Interest rates on intra group loans are a recurring topic. The Swiss Federal Tax Administration (FTA) publishes safe harbour interest rates on an annual basis in advance. Their application will usually prevent unwelcome surprises. But there is more to be considered.
Annual guidance published by the FTA
In its annually published advance guidance on intra group interest rates the FTA differentiates whether the Swiss company acts as creditor or debtor, what currency the loan was granted in and whether (real estate) security was provided. Excessive or insufficient interest rates may trigger tax consequences in particular for corporate income and withholding tax purposes (WHT).
If the safe harbour rates are met, FTA assumes that the rates
are at arm's length without further proof required. Where a
Swiss company however applies higher or lower interest rates, it
should be able to prove that they are at arm's length.
CHF loans granted by Swiss companies
Equity-financed loans in CHF granted by a Swiss company to its shareholders, subsidiaries or other related persons must bear a minimum interest rate of 0.25 % in 2018. Debt-financed loans must bear a minimum interest rate of the company's interest cost plus a spread of 0.5 % on loan amounts up to CHF 10m (and a spread of 0.25 % on loan amounts in excess of CHF 10m) in 2018. These minimum interest rates ensure a minimum net interest income for Swiss companies lending to affiliates.
CHF loans granted to Swiss companies
For Swiss companies that receive loans from its shareholders, affiliates or other related parties, FTA prevents undue erosion of the Swiss company's profit by setting maximum interest rates.
For working credits in CHF granted to a Swiss trading or manufacturing company, the maximum interest rate 2018 amounts to 3 % on amounts up to CHF 1 million and to 1 % on amounts exceeding CHF 1 million.
For loans granted to Swiss holding and asset management companies the maximum interest rate 2018 amounts to 2.5 % on amounts up to CHF 1 million and to 0.75 % on amounts exceeding CHF 1 million.
Loans secured by real estate may bear a maximum interest rate between 1 % and 2.25 %, depending on the type of property (rural/residential or commercial/industrial) and on the relation between loan amount and market value of the property. The maximal debt-financing of a property amounts to 70 % - 80 % of its market value, depending on the type of property.
Non CHF loans
Loans in currencies other than CHF are in principle subject to separate interest rates published in an own circular. Contrary to CHF loans, the interest rate is the same irrespective of whether the Swiss company acts as lender or borrower. The 2018 safe harbour interest rate for EUR loans is 0.75 % and for USD loans 3 %.
However, where the safe harbour interest rate for a non-CHF loan granted by a Swiss company to affiliates is below the required minimum interest rate for CHF loans, the higher CHF rate as minimum rate applies. Conversely, if a non-CHF loan is granted to a Swiss company and the maximum interest rate for a non-CHF loan is lower than the one for a CHF loan, it is admissible to apply the higher CHF rate.
If the Swiss company grants debt-financed non-CHF loans, the same minimum spread as for CHF loans granted by Swiss companies is required.
If down or cross-stream loans are granted to Swiss companies by related parties (shareholders, group companies etc.), tax authorities check whether the Swiss company is adequately equity-financed from a tax perspective (as defined in FTA Circular No. 6 dated 6 June 1997). The excessive part of the debt qualifies as deemed equity as far as it has been granted by related parties and it is not allowed to bear interest. Interest on the hidden equity qualifies as hidden profit distribution - even if the above-mentioned interest rates have been met. As a result, the interest on the hidden equity is added back to taxable profit for income tax purposes and is is further subject to Swiss dividend withholding tax.
Directlinks to the annual guidance published by the FTA (only available in german )
a) CHF loans
b) non CHF loans
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.