (confusing) national measures. Thus, in principle, Switzerland supports the parameters of the discussed rules regarding the international profit reallocation of large multinational entities (MNEs) according to Pillar One as well as the minimum taxation global anti-base erosion (GloBE) rules according to Pillar Two, in order to restore legal certainty for countries and corporations.

Pillar One

Regarding Pillar One, Switzerland advocates that the interests of small, economically strong countries be taken into account in the implementation. Although in principle Pillar One works in both directions, Switzerland exports much more than it imports, as it creates attractive location conditions for a wide range of industries while is itself a small but nevertheless important consumer market.

Pillar Two

On 18 June 2023, the Swiss electorate voted on the implementation of the OECD/G20 minimum taxation (and the creation of the constitutional basis for the introduction of Pillar One), with the proposal being approved by 78.5%. The referendum was necessary as the introduction of the OECD/G20 minimum taxation required an amendment to the Federal Constitution. This was because the OECD/G20 minimum taxation would have contradicted the constitutional principle of equal treatment of taxpayers. With the approval of the constitutional amendment, which came into force on 1 January 2024, the Federal Council enacted the ordinance on minimum taxation at federal level on the same day. At the same time, some cantons also decided to increase tax rates for companies.

It should be noted, however, that the minimum taxation in Switzerland is currently limited to the national supplementary tax (Qualified Domestic Minimum Top-up Tax, QDMTT). The Federal Council has refrained from applying the international supplementary tax rules (Income Inclusion Rule, IIR and Undertaxed Profit Rule, UTPR), which are provided for in the ordinance, for the time being. The partial introduction of the minimum taxation results in a tax increase for Swiss corporate groups and in particular US corporate groups with directly held Swiss constituent entities, provided the GloBE effective tax rate ETR in Switzerland is below 15% (and no corresponding substance-based income exclusion applies). However, there will generally be no additional tax burden for corporate groups from countries that introduce an IIR from 1 January 2024.

The reasoning of the Federal Council for this partial introduction of the minimum taxation is the aim of preventing the erosion of the Swiss tax base in favour of other countries. In contrast, an IIR would currently lead to the capture of under-taxed tax substrate from abroad, with negative effects on Switzerland’s attractiveness as a business location. As things stand at present, it is expected that Switzerland will apply all measures, including the UTPR, from 2025 if at least the EU member states have introduced the UPTR by this point, which is to be expected based on the current legal situation.

It is obvious, that Pillar Two (as well as Pillar One) poses major challenges for Switzerland. Low taxes, clearly a locational advantage for Switzerland, will lose importance. However, the liberal economic system – in particular, the liberal labour law – good infrastructure, the first-class education system and the comparatively moderate corporate tax burden are reasons why Switzerland is, and will continue to be, a popular location for group headquarters and entrepreneurial activities that yield high residual profits, despite quite high labour costs by international standards.

Even though the effective Swiss tax burden may increase for multinational companies that fall under the Pillar Two regime, their higher tax costs may be offset by other benefits: the cantons are analysing how to use the expected additional tax revenues from the additional qualified domestic top-up tax, and it can be expected that they will take measures to maintain and even improve their attractiveness. In this context, the instrument of the Qualified Refundable Tax Credit (QRTC) will play an important role.

Given this situation, there will also be a significant tax rate differential between Switzerland and many other jurisdictions after Pillar Two, so foreign tax authorities are expected to continue to be increasingly interested in intra-group transactions with Swiss companies.

From a contract and commercial law perspective, a group can freely allocate risks and functions to be assumed between its entities. With a view to the acceptance of such an allocation, the FSC held, in favour of the taxpayers, that the tax administration must recognise the contractual distribution of functions and risks undertaken by group entities, if these were not merely sham structures.

However, as the tax administrations are also following a substance-over-form approach in the area of transfer pricing, the splitting up of the assumption of risks and functions is increasingly questioned by the tax authorities. In particular, the tax administrations will evaluate whether the personnel of a risk-bearing entity were effectively able to manage and control the assumed risks.

The UN Practical Manual on Transfer Pricing is of only minor importance in Swiss transfer pricing practice.

There are safe harbour rules that apply to thin capitalisation and to interest rates that are regularly used by corporate taxpayers (see 9.1 Alignment and Differences).

Thin Capitalisation

The FTA published thin capitalisation rules in its Circular Letter No 6 (6 June 1997). In this circular, the maximum debt is determined according to maximum debt capacity ratios that apply for each asset category. No interest expense can be made on debt that surpasses this maximum debt amount (to be considered as constructive dividend distribution). Special safe haven rules might apply on the level of the Swiss cantons (eg, a maximum debt ratio of 6/7 in the canton of Zug).

