Swiss Tax – The One Pager

Background

B. AG granted an unsecured loan to the Zurich branch of its subsidiary A. AG. The interest rates were set at 2.5% for the loan and at 3% for the current account. The cantonal tax administration of Zurich considered that the loan between related parties had been granted on terms that did not comply with the arm’s length principle. A. AG had therefore provided monetary benefits subject to corporate income tax. The tax authorities determined the applicable market interest rate for both the loan and the current account at 1.08%. This interest rate corresponds to the average cost of debt of B. AG of 0.83% plus a margin of 0.25%. The taxable income of the permanent establishment of A. AG was corrected accordingly. The Administrative Court of the Canton of Zurich partially upheld the corresponding appeal and confirmed a monetary benefit only in the difference between the agreed interest rates (2.5% or 3%) and the maximum interest rates according to the relevant FTA circular letter (so-called “safe haven” interest rates). The Zurich cantonal tax authorities filed an appeal against the decision of the Administrative Court with the Federal Supreme Court.

Applicability of the FTA circulars

In its decision, the Federal Supreme Court stated that the FTA circular letter – contrary to the opinion of the Zurich tax authorities – is not only applicable to direct federal tax, but also to state and municipal taxes. This is because corporate income tax law is a harmonized matter.

Binding nature of the “safe haven” interest rates

In principle, the tax authority is required to adhere to the “safe haven” interest rates set out in the FTA circular letter. The Federal Supreme Court has ruled that this can only apply provided that the taxpayer adheres to the “safe haven” maximum interest rates when setting interest rates on loans from participants or related parties. In the event of a discrepancy between the agreed interest rate and the arm's length principle, the tax authority may set a market interest rate without having to observe the interest rates set out in the circular letter. In the present case, the assessing authority permissibly applied a market-conform interest rate below the maximum “safe haven” interest rate. As the taxpayer deviated from the circular deliberately, the tax authority was not bound by it.

Key take-aways

• The decision reduces the binding nature of the “safe haven” interest rates in accordance with the FTA circular letter at the expense of legal certainty.
• Interest rates that deviate from the “safe haven” interest rates may be determined by the competent tax authorities without being bound by the FTA circular.
• Correct wording in the corresponding loan agreements is of central importance.