Intra-group tax write-backs: correlative adjustment and amicable procedure

Under its double taxation treaties (DTTs), Switzerland has established mutual agreement procedures in line with Article 25 of the OECD Model Convention. Since January 1st, 2022, these procedures have also been governed by the Federal Act on the Execution of International Tax Treaties (LECF). Their main objective is to eliminate economic double taxation (so-called "correlative" adjustments), which frequently arises in the event of a transfer pricing adjustment by a foreign tax authority (so-called "primary" adjustment).

As we discussed in our November 22, 2024 article on intra-group transactions with cascading tax consequences, three types of tax adjustments are to be expected in the event of an adjustment made the tax authorities:

Primary adjustment: Initial reassessment of taxable profits by a tax authority, often following audits of intra-group transactions.
Correlative adjustment: Correction in the foreign country to offset the primary adjustment and avoid double taxation.
Secondary adjustment: Adjustment to correct differences between tax and commercial accounts and, depending on the procedure followed (mutual agreement or domestic treaty), taxing excess amounts such as hidden dividends through Swiss withholding tax.

By clarifying the rules on correlative adjustment, introducing the domestic convention, and dealing with the resolution of double taxation through mutual agreement procedures, the LECF marks an important step in the evolution of international taxation in Switzerland.

Internal agreement (art. 16 LECF)

As part of a drive to modernize and simplify Swiss tax tools in response to an increase in international tax disputes, the LECF introduced a mechanism to simplify the handling of double taxation cases in Switzerland, enabling tax authorities to resolve certain disputes without resorting to the traditional mutual agreement procedure, which involves bilateral negotiations between states.

This procedure enables the Swiss tax authorities to resolve obvious cases of double taxation unilaterally, without having to resort to the bilateral phase of a mutual agreement procedure with foreign tax authorities (which is often long and uncertain).

Following the submission of a mutual agreement procedure request by the taxpayer concerned, in cases of double taxation or risk of double taxation, the competent cantonal tax authority, together with the Secretariat for International Tax Matters (SFI), will examine the request. If these two authorities agree, in a clear and unambiguous manner, that a correction needs to be made at Swiss tax level (for example, when a Swiss company has been overpaid in an intra-group transaction, violating the arm's length principle), they may conclude an internal agreement with the company concerned. A correlative adjustment is thus agreed in Switzerland, without having to negotiate with a foreign tax authority.

Mutual agreement procedure (art. 25 MC OECD | art. 2 - 23 LECF)

Once a request for a mutual agreement procedure has been filed with the SFI by the taxpayer concerned, the SFI examines the admissibility of the request, the criteria for applicability of the agreement, and the facts and adjustments in dispute. If art. 16 LECF cannot be applied, the SFI informs the competent authorities of the states concerned that a mutual agreement procedure has been opened in Switzerland. The SFI then initiates discussions with a view to reaching partial or total agreement on the primary adjustment and/or the establishment of a correlative adjustment to avoid double taxation.

If negotiations are successful, a mutual agreement binding on the tax authorities is signed (and by the taxpayer if agreed), setting out the terms of the adjustment and any corrective measures. By approving the agreement, the taxpayer concerned waives all legal remedies in relation to the subject matter of the agreement. In addition, the taxpayer undertakes to immediately withdraw from any legal action already taken.

The implementation of a settlement agreement in Switzerland naturally raises the question of the accounting and tax treatment of group companies following the primary or correlative adjustment. The so-called "secondary adjustment" and compensatory payments will be dealt with in our 3ème and final article on.