Interest Rates

Furthermore, the FTA annually publishes circular letters providing inbound and outbound safe harbour interest rates on long-term intercompany loan receivables and payables.

The FTA, in principle, allows taxpayers to deviate from the conditions set out in the above-mentioned circular letters if the taxpayer can prove that the applied interest rate is at arm’s length by performing and providing a detailed transfer pricing analysis.

Switzerland does not have any specific rules relating to location savings and relies on the OECD TPG on this issue. However, Switzerland does not provide notable location savings in the sense of the OECD TPG as production and labour costs are comparatively high.

Switzerland does not have unique transfer pricing rules and, in principle, adheres to the OECD TPG.

Switzerland levies VAT on imported goods (import tax) of 8.1%, where the tax is assessed on the respective consideration. The import tax is levied by the Federal Customs Administration, which acts, like the FTA, as an independent administrative body of the federal government.

Despite the fact that the FTA and the Federal Customs Administration act independently, the administrations are entitled and encouraged to exchange relevant information between themselves and with other interested administrative bodies. The information exchange has massively increased within the past couple of years, which is mostly due to improved electronic systems, allowing a comprehensive and steady data flow. Hence, transfer pricing adjustments should always be considered for import tax purposes, as well.

Regarding customs duty, no adjustment is generally required as the customs duty itself is based on weight and not on monetary value. It is to be noted that Switzerland has abolished levying customs duty on industry products as of 1 January 2024.

General

Transfer pricing issues can generally be raised by the tax administration in the course of ordinary tax assessments or in the course of audits. For the transfer pricing controversy process, whether a cantonal tax administration or the FTA raised the issue of transfer pricing has to be differentiated. While the cantonal tax administrations raise this issue in the context of corporate income tax, the FTA may also challenge transfer pricing with regard to withholding tax, stamp duty or VAT.

As will be shown, taxpayers may challenge the results of a tax assessment or of an audit in an administrative objection proceeding before bringing the case to court. As regards the selection of the courts, the taxpayer does not have options since the competent courts are determined by law.

Corporate Income Tax

Transfer pricing adjustments affecting corporate income tax have to be discussed with the cantonal tax administrations, as they are the competent authorities to assess and levy corporate income tax at cantonal and federal level. If a tax administration has already issued an assessment or a decision, a formal objection can be lodged with the tax administration itself within 30 days. The tax administration will then have to evaluate the material objections and render a new decision.

The tax administration’s second decision can be appealed before court, again within a 30-day deadline. Generally, each canton provides two judicial instances; though, typically, smaller cantons only establish one judicial instance.

Once the highest cantonal court has rendered its decision, an appeal with the FSC can be lodged, also within 30 days. In contrast to the cantonal instances, the FSC will only deal with questions concerning the correct application of the law, which includes the application of the OECD TPG as soft law. Issues concerning the facts will only be dealt with if the facts were arbitrarily established. In the context of transfer pricing, it is worth noting that the choice of the transfer pricing method and its correct application is a question of law, whereas the result is considered a factual question. Hence, regarding the determination of the arm’s length remuneration, the FSC can only intervene if the remuneration appears arbitrary.

The disputed tax needs to be paid irrespective of the fact of appealing a decision or moving the case forward into court. If the appeal/objection is successful, the tax already paid will be paid back, with interest. However, the FSC clarified that the tax administration is not entitled to enforce the disputed tax amount as long as the controversy has not been decided with legal effect. Nevertheless, the tax authority may request a freezing order at any time, even before the tax amount has been legally determined, if the taxpayer is not domiciled in Switzerland or payment of the tax owed by them appears to be at risk. The freezing order is immediately enforceable and has the same effects in the debt collection proceedings as an enforceable court judgment.

Withholding Tax, Stamp Duty and VAT

In contrast to the cantonal tax administrations, the FTA can raise transfer pricing issues in connection with withholding tax, stamp duty and VAT. As at the cantonal level, the taxpayer can object to a negative decision of the FTA before appealing to the court.

As such a decision affects taxes being levied by a federal administrative authority, the appeal has to be lodged with the Swiss Federal Administrative Court (FAC)– within 30 days. This court’s decision can then – again within 30 days – be appealed with the FSC.

Due to Switzerland’s practice of issuing transfer pricing rulings and its APA programme, disputes on core transfer pricing issues that have to be settled by courts are relatively rare. Nevertheless, the FSC as well as the FAC have recently issued important decisions that raise key issues in the field of transfer pricing. Furthermore, it can be observed that cantonal courts are also scrutinising transfer pricing in more detail and increasingly refer to the OECD TPG.

