Intra-group tax writebacks: secondary adjustment or compensatory payment

Are you facing complex international tax adjustments that could double your group's tax burden? Avoid letting these adjustments penalize your results: optimize your tax strategy with the excess profit repatriation mechanism.

After examining the stages of correcting taxable profits through primary adjustments in our first article (read it here) and mutual agreement procedures (correlative adjustments) in our second (discover it here), we conclude this trilogy on the tax challenges of cross-border intra-group transactions. This article highlights the repatriation of excess profits as a critical tool to eliminate double taxation and enhance corporate competitiveness, drawing from recent Swiss practice developed under the LECF.

Repatriation of Excess Profits (art. 25 MC OECD | art. 2 - 23 LECF)

The repatriation of excess profits is a mechanism introduced as part of mutual agreement procedures (MAPs) to prevent the application of a secondary adjustment, which would otherwise tax excess amounts as hidden dividend distributions. These distributions are subject to a Swiss withholding tax of 35%, unless a declaration procedure has been established, respectively the beneficial owner identity has been disclosed.

In the context of a MAP, repatriating excess profits allows the taxpayer to avoid secondary adjustments and corresponding withholding tax. This mechanism facilitates the transfer of excess profits, confirmed in the mutual agreement, back to the relevant Swiss entity. Repatriation can take various forms, including an actual monetary transfer, a partial reimbursement of initial transfer prices deemed excessive, or an adjustment of intercompany accounts (e.g., opening a current account). While adjusting intercompany accounts remains a possible option, it is not recommended due to the fiction of payment. For repatriation to be valid, it must strictly comply with the conditions and deadlines specified in the MAP or internal convention. Typically, the written agreement sets a 60-day deadline, contingent upon taxpayer approval. The taxpayer must also provide proof of payment to the Federal Tax Administration (FTA) via the State Secretariat for International Financial Matters (SIF).

Withholding tax thus avoided, the repatriated amount is recorded as extraordinary income in the Swiss company's commercial balance sheet. However, it is excluded from the taxable income base for corporate income tax purposes, in accordance with the mutual agreement. This treatment ensures that repatriation does not trigger additional income tax burdens. Moreover, Art. 18 para. 4 LECF specifies that any compensatory payments from Swiss companies to foreign entities are also exempt from withholding tax, provided they are executed under a MAP or internal convention.

Withholding Tax Refund (art. 25 MC OECD | art. 24 - 33 LECF)

If no compensatory payment is made, or if its conditions for exemption from withholding tax are unmet, the latter becomes due. The rules under the Federal Withholding Tax Act (WTA) therefore apply.

Given the protracted nature of out-of-court settlements, the 3-year deadline frequently expires before the conclusion of a mutual agreement. To address this issue, the LECF provides an additional 60-day period to submit a refund claim, under the following circumstances:

Withholding tax is paid and transferred only after a dispute with the FTA; and
The original 3-year period has already expired or will expire within less than 60 days.

In such cases, it is crucial to defer payment until the group or taxpayer is confident that the 60-day deadline can be met, if applicable.