Swiss “Safe Haven” interest rates for 2023

What are the tax-recognised interest rates for intra-group financing in 2023 and what factors determine their amount?

In the case of loans and advances (hereinafter referred to as “loans”) granted within a group or between a company and a related party, e.g. a shareholder, the question always arises as to what appropriate interest rate is appropriate. In principle, the Swiss tax authorities accept the interest rate agreed between the related parties, provided that it is in line with the market. For loans within Switzerland or for loans granted by Swiss companies to related parties domiciled abroad, Swiss tax purposes may also be based on the “safe haven interest rates” of the Federal Tax Administration (FTA). These published interest rates are assumed to be in conformity with the market.

The FTA’s circulars stipulate minimum interest rates for loans granted by a company domiciled in Switzerland to its shareholders or related parties (active loans). If, on the other hand, such a Swiss company receives a loan from its shareholders or related parties (passive loans), maximum interest rates are provided. Which interest rate is applicable depends essentially on whether it is an asset or liability loan and whether the loan is granted in Swiss francs or a foreign currency.

In addition to these “safe haven” interest rates, it is also possible to apply a different interest rate if it can be proven that this interest rate is in line with the market. The proof can be provided, for example, by means of a study or on the basis of the concrete financing of a loan (e.g. back-to-back loans). In order to check whether a loan interest rate stands up to third-party comparison, the Swiss tax authorities also rely on the transfer pricing guidelines of the Organisation for Economic Co-operation and Development (OECD), in particular on Chapter X on financial transactions contained therein.

It is important to note that the “Safe Haven” interest rates published by the FTA are only binding for the tax authorities in Switzerland. In the case of loans granted to companies domiciled abroad, care must therefore be taken to ensure that the interest rates are also accepted by the tax authorities abroad. Most foreign tax authorities also base their assessment on the aforementioned OECD transfer pricing guidelines and accept the interest expense if it stands up to a third-party comparison.

Furthermore, the financing situation of the borrower must also be taken into account. It must always be checked whether an independent third party would also grant the borrower a loan. In particular, the borrower must not be underfunded. To determine whether a company is underfunded, the Swiss and foreign tax authorities rely on so-called “thin-cap rules”, which are used to calculate the minimum equity capital of a company. If, on the basis of these schematised calculation methods, it is determined that the Group company receiving the loan does not have sufficient equity, part of the loan granted is reclassified as equity of the borrower (hidden equity). As a result, interest paid on this part of the loan is not eligible for tax deduction. For tax purposes, this part of the interest is treated as a dividend payment. In addition, certain countries, such as Germany, only allow interest expenses in a certain proportion to net profit or EBIT(DA).

Loans in Swiss francs

In the case of loans in Swiss francs, the interest rates published by the FTA in an annual circular apply to such advances or loans. The following interest rates refer to the year 2023.

Minimum interest rate: If the loan is granted by a Swiss company to a related party, it is required that the interest rate covers at least the lender’s cost price, e.g. the interest rate of the debt financing, plus a margin. However, the interest rate must be at least 1.5%.

Margin and minimum interest rate for the year 2023 according to “Safe Haven” Rules:

Maximum interest rate: If a Swiss company takes out a loan from a related party, the amount of the maximum interest rate accepted for tax purposes differs depending on whether (i) it is a real estate or an operating loan and (ii) the loan is granted to a trading and manufacturing company or to a holding and asset management company.

If the borrower is a trading and manufacturing company, the following “safe haven” interest rates apply to a business loan for 2023:

Maximum interest rates for operating loans granted to trading and manufacturing companies for the year 2023 according to “Safe Haven” rules:

* For the calculation of the aforementioned limits, the loans of all parties involved and related parties must be added together.

Loans in foreign currency – example of a loan in euros

For loans in foreign currencies, the interest rates for such advances or loans, which are also published by the FTA in an annual circular, apply.