FAC Decision A-4976/2022 of 4 September 2023

Although this case was not decided by the FSC, the ruling of the FAC nevertheless contains interesting and important considerations with respect to the selection and application of transfer pricing methods; especially concerning financial service transactions. The case at hand concerned Company A (“A AG”) – an asset manager operating in Switzerland. A AG had outsourced part of its activities to two companies domiciled abroad, Company B (“B Ltd.”, domiciled in Hong Kong) and Company C (“C AG”, most likely domiciled in Germany). These companies were each owned by different shareholders, with individual I holding a direct or indirect stake in all companies to varying degrees. In addition, his two sons held substantial shares in A AG and one of these sons also held a substantial share in C AG.

With regard to the services provided by B Ltd. and C AG, the FTA was of the opinion that the services had been provided at an excessive price and made adjustments for the 2015 and 2016 tax periods. With regard to the services provided by C AG, which essentially related to the creation of model portfolios, the FTA justified its assumption of an obvious mismatch on the fact that two employees of A AG also worked for C AG, whereby they had an hourly rate of CHF60 at A AG and C AG charged CHF300 per hour for the creation of the model portfolios. The FTA concluded that the hourly rate charged by C AG was obviously too high and not in line with the arm’s length principle. It reached the same conclusion with regard to B Ltd., which provided services to A AG for “non-discretionary investment advisory” and “Asia market news”. To the extent that the dealing at arm’s length principle was violated, the FTA assumed a deemed dividend and levied WHT of 35%.

With regard to the assumption of a deemed dividend by the FTA, the FAC first pointed out that the tax administration has to prove the existence of an obvious mismatch between the service rendered and its consideration. Once this proof has been provided, the person concerned has the opportunity to provide evidence to the contrary. With regard to the assumption of an obvious mismatch, the FAC further stated that such a mismatch could only be assumed if the actually agreed prices lay outside the benchmark range for arm’s length conditions. For the determination of the benchmark, the FAC acknowledged that the hierarchy of methods according to the OECD TPG has to be respected. Thus, firstly, an effective comparison has to be sought. Only if there is no effective comparison should the applicability of the various transactional standard methods be assessed, whereas the CUP has priority. With regard to the application of the cost plus method (CPM), the FAC stated that the relevant cost base included all direct and indirect costs.

Against this background, the FAC held that the FTA’s approach had violated the methodological hierarchy according to the OECD by relying exclusively on the CPM. In addition, the FTA only considered the labour costs and did not take into account any other direct or indirect costs to determine the relevant cost base. In the opinion of the FAC, the FTA wrongly relied on the CPM and also applied it incorrectly. As a result, it referred the case back to the FTA for reassessment.

This ruling is part of a series of more recent rulings that heavily refer to the OECD TPG and make extensive statements on transfer pricing methodology. For example, in a case that has not yet been legally decided, the competent court of first instance dealt in detail with the question of the lege artis performance of a benchmark analysis. This development is to be welcomed, as the systematic application of the OECD TPG creates legal certainty and prevents seemingly arbitrary assessments by the administration.

FSC Decision 9C_686/2022 of 14 March 2023

In this decision the FSC dealt with the question of whether a real estate management fee of 20% on the gross rental income charged by a fund to one of its special purpose vehicles was, in fact, at arm’s length. In the case at hand, a foreign pension fund invested – inter alia – indirectly into Swiss real estate via Company A (“A GmbH”), which was held by foreign companies without notable substance. The fund management was provided by a foreign asset manager H. For its services asset manager H charged a fee of 1.25% based on the assets under management to the fund which in turn charged 20% on the gross rental income generated by the real estate held by A GmbH to A GmbH itself (the allocation of the fee was based on the real estate assets managed by the fund).

The FTA contested that the fee should be calculated on an arm’s length basis and was of the opinion, that – according to practice applicable for pure real estate companies – only 5% calculated on the gross rental income generated by the real estate held by A GmbH (equal to CHF200,000) would qualify as a commercially justified administration fee. In addition, the FTA argued that the fee paid by the fund to asset manager H also covered services in favour of other real estate held by the fund outside of Switzerland. Accordingly, the FTA held that A GmbH could only be charged for services that could directly be attributed to the activities of A GmbH. Thus, the amount exceeding the 5% threshold was qualified by the FTA as deemed dividend and as such subject to 35% WHT. According to the FAC, the significant discrepancy indicated that A GmbH provided a benefit without a corresponding equivalent consideration. It was questionable, for instance, whether a single piece of real estate, of whose rental income 80% was attributable to a single tenant, required specific management services at all. Furthermore, the lack of a contract between asset manager H and A GmbH showed that the service had its legal basis in the shareholding relationship and had an unusual character. The mere listing of the services allegedly provided or invoiced was not sufficient evidence.

