EU Commission’s Action Plan for a fair and efficient corporate taxation system

On 17 June 2015, the European Commission (EC) presented its Action Plan for a fair and efficient corporate taxation system in the European Union (EU). The plan’s objectives include, but are not limited to, re-establishing the link between taxation and where economic activity takes place, as well as securing a strong and coherent EU-wide approach to external corporate tax issues, including measures to implement OECD base erosion and profit shifting (BEPS) reforms in order to deal with non-cooperative tax jurisdictions and to increase tax transparency. The Action Plan presents a series of measures to meet the set objectives. These measures include addressing the mechanisms identified within the EU and globally as those most likely to facilitate aggressive tax planning. Five key areas of EU-wide action are proposed:

  • Relaunching the Common Consolidated Corporate Tax Base (CCCTB)
  • Ensuring effective taxation where profits are generated
  • Creating a better business environment
  • Increasing tax transparency
  • Improving EU coordination

For more information and details on the areas for action, please find here the EU Direct Tax Group’s (EUDTG) Newsalert of 17 June 2015, as well as the Commission’s press release, communication and annex, including a first list of third-country non-cooperative tax jurisdictions.

For further questions please contact your usual PwC contact or:

Armin Marti
PwC | Partner, Leader Corporate Tax
Office: +41 58 792 43 43 | Mobile: +41 79 422 15 49
Email: armin.marti@ch.pwc.com

Anna-Maria Widrig Giallouraki
PwC | Senior Manager
Office: + 41 58 792 42 87
Email: anna-maria.widrig.giallouraki@ch.pwc.com

Greek Draft Bill on Voluntary Disclosure of Undeclared Taxable Income

The Greek Ministry of Finance published a draft bill on the Voluntary Disclosure of undeclared taxable income for public consultation. The key points for Greek tax residents with undeclared funds abroad is that they may legalise these funds by submitting a special tax return and paying a tax of 15% on these funds without any additional taxes or penalties.The final text of the bill is still outstanding and many details and procedural matters still need to be clarified via Ministerial Decision. Click here to read the relevant tax newsletter from PwC Athens.

With respect to deposits in Switzerland, a special procedure is anticipated to be followed involving also the Swiss banks, assuming that a specific agreement between Greece and Switzerland can be signed after the voting of the above mentioned (and currently still in draft) bill.

The FTA can forget its percentage calculations – Federal Court judgement on the 25/75% practice

With unusual clarity the Federal Court has found against the Federal Tax Administration (FTA). At issue was the tax liability of a foundation, which operates a museum. The FTA struck the foundation off the VAT Register as of 1.1.2010, because „the costs of an activity are not covered in the long-term as to at least 25% by revenues from supplies and services (excluding investment and interest income), but more than 75% by non-considerations, such as subsidies, donations, cross-financing, contributions of capital, etc.“.

Continue reading…

Swiss Federal Supreme Court rules in Withholding Tax Case for Danish banks

The Swiss Federal Supreme Court has delivered two judgements regarding Swiss withholding tax refund cases for two Danish banks involved in derivative transactions over dividend ex-date with Swiss equities. In both cases, the Swiss Federal Supreme Court ruled in favour of the Federal Tax Authority (FTA) and overruled the previous decisions taken by the Federal Administrative Court

The cases under scrutiny

In the first case, a Danish bank entered into various total return swap transactions with counterparties in the EU and the US relating to Swiss equities. To hedge the exposure from the total return swaps, the Danish bank bought the necessary Swiss equities from various parties. Upon the maturity of the total return swaps, the shares were sold to different parties than those from whom the bank had previously sourced the shares. Under the swaps the Danish bank had to pay to the counterpart an amount equivalent to the dividend received.

The second case relates to a subsidiary of a Danish bank that had entered into derivative transactions by selling (OTC) SMI futures through Eurex and a broker and that had hedged this short position by buying the necessary Swiss equities from a different platform/broker. Upon the maturity of the SMI futures, the derivative positions were either closed (and the Swiss equities sold) or rolled into further SMI future contracts.

In both cases, dividends received during the maturity of the trade were subject to 35% Swiss withholding tax for which a full refund was claimed under the former Swiss-Danish double tax treaty (the current amended treaty only provides for a partial refund on portfolio holdings). In both cases, the FTA had denied the refund of Swiss withholding tax and was then overruled in the Federal Administrative Court.

Decisions of the Swiss Supreme Court

In its public hearing of 5 May 2015, the Swiss Supreme Court overruled the decisions taken by the Federal Administrative Court and decided in favour of the FTA.

Regarding the first case, the court was of the opinion that the Danish bank should not be regarded as being the beneficial owner of the dividends. This ownership was given up at the moment in time where the funds received as dividends were paid out to the counterparty of the swap agreement as there was, in the view of the Swiss Supreme Court, an on-payment obligation under the total return swap agreements entered into by the Danish bank. Further to this obligation, the bank was no longer in a position to freely dispose of the dividend proceeds received and, in addition, the total return swap entered into put the bank in a position of being fully relieved of any risk associated to the underlying long position in Swiss equities. Hence, the bank had given up its beneficial ownership of the underlying Swiss equities.

In the second case, the underlying facts were more abstract and, in the view of some judges, insufficiently established by the FTA. Nevertheless, the Swiss Supreme Court was of the opinion that it would have been the Danish claimant’s call to assist the FTA in establishing the right facts and circumstances. Hence, the majority of the judges were of the view that the volumes of SMI futures traded and the fact that only a limited number of parties were involved in the transaction were sufficient evidence to conclude that the bank had given up its beneficial ownership and had to forward the dividend proceeds, the prices for which had been partially pre-determined in the sold (OTC) SMI futures.

