Switzerland

Corporate - Group taxation

Last reviewed - 09 July 2020

Tax is levied on each corporation as a separate entity. A parent company and its Swiss subsidiaries are taxed separately. Only the dividends from the subsidiaries (but not their profits) are taxable in the parent company’s hands. However, usually for dividend income, participation relief is available (see Participation relief in the Income determination section). For corporate income and capital taxes, no rules on group taxation exist.

Transfer pricing

So far, Switzerland has not introduced specific transfer pricing regulations. There is, however, an increasing awareness of transfer pricing matters and a related concern on the part of the Swiss tax authorities that taxpayers may transfer profits without sufficient economic justification either to countries with strict transfer pricing rules and documentation requirements in order to avoid challenges by the respective local tax authorities or to offshore locations. In this context, Swiss tax authorities take an increasing interest in a company’s transfer pricing position in order to defend their own position. Some cantonal, as well as the federal, tax authorities have started to particularly focus on low risk/low profit entities located in Switzerland.

Switzerland follows the OECD Guidelines as closely as possible and recognises the arm’s-length principle based on interpretation of actual legislation. To clarify transfer pricing issues, Switzerland offers an informal procedure for agreeing to pricing policies in advance. In an international context, such agreements are subject to the spontaneous exchange of information (see Spontaneous exchange of information in the Other issues section).

Thin capitalisation

Swiss thin capitalisation rules are, in general, only applicable for related parties. In case of a thin capitalisation, the related party debts can be treated as taxable equity. The respective circular letter issued by the Swiss Federal Tax Administration provides for debt-to-equity ratios as safe harbour rules. As an example, the debt-to-equity ratio is generally fixed at 6:1 for finance companies (safe harbour). Interest paid on loans that exceed the relevant ratios are generally not tax deductible; further, such interest may be deemed as a hidden distribution subject to Swiss WHT. There are no limitations on the financing of Swiss corporations by independent third parties (e.g. banks).

Interest rates paid to affiliated companies are also subject to periodically fixed safe harbour interest rates (see Interest expense in the Deductions section). The tax deduction of interest in excess of the permitted safe harbour rate may be disallowed and treated as a hidden distribution subject to Swiss WHT.

Controlled foreign companies (CFCs)

In Switzerland, no CFC or 'subject to tax' rules exist. Foreign companies are therefore recognised for Swiss tax purposes if they are managed and controlled offshore and are not set up purely for the reason of avoiding Swiss taxes.