Against the FTA’s position, A GmbH argued that it was to be regarded as an economic unit with the fund and, thus, not as a pure real estate company. As a consequence, the 5% limit could not be applied since this limitation only applies for pure real estate companies. Furthermore, A GmbH argued that there was neither a mismatch between the management fee and the services consumed by A GmbH nor would an eventual mismatch have been recognisable for the management of A GmbH. This was due to the fact that asset manager H was an independent third party and the remuneration of asset manager H was, by definition, at arm’s length. The lack of a contract between asset manager H and A GmbH was justified by considerations of practicability.

The FSC essentially supported the arguments of the FTA and the FAC. However, the FSC amended the findings of fact in line with the statement that A GmbH had conceded in the proceedings before the FTA that the services provided by asset manager H in the area of investment advice were marginal. The services were essentially limited to the real estate management of the property held by A GmbH – ie, so-called facility services. For such services, compensation of only 2–6% of the annual gross rental income can be considered as customary and, thus, at arm’s length. Against this background, the 5% fee according to FTA practice is not objectionable.

This ruling, although it may well be correct in its result, gives rise to the following issues: As shown, the FTA’s practice provides for a 5% fee for administrative costs. However, this percentage should be limited to the purely technical administration costs and not also include asset management. In addition, the 5% fee should be interpreted as a safe haven rule, which means that proof of remuneration in line with third-party comparisons should always be reserved, provided, however, that the services in question can be documented. However, practice shows that the tax authorities tend to use the 5% rule as an at arm’s length benchmark, which is certainly not in line with the OECD TPG

FSC Decision 2C_907/2022 of 16 December 2022

In this case, a Swiss entity with domicile in Geneva (“A SA”) held a subsidiary in Gibraltar, which, in turn, held directly and indirectly 79.53% of Company D with domicile in the British Virgin Islands (BVI). A SA was active in the business of asset and fund management and was, as far as was evident, operationally run by individual B, the sole shareholder of A SA. For the sake of completeness, it is worth mentioning that the name of the shareholder and A SA can be tracked down using the information in the anonymised decision and that the person concerned was also mentioned in the Panama Papers.

Company D, for which B served as a director, owned shares in various companies, whereas the assets were managed by B who received a salary from A SA of around CHF700,000 per year. A SA, however, did not charge Company D for the services of B. Further, Company D had no employees or any other physical substance. In light of these facts, the tax administration of the Canton of Geneva was of the opinion that A SA should have been compensated by Company D at arm’s length and added 79.53% of Company D’s earnings to the earnings of Company A. This offset was challenged by A SA, which ultimately brought the case to the FSC.

The FSC ruled, inter alia, that the approach taken by the tax administration of Geneva was not in line with the arm’s length principle. According to the FSC, the tax administration should have analysed the value of the services rendered by B to Company D and set the respective service fee accordingly. However, the FSC nevertheless confirmed the offset of 79.53% arguing that the established structure was abusive and served only the purpose of avoiding taxes. According to the FSC it would have been much more logical if the funds were managed directly by A SA. Following this line of argument, the earnings of Company D were added to the earnings of A SA to the extent of 79.53%.

This case shows that the law provides tax administrations with different means to prevent undue profit shifting to offshore jurisdictions. The FSC, however, upholds that corrections based on transfer pricing principles have to be justified according to best practice. Simple lump-sum offsets are therefore inadmissible from the perspective of transfer pricing. In specific cases, however, this does not protect the taxpayer from corresponding offsets.

Switzerland does not have any specific rules or even restrictions regarding uncontrolled outbound 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, a “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 outbound payments to a non-DTA foreign country or to a DTA foreign country to the extent that the DTA does not yet meet the current OECD standard on information exchange. The reasoning is that the circumstances of the foreign recipient are beyond the control of the domestic tax authorities.

Switzerland does not have specific rules regarding the effects of other countries’ legal restrictions. In the event that a foreign entity is affected by an adjustment of a payment to a Swiss entity due to such restrictions, a double taxation is most likely to be incurred.

However, Swiss tax authorities may prevent a double taxation with unilateral measures if they agree to the reason and extent of the correction. Otherwise, a MAP would need to be initiated if a double taxation agreement is applicable.

In Switzerland, taxpayer information is kept strictly confidential. Thus, results from APAs and transfer pricing audits are not published.

However, it is to be noted that court rulings (excluding the reasoning) are made publicly available at the court for 30 days, whereby the names are generally not redacted. The FAC, as an exception, also redacts the names during the temporary public disclosure. After the public disclosure, rulings are published online with the names redacted. Despite the redactions, it cannot be excluded that from the other pieces of information of the decision, the party concerned can be identified. Outside of the administrative procedure, tax secrecy is therefore not guaranteed.

In principle, Switzerland adheres to the OECD TPG and follows the principle according to which the tax administration is prohibited from basing transfer pricing adjustments on secret comparables.