Swiss Court Rules Safe Harbor Interest Rates May Not Be Binding

The Swiss Federal Supreme Court ruled on the binding effect of safe harbor interest rates issued annually by the Swiss federal tax administration.

In its landmark decision of July 17, published Aug. 9, the highest court ruled that the tax administration isn’t bound by the published interest rates if the rates agreed between affiliated companies are below or above the published minimum or maximum interest rates.

Multinational groups that have financial transactions with Switzerland and set an interest rate outside the safe harbor rates will no longer be able to rely on these annually published interest rates during a tax audit. Instead, they will be required to prepare transfer pricing documentation and demonstrate to the Swiss tax administration that the interest rate is at arm’s length.

Safe Harbor Circulars

At the start of each fiscal year, the Swiss tax administration publishes a circular containing the interest rates relevant for the calculation of deemed dividends, in German and French. The purpose is to facilitate application of the arm’s-length principle to interest rates on intercompany loans.

These rates are safe harbor rates, meaning that if taxpayers follow these rules, the tax administrations will accept the interest rates. But if taxpayers don’t follow the safe harbor rates, the burden of proof is reversed and the taxpayer must prove that the interest rates are still arm’s length.

This annual circular is basically a practical tool for setting interest rates for intragroup loans to reduce the administrative burden on taxpayers. However, the circular is short, and it’s not always clear to a layperson unfamiliar with the subject under what conditions these rates can be applied. Various aspects are open to interpretation and not explicitly addressed. With its decision, the federal supreme court provides clarity.

The highest court adopted a “quid pro quo” approach: The rates are binding on the tax administration only if the taxpayer complies with them. If the taxpayer doesn’t comply, the tax administration can ignore the circular and determine an arm’s-length interest rate as part of the assessment. Like the taxpayer, the tax administration doesn’t have to comply with the circular.

If taxpayers set interest rates outside the safe harbor, they will have to prove through transfer pricing documentation and a benchmark study that the interest rate is still at arm’s length. This will lead to a further tightening of transfer pricing in Switzerland.

The Case

A foreign group company granted an unsecured loan of 500 million Swiss francs ($590 million) at an interest rate of 2.5% and an overdraft facility of 500 million Swiss francs at an interest rate of 3.0% to a Swiss permanent establishment of another foreign group company. The Zurich cantonal tax administration didn’t consider these interest rates to be at arm’s length and accepted a rate of only 1.08%, calculated using its own methodology.

The Zurich cantonal administration appellate court also considered the interest rates not to be at arm’s length, but only made an adjustment up to the difference to the maximum interest rates in accordance with the Swiss tax administration’s annual circular on interest rates—1.5% and 2.0% in the relevant tax periods.

The Swiss supreme court judges had to decide in this case whether the circular was still binding on the Zurich cantonal tax administration, which would have limited the profit adjustment to the difference between the maximum safe harbor rates, instead of 1.08%.

The court clarified that the safe harbor rates are no longer binding on the tax administration if the taxpayer doesn’t comply with them. According to the court, there is neither a violation of the protection of legitimate expectations nor of the constitutional principle of equal treatment, since the taxpayer itself deviated from the Swiss tax administration’s interest rates.

Finally, the deviation from the interest rates would also frustrate the purpose of the safe harbor rules—administrative simplification—as the tax administration in these cases would have to check whether the interest rate claimed is in line with the market.

Transfer Pricing Practice

The Swiss federal tax administration published a Q&A on Swiss transfer pricing practice at the beginning of 2024, now available in English. A large part of this Q&A deals with financial transactions.

As part of a benchmark study, the Swiss tax administration expects—in accordance with OECD transfer pricing guidelines—that aspects relevant to pricing such as maturity, start date, currency, rating, and any guarantees or collateral are taken into account. However, the rating should focus less on the borrower’s rating and more on the rating of the financial transaction. This includes any collateral, for example.

In the absence of a rating from an independent rating agency, the taxpayer must determine the rating—for example, by using the same methodology as rating agencies or by using rating software. If a loan is granted in a foreign currency, the federal tax administration expects a justification. In addition, it must always be examined whether realistic financing alternatives would have been available to the borrower. The federal tax administration will in future focus not only on whether the controlled loan bears an arm’s-length interest rate, but also on whether the financial transaction itself is at arm’s length.

In the future, multinational groups will have to search for comparable transactions in Switzerland based on the above aspects in order to benchmark the interest rate for the intragroup transaction.

The case is No 9C_690/2022, Bundesgericht Tribunal fédéral, decided July 17, 2024.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Thomas Hug is a partner with Deloitte Switzerland, leading the firm’s national tax office, and co-authored the first comprehensive book on transfer pricing in Switzerland.

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