Minimum interest rate: If the loan is granted by a Swiss company to a related party, the interest rate must at least cover the lender’s cost price, i.e. the interest rate of the debt financing, plus a margin. However, the interest rate must be at least equal to the minimum interest rates published by the FTA for loans in foreign currency. For such loans, the FTA provides for different “safe haven” interest rates depending on the currency. These are published annually in the FTA circular. If the applicable interest rate for a foreign currency is lower than the minimum interest rate for Swiss francs, the minimum interest rate for Swiss francs shall apply. From the lender’s point of view, it is again relevant that the interest rate covers the cost price of debt financing plus a margin, but at least reaches the minimum interest rate determined for the foreign currency. For loans or advances in euros, the published minimum interest rate for 2023 is e.g. 3%.

Margin and minimum interest rate for 2023 according to “Safe Haven” rules for loans granted in euros without foreign currency risk (e.g. lender has euros as functional currency):

*If there is a foreign currency risk, the minimum margin is always at least 0.5%

Maximum interest rate: If a Swiss company takes out a foreign currency loan from a related party, the amount of the maximum interest rate is determined on the basis of the minimum interest rate defined for the currency and the permissible margin at the minimum interest rate. The permissible margin is identical to the margin that applies to loans in Swiss francs. If a Swiss company takes out a loan in foreign currency, it must also be explained to the Swiss tax authorities why no commitment has been entered into in Swiss francs with lower interest rates.

Maximum interest rates for operating loans granted to trading and manufacturing companies in euro for the year 2023 according to “Safe Haven” rules:

*For the calculation of the aforementioned limits, the loans of all parties involved and related parties must be added together.

As already mentioned, the “safe haven” interest rates are only binding for the Swiss tax authorities. If the borrower is a company domiciled in the EU, it should also be noted that the application of unilateral “safe haven” interest rates under the so-called “Hallmark” E.1. of the disclosure requirements of the European Union (notification obligation for certain cross-border arrangements or DAC 6). Swiss companies that apply the Swiss “safe haven” interest rates to transactions with group companies domiciled in an EU member state should therefore be aware that these transactions may be reportable in the EU.

Summary and recommendation

The annually published “Safe Haven” interest rates are a welcome administrative relief for Swiss companies that grant loans to or receive loans from related parties. However, the “safe haven” interest rates are only binding for the tax authorities in Switzerland. As soon as loans are granted to companies domiciled abroad, foreign tax laws must be observed and consultation with a local tax advisor should be considered.

In individual cases, e.g. in the case of loans granted by companies domiciled abroad whose interest rate exceeds the “safe haven” rate or in order to meet the individual financing situation, the market-conform interest rate must be determined on the basis of the specific circumstances. The Swiss tax authorities accept interest rates that exceed or fall below the “safe haven” interest rates, provided that it can be proven that they stand up to the third-party comparison. From our experience, it is worthwhile to contact the responsible cantonal tax administration in such situations and to record the permissible interest rate or its calculation in writing in a tax ruling. Questions regarding the calculation of the tax-necessary equity capital can also be clarified at the same time.

Since the interest rates in the FTA’s circulars change annually, we recommend that you include a clause in intra-group loan agreements according to which the agreed interest rate can be adjusted annually. Where contracts provide for such a clause, it must be ensured that the interest rates used are actually reviewed annually.

We are happy to assist you in drawing up financing agreements, determining the tax-permissible interest and confirming the tax consequences of planned financing by obtaining tax rulings.

By Vischer, Switzerland, a Transatlantic Law International Affiliated Firm.

For further information or for any assistance please contact switzerland@transatlanticlaw.com

Disclaimer: Transatlantic Law International Limited is a UK registered limited liability company providing international business and legal solutions through its own resources and the expertise of over 105 affiliated independent law firms in over 95 countries worldwide. This article is for background information only and provided in the context of the applicable law when published and does not constitute legal advice and cannot be relied on as such for any matter. Legal advice may be provided subject to the retention of Transatlantic Law International Limited’s services and its governing terms and conditions of service. Transatlantic Law International Limited, based at 42 Brook Street, London W1K 5DB, United Kingdom, is registered with Companies House, Reg Nr. 361484, with its registered address at 83 Cambridge Street, London SW1V 4PS, United Kingdom.