Legal consequences of violating the safe haven interest rates
The safe haven interest rates published by the Swiss Federal Tax Administration (SFTA) are an important instrument for many companies to mitigate and avoid tax disputes. In the past, it was assumed that a non-cash benefit/hidden profit distribution only existed if the interest owed in the interest period exceeded the safe haven interest rate in accordance with the relevant circular by the SFTA. The interest rate according to the circular could also be considered a "safe haven" if it was not adhered to. However, a new decision by the Federal Supreme Court (BGer of July 17, 2024, 9C_690/2022, E. 6.2) clarifies that this practice cannot always be applied. The decision might have far-reaching consequences, which we would like to explain in this blog post using a practical example.
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Facts
A AG, a sales company of the German Z Group with parent company Z AG in the consumer goods sector, is financing its expansion in the Swiss market with a loan of CHF 1 million granted to it by its sister company B AG based in Vaduz/Liechtenstein. The loan is unlimited and bears interest at 5% in 2024. In addition, A AG has taken out a further loan of the same amount from a Swiss bank at 3% per annum.
The competent cantonal tax office disputes the interest on the loan and adds A AG the difference between the 3% and 5% interest to the taxable profit. This results in a non-cash benefit/hidden profit distribution of CHF 20,000. According to the SFTA circular for 2024, an interest rate of 3.75% would be applicable in this case.
Questions
- What are the immediate tax consequences if the cantonal tax office's proposal becomes legally binding?
- How is the offsetting of the cantonal tax office to be assessed with reference to the safe haven interest rates?
Preliminary remark
According to the previous practice of the SFTA, a benefit in kind only exists to the extent that the interest owed exceeds the maximum permissible interest rate according to the circular (3.75%), which in the present case is 1.25% or CHF 12,500. However, the Federal Supreme Court has ruled for the purposes of the corporate income tax that the safe harbor interest rate is only binding if the taxable person adheres to the interest rates defined therein (judgment 9C_690/2022 of 17 July 2024). In this respect, A AG is not entitled to a restriction of the set-off to the difference between the safe harbor interest rate of 3.75% and the actual interest rate of 5%.
Corporate Income Taxes
The set-off qualifies as a non-cash benefit from A AG to B AG and is therefore included in the taxable profit of A AG.
Withholding tax (WHT)
Excessive interest, which is paid on the basis of obligations to related parties, is deemed to be a non-cash benefit (dividend within the meaning of the relevant DTA) and is subject to WHT of 35%. In practice, however, the reporting procedure is not applied in international sister relationships. Due to the application of the direct beneficiary theory for the purposes of the Swiss WHT, the zero rate under the DTA with Germany does not apply. Instead, the DTA with Liechtenstein is applied, whereby the residual rate of 15% is applied as B AG does not hold a stake in A AG. It is currently uncleafaf whether the SFTA will also adopt the ruling by the Federal Supreme Court for the purposes of the WHT .
Emission levy
Although Liechtenstein qualifies as "domestic" under the stamp duty act, no emissions tax is levied in practice on the basis of the direct beneficiary theory, as the subsidy only came directly from Z AG in concept, but not formally.
Conclusion
The case study illustrates how the new Federal Supreme Court ruling of July 17, 2024 can have a significant impact on the tax treatment of loan interest and non-cash benefits. We will be happy to assist you in reviewing your loan relationships to ensure that they comply with the new legal requirements.