Appraisal of the decisions

The Swiss Supreme Court has now issued two leading decisions with regard to the question of beneficial ownership which will have an important impact on the numerous other cases pending with the Swiss courts and the FTA. Although the Swiss Supreme Court’s exact line of argumentation will only be available in a couple of weeks, after the entire decisions including the motivation have been published, these decisions are effectively increasing the hurdles for a refund of Swiss withholding tax for derivative transactions with underlying Swiss equities – not only in an international but also in a domestic context.

It is now clear that the Swiss Supreme Court is of the view that anyone transferring a received dividend to a counterpart of a derivative instrument while not being in a risk-taking position will most likely have relinquished their beneficial ownership to the underlying Swiss equity and with this their right to claim Swiss withholding tax.

Pending claims as well as new derivative transactions that may give rise to a Swiss withholding tax refund claim should carefully be evaluated on the basis of the recent decisions of the Swiss Supreme Court once the written decision is available.

Victor Meyer
Partner Corporate Tax
victor.meyer@ch.pwc.com
+41 58 792 43 40
Martin Büeler
Partner Corporate Tax
martin.bueeler@ch.pwc.com
+41 58 792 43 92
Dieter Wirth
Partner Corporate Tax
dieter.wirth@ch.pwc.com
+41 58 792 44 88
Luca Poggioli
Director Corporate Tax
luca.poggioli@ch.pwc.com
+41 58 792 44 51

The Federal Court rules against the FTA’s 25/75% practice

PwC_PC_France_Paris_MB_081Impact on non-profit organisations

In an explicit manner, the Swiss Federal Court has ruled against the Federal Tax Administration’s (FTA) so-called 25/75% practice regarding VAT liability and the right to register for VAT purposes in Switzerland.

The case related to a foundation operating a museum which covered less than 25% of its costs by revenues generated from supplies of goods and services, respectively more than 75% of its costs were financed by non-considerations, such as donations, subsidies, capital contributions, etc. In accordance with the 25/75% practice, the FTA claimed that the foundation cannot be considered taxable person and cancelled the VAT registration of the foundation retroactively from 1 January 2010.

In its judgement 2C_781/2014, dated 19 April 2015, the Swiss Federal Court has decided that this practice is inconsistent with the VAT Law. Even if, as in the case at hand, the foundation’s costs are covered far below 25% by considerations for supplies of goods or services, the VAT registration cannot be denied.

The Federal Court dismissed the argument of the FTA in relation to the 25% threshold stating in its judgement that: “within a business activity there cannot be a non-business area. A nonbusiness activity, which is not entitled to input VAT deduction, cannot be simply presumed, but must be clearly and unequivocally independent to the business activity”. As a result, the foundation will be reinstated in the VAT Register with retroactive effect as of 1 January 2010 and will likely be reimbursed a significant (six figure) VAT amount from the FTA.

For non-profit organisations this judgement has significant consequences:

  1.  If a non-profit organisation performs business activities, it is liable for the VAT and must register, when its turnover from such business activities exceeds the threshold of CHF 150,000 (for cultural, sport or other organizations pursuing goals in the public interest) or CHF 100,000 (for organisations not falling under the previous category). In case the organisation’s turnover is below the threshold, the possibility for opting for voluntary VAT registration should be investigated.
  2. Where the organisation does not perform non-business activities which are clearly and unequivocally independent from its business activities, it should be entitled to full input VAT deduction, unless the organisation carries out supplies of goods and services exempt from tax without credit or receives subsidies.
  3. If an organisation has been de-registered for VAT purposes due to the discussed practice of the FTA as of 1 January 2010, it is worth analysing the possibility of the organisation to claim retroactive VAT registration and the related input tax.
  4. If the organisation has, besides its business activity, a clearly independent non-business area of activity, the allocation and therefore the input VAT deduction right should be examined.

In any event the FTA will have to revise its current practice and take a decision which is already overdue. Taking into account the Swiss Federal Court’s clear judgement it is worthwhile to act proactively and take the opportunity to analyse the VAT position of your organisation and submit your proposed solution to the FTA.

Download this document

Contacts:

Olivier Comment

Gergana Chalakova

Senior Manager
PwC Switzerland
Tel. +41 58 792 81 74
Email:olivier.comment@ch.pwc.com
Assistant Manager
PwC Switzerland
Tel. +41 58 792 92 02
Email:gergana.chalakova@ch.pwc.com

New European Union Implementing Regulation for company vehicles registered in Switzerland

Do you provide company vehicles for the use of your crossborder employees? These new rules could affect you!

New regulation for company vehicules

The entry into force of the new European Union Implementing Regulation (EU) 2015/234 as of 1 May 2015 means that company vehicles registered in Switzerland and placed at the disposal of employees resident in the EU will be subject to customs duties if they are used for private purposes.

In cases of non-compliance with European customs regulations, the user, i.e. the employee, becomes liable for the corresponding import duties and taxes as well as any fines for not clearing the vehicle through customs.

Company vehicles registered in Switzerland and used by employees residing in Switzerland are not affected by this change. However, for cross-border commuters, companies have to distinguish between those who use such vehicles purely for professional purposes and those who use them for professional and personal ends.

(i) In the first case, a cross-border commuter using a vehicle only for the journey to and from home to the place of work and to carry out professional activities specified in the employment contract may continue as before under the current rules (temporary admission procedure, which suspends customs duