Swiss safe harbour intercompany interest rates for 2023 announced
On 7 and 8 February 2023, the Swiss Federal Tax Administration (“SFTA”) published the Swiss safe harbour interest rates applicable for the year 2023, both for intercompany (“IC”) loans and advances denominated in Swiss francs (Circular Letter No. 203) as well as in foreign currencies (Circular Letter No. 204). These rates are used by the SFTA to determine the arm’s length nature of interest on intragroup loan receivables or payables and provide a level of tax certainty from a Swiss tax perspective, in absence of a bespoke arm’s length comparability analysis.
The safe harbour interest rates for 2023 apply retroactively as of 1 January 2023.
2023 Safe harbour interest rates for Swiss franc (CHF) IC loans and advances
The 2023 minimum interest rates on CHF-denominated loans granted by a Swiss resident company to a shareholder or related party generally are as follows below:
This indicates an increase in the CHF minimum lending rate from 0.25% for 2022 to 1.5% for 2023.
For loans denominated in Swiss Francs, received from shareholders and affiliated parties, the maximum interest rates payable by Swiss entities are calculated based on the minimum lending rate in CHF increased by a specific spread, as follows:
It should also be noted that different interest rates apply to real estate loans.
2023 Safe harbour interest rates for IC loans and advances in foreign currencies
The table below shows the safe harbour interest rates by currency, applicable for 2018 to 2023. We note that for 2023 we can see significant rate “hikes” across the board for all foreign currencies.
The interest rates depicted in the table above apply to advances and IC loan receivables which are equity-financed. For debt-financed receivables, the respective third-party or related party debt financing costs (%) plus a margin of 0.50% applies, at least however the interest rate shown in the table applies. However, if the CHF safe harbour rate is higher (i.e.1.5% for 2023), then this higher rate has to be charged.
For the determination of the maximum interest rate for IC loan payables under the safe harbour rules, a spread is to be added to the interest rates depicted in the table. The spread is stipulated by reference to the Operating loans under paragraph 2.2 of the Circular No. 203. Therefore, for operating loans up to the equivalent of CHF 1 million or less., the spread amounts to 2.25% in case of trading and manufacturing companies as borrowers, and to 1.75% for holding and asset management companies as borrowers. For advances and IC loans exceeding the equivalent of CHF 1 million, the applicable spread is 0.75% and 0.50% respectively.
Deloitte perspective – implications and recommendations
Our key observation from the latest Circular letters is that the 2023 Swiss safe harbour interest rates have been significantly increased in an effort to reflect the recent market interest rate developments driven by a rapid shift by major central banks from monetary easing to monetary tightening in response to rising inflationary pressures.
Given that the increased volatility in the markets is expected to persist throughout 2023, there may be growing differences between the Swiss safe harbour interest rates and the external debt financing costs at which multinational companies are able to finance their operations. This may put pressure on multinational companies which are relying on safe harbour rates to defend their position in Switzerland. The application of such rates can also have an impact on the transfer pricing consideration of other jurisdictions party to the transfer pricing arrangements.
In this regard, we would like to note that a taxpayer can apply an interest rate that deviates from the published safe harbour rates. However, for such an interest rate to be acceptable by the Swiss tax authorities, the taxpayer would have to demonstrate that the interest rate applied meets the arm’s length standard. In practice, this would require performing appropriate transfer pricing analyses of comparable third-party arrangements in line with the latest requirements of Chapter 10 of the OECD Transfer Pricing Guidelines.
Non-compliance with the arm’s length principle can lead to negative tax consequences in Switzerland, such as recharacterization of the interest as a hidden profit distribution subject to Swiss withholding tax at a rate of 35% (grossed up to 53.8% if not borne by the recipient) and its add-back to taxable income.
Lastly, the Swiss Supreme Court recently decided a case in the canton of Geneva that will shed some light on the documentation requirements as well as requirements on arm’s length comparability analysis. We are in the process of analysing the decision and will discuss this in more detail in our next blog shortly.
If you would like to discuss any aspect of transfer pricing for loans or other types of financial transactions such as guarantees, cash pooling, hedging or captive insurance, please reach out to our Transfer Pricing experts at Deloitte. See contacts below.
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