Switzerland has not developed ad-hoc legislation to regulate transfer pricing, but as a founding member of the OECD, it follows the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD Guidelines). The domestic legislation that is relevant for the transfer pricing purposes can be found in the Federal Law on Federal Direct Tax (DBG) –Article 58(1) and the Federal Law on Harmonization of the Cantonal and Communal Taxes (StHG)- Article 24(1).
Arm’s Length Principle
Even though the Swiss legislation has not developed a specific law on the arm’s length principle, two main law acts provide relevant provisions including Article 58 1) (b or c) of the Federal Law on Federal Direct Tax and Article 24(1) (a or b) and the Federal Law on Harmonization of the Cantonal and Communal Taxes. Bth the DBG (Article 58(3)) and StHG (Article 24(5)) introduce specific rules for quasi-public entities that provide services primarily to related parties, such as companies serving mainly affiliated businesses. The StHG is relevant for the arm’s length principle regarding income tax on “total net profit.” This calculation includes certain types of income that may not appear in the profit-and-loss statement while disallowing deductions for expenses that are not commercially justified, ensuring companies adhere to fair, market-based pricing in their transactions. Although these rules do not apply to most companies or international operations, they serve as guidance for how Swiss tax authorities (FTA) might interpret and apply transfer pricing principles.
Related Party Definition
The Swiss Federal Supreme Court has defined a “related entity” based on its jurisprudence, as referenced in the Revue de Droit Administratif et Fiscal. A company is considered related to another if there is either a primary commercial relationship or a secondary personal connection between them. Unlike some definitions of related entities, this does not require direct or indirect participation in management, control, or capital. Instead, the key factor is whether the transaction in question occurred solely because of the relationship between the entities rather than as an independent business decision.
Transfer Pricing Methods
The methods that can be used to determine the arm’s length price in Switzerland are:
- Comparable uncontrolled price method
- Resale price method
- Cost plus method
- Transactional net margin method
- Profit split method
Switzerland does not have specific laws or regulations on transfer pricing methods; however, its administrative doctrine advises following the OECD Transfer Pricing Guidelines. To determine the appropriate method, Swiss tax authorities first analyze the nature of the controlled transactions using a functions, assets, and risks (FAR) analysis. They then assess whether reliable data and comparable transactions from independent parties (uncontrolled comparables) are available. Finally, if necessary, they adjust for differences between the controlled and uncontrolled transactions to ensure comparability. Though there is no preferred method, experience indicates that Split and Transactional methods have been used.
Comparability Analysis
An important part of the transfer pricing compliance is the comparability analysis. Below is a summary of the main points regarding comparability analysis in Switzerland:
In practice, Switzerland follows the OECD Transfer Pricing Guidelines (OECD TPG) and applies the comparability analysis outlined in Chapter III. This means Swiss tax authorities assess transactions between related parties by comparing them to similar transactions between independent parties. To refine and narrow the range of acceptable transfer prices, they often use statistical tools that focus on central tendencies, such as the interquartile range or other percentiles. These methods help ensure that transfer prices fall within a fair and commercially justifiable range.
Documentation Requirements
Documentation requirements for transfer prices in Switzerland are based on the three-wheeler method of OECD. That means multinationals have to report the following to the French tax authorities:
- Master file;
- Local file; and
- Country-by-Country (CbC) report.
Except for filling as a Country-by-Country report, there are no specific transfer Pricing documentation rules in Switzerland. Nevertheless, taxpayers have to present such documents as are necessary to determine taxable income. For related transactions, they must prove that their transfer prices follow the arm’s length principle.
Country-by-Country Reporting
In 2018, Switzerland implemented Country-by-Country (CbC) reporting to meet the international tax requirements of the BEPS framework. For public companies with annual sales €750 m, information on turnover, taxes and main activities in each member state shall be provided in the form of a report. These reports are exchanged annually with tax authorities in partner countries but are not publicly available. Switzerland met all OECD standards without recommendations. CbC reports must be filed within 12 months, with penalties for non-compliance reaching up to CHF 250,000. While master and local files are not yet mandatory, future implementation is planned.
Advance Pricing Agreements (APA) and Mutual Agreement Program (MAP)
Switzerland uses both APA and MAP to manage and resolve international tax disputes, in compliance with OECD guidelines and EU directives.
APAs are agreements made between the taxpayer and the tax authorities, in advance, to avoid tax disputes regarding transfer pricing methodology.
The Swiss law provides three types of APAs: Unilateral, Bilateral, and Multilateral
Switzerland does not have an official APA (Advance Pricing Agreement) program, but it can make bilateral or multilateral APAs based on the MAP (Mutual Agreement Procedure) in its tax treaties. These APAs can be applied retroactively (roll-back) for up to 10 years, depending on Swiss law. Typically, Switzerland aims for a 5-year APA, but this can change. Switzerland also has extensive experience in handling MAP cases. More details are available in its MAP profile and Peer Review Report.
Mutual Agreement Procedure (MAP): A transfer pricing adjustment by a different jurisdiction that raises a company’s tax basis will likely lead to double taxation, where both jurisdictions impose tax on the same flow of revenue. Should a taxpayer in Switzerland request a Mutual Agreement Procedure (MAP), unilateral relief may be given by the Swiss Federal Tax Administration (SIF). This means the SIF might reduce the taxable income of the Swiss company to avoid double taxation, without needing to contact the other country. It is often recommended for the taxpayer to first explore unilateral relief before formally requesting a MAP.
Approach to Transfer Pricing Audits
Audit control is conducted by both Federal and Cantonal tax authorities. Swiss tax authorities closely examine transfer pricing in regular tax audits, focusing on low-risk, low-profit entities and offshore structures. They also scrutinize transactions involving intellectual property, intercompany financing, and business restructurings to ensure compliance with the arm’s length principle.
Penalties
There are no specific penalties for transfer pricing, but regular tax penalty rules still apply. For instance, in the case of direct federal income tax, the fine is CHF 1,000, increasing to CHF 10,000 for severe or repeated violations. Similar penalties apply for cantonal and municipal taxes. These fines do not cover tax omissions, which are penalized separately. Additionally, VAT violations may result in fines for both taxpayers and third parties who fail to provide necessary information.
Taxation at a Glance
Switzerland is made up of 26 cantons. Its tax system reflects this hierarchy with a federal level and 26 cantonal governments. Along with the federal tax law that applies across the country, each canton has its tax laws and practices. Cantons can introduce any tax unless the federal government has claimed exclusive rights to it under the Federal Constitution. Furthermore, the country has signed double tax agreements with 102 countries.
The official name of the Switzerland tax authority is the Federal Tax Administration (FTA).
The table below provides a summary of the main taxation rates related to businesses:
Tax Type | Tax Rate |
Corporate Tax | 11.9% – 20.5% |
VAT | 8.1% |
Withholding tax on dividends to non-residents | 35% |
Withholding tax on interest to non-residents | 0/35% |
Withholding tax on royalties to non-residents | 0% |
Our firm provides our clients with comprehensive assistance in their transfer pricing needs globally. To contact a team member, please click here.
