Intra-group debt financing: updated safe haven rates

Safe haven rules are regulations in international tax law that are intended to simplify the determination of intra-group transfer prices. Such rules also exist in Switzerland.

Companies need financial resources to carry out their business activities. A shareholder who provides equity is generally compensated through dividend payments. These constitute non-deductible costs on the company side. To mitigate or avoid double taxation at the recipient level, such dividend income is often exempt or taxed on a preferential basis. Conversely, the provision of debt capital results in interest expenses that are usually tax-deductible at the company level and taxable at the payee level. Such interest paid to a third party is not a payment in kind.

If loans are granted by or to shareholders or related parties, this is referred to as intra-group financing. The term “intra-group financing” covers all types of financing within groups in the non-banking sector. The most important form is the granting of loans. If interest-free or non-interest-bearing advances or loans are granted to shareholders or related parties, this constitutes a payment in kind. If loans from shareholders or related parties bear excessive interest, this also constitutes a pecuniary benefit.

Monetary benefits are subject to 35% withholding tax and must be declared within 30 days without being requested to do so. To determine when a pecuniary benefit is presumed to exist, safe haven interest rates are determined annually in Switzerland by means of a circular issued by the Swiss Federal Tax Administration (FTA). If the third-party comparison can be proven, interest outside the safe haven interest rates does not constitute a pecuniary benefit.

Loans in Swiss francs from Swiss companies (asset loans)

The minimum interest rate for equity-financed loans in Swiss francs granted by a Swiss company to its shareholders or other related parties is 0.25 % in 2022.

For debt-financed loans, the minimum interest rate required by the FTA for 2022 corresponds – as in previous years – to the Swiss company’s borrowing costs plus a surcharge of 0.5 % for loans up to CHF 10 million (or a surcharge of 0.25 % for the amount exceeding CHF 10 million).

Loans in Swiss francs to Swiss companies (loans payable)

According to the circular of the FTA dated January 27, 2022, shareholder loans to a Swiss trading or manufacturing company in Swiss francs up to CHF 1 million may be subject to a maximum interest rate of 3 % in the sense of a safe-haven rule, and operating loans of CHF 1 million or more may be subject to a maximum interest rate of 1 %. Loans to holding and asset management companies may bear interest at a maximum rate of 2.5 % or, from CHF 1 million, at a maximum rate of 0.75 %.

Loans in foreign currency from Swiss companies (asset loans)

If loans are not granted in Swiss francs, other safe-haven interest rates are generally used. These are published in a separate circular. Except for loans in Chinese renminbi, Danish krone, Hong Kong dollar, Indian rupee, Japanese yen, Norwegian krone, Polish zloty, South Korean won, and Thai baht, the SFTA has in some cases significantly increased the permissible minimum interest rates for loans in foreign currencies compared to 2021.

Loans in foreign currencies to Swiss companies (liability loans)

According to the table in the circular, the interest rates are applicable for loans from Swiss companies to shareholders or related parties. Therefore, in the sense of a safe haven solution, according to the SFTA, for loans in foreign currency from shareholders or associated parties to Swiss companies, the same interest premium (up to the equivalent value of CHF 1 million 2.75 % or 2.25 % and from the equal value of CHF 1 million 0.75 % or 0.5 %) can be taken into account for loans in Swiss francs for so-called operating loans in analogy to the circular of the SFTA concerning tax-approved interest rates 2022.