Swiss Supreme Court Clarifies Safe Harbour Rates for Intra-Group Loans

In a decision published on 17 July 2024, the Swiss Federal Supreme Court took a position on the determination of interest rates applicable to intra-group loans where these deviate from the rates accepted for tax purposes by the Federal Tax Administration (hereinafter ‘FTA’; hereinafter ‘safe harbour rates’). In the case in point, a Zurich company received two loans from its parent company at interest rates higher than the safe harbour rates. If the company is unable to prove that its interest rates are in line with the market price, the cantonal tax administration is entitled to set a market interest rate lower than that determined by the FTA in its directives.

The FTA publishes an annual circular setting out the safe harbour interest rates for intra-group loans. The interest rates thus set constitute a range within which the interest paid is considered to comply with the arm's length principle. By complying with these rates, the taxpayer avoids recharacterisation as a hidden distribution of profit.

According to established case law, the tax authorities must in principle adhere to the safe harbour interest rates set out in the FTA circulars. However, if the taxpayer deviates from these rates and sets higher interest rates for loans payables from related parties without being able to prove that they comply with the arm's length principle, the tax authorities are no longer bound by this principle. The tax authorities can set an interest rate that is lower than the maximum interest rate allowed for tax purposes by providing evidence of compliance with the arm's length principle.

Our High Court emphasises that the safe harbour rates serve to simplify administration and that this purpose is no longer fulfilled if the taxpayer sets an interest rate higher than the maximum rate provided for in the circular. In such a case, the tax authority is in any case obliged to check whether the interest rate invoked is in line with the market and may therefore depart from it if it does not reach the same conclusions.

In this decision, the Federal Court also points out that the circulars published by the FTA also apply to cantonal and municipal taxes and are not limited to direct taxes.

Our experts can assist you in your dealings with the authorities to obtain tax certainty on the remuneration of your intra-group loans by preparing a transfer pricing study and filing a ruling.