Transfer pricing, the pricing of goods, services, and intangibles between related entities, has always been a significant concern for multinational enterprises (MNEs) and tax authorities globally. In recent years, cantonal tax authorities devoted more resources to transfer pricing, increasing the number of transfer pricing audits. A website specifically dedicated to the transfer pricing was created by the Swiss Federal Tax Administration.  

What are the transfer pricing rules that apply in Switzerland?

Switzerland follows the arm’s length principle and refers taxpayers to the OECD Transfer Pricing Guidelines. While these guidelines are not legally binding, they are widely used by Swiss tax authorities and courts as an interpretative tool.  

Swiss taxpayers are not required to prepare formal transfer pricing documentation. However, they must demonstrate that intra-group transactions comply with the arm’s length principle. Compliance with OECD guidelines generally protects taxpayers from challenges by authorities.  

The Swiss Federal Tax Administration (FTA) started publishing its views on various transfer pricing topics on its website, including cost plus method, primary, corresponding and secondary adjustments, cost sharing agreements and intra-group loans.  

What are the local Swiss specifics with regard to transfer pricing?

As mentioned above, Swiss tax authorities follow the OECD transfer pricing principles. A significant exception is the treatment of interest rates on intragroup loans.  

The FTA annually publishes “safe harbor” interest rates for intra-group loans in CHF and other currencies. Taxpayers using these rates are not required to justify their calculations. Hence, application of safe harbor interest rates lowers tax risks and simplifies the tax documentation process.  

Swiss taxpayers can use rates outside the safe harbor range but must prove their arm’s length nature through detailed transfer pricing studies. Please note that providing credit offers from third-party banks to prove that applied interest rates are at arm’s length may not be accepted by tax authorities.  

What are the consequences of noncompliance with transfer pricing rules in Switzerland?

Tax consequences of noncompliance with transfer pricing rules may be severe. Differences between actual remuneration and arm’s length compensation will be considered a hidden transfer to the related party and taxed as follows:  

✔ Such differences are added to the Swiss taxpayer’s taxable income and are subject to corporate income tax. 
✔ Hidden transfer to a related party may be treated as a dividend for withholding tax purposes. As the payor is legally obliged to deduct the withholding tax of 35% from the dividend payment, the amount of hidden transfer is treated as a net payment, i.e. as 65% of the gross payment. The payment amount is grossed up and the withholding tax is due on the grossed-up amount.  

Switzerland does not impose any specific transfer pricing penalties.  

Example:  

Swiss subsidiary A in Zurich pays 200 to its foreign parent company B for services. However, the market price for comparable services is only 100. 

Given that the remuneration paid by A to be is not at arm’s length, only 100 (market price) is allowed as a deductible expense for tax purposes. The excess 100 is disallowed, resulting in an additional taxable income of 100, subject to corporate income tax of approx. 20%.  

The disallowed 100 may be treated as a hidden transfer to the parent company  B.  This amount is considered net of Swiss withholding tax of 35%. To calculate the gross amount subject to withholding tax:   

Net amount: 100 
Withholding tax rate: 35%
Gross amount = net amount / (1 – tax rate)
Gross amount = 100/0.65 = 154
WHT = 154 * 35% = 54 

The hidden transfer amount subject to the withholding tax is 154 and the withholding tax amounts to 54.  

Who conducts transfer pricing audits in Switzerland?

Transfer pricing is typically examined as part of the standard corporate tax audit conducted by cantonal tax authorities. Cantonal tax authorities are particularly vigilant about transactions involving high-risk areas, such as intellectual property, intra-group services, and financing. An increasing number of cantonal tax authorities are establishing specialized transfer pricing teams to support regular corporate tax audits. If a tax auditor makes an adjustment that is also relevant for withholding tax, they inform the FTA, which then issues a separate assessment. 

The FTA can also raise transfer pricing issues during audits related to VAT, withholding tax, or stamp duty. 

Is it possible to obtain an Advance Pricing Agreement (APA)?

It is possible to obtain an APA. The competent authority is the Swiss State Secretariat for International Finance (SIF).  There has been a notable increase in the use of APAs, where taxpayers and tax authorities agree in advance on the transfer pricing methodology for specific transactions. This provides certainty and reduces the risk of disputes. 

Transfer pricing in Switzerland is built on the OECD Guidelines, yet Swiss authorities apply specific interpretations for instance with regard to intra-group loans or safe harbor interest rates. With the increasing focus by cantonal tax authorities and the FTA, proactive compliance is more important than ever. 

At LINDEMANNLAW, we advise clients on compliance with Swiss transfer pricing regulations and represent them in audits and APA negotiations. Contact us today to ensure your transfer pricing strategy is aligned with current Swiss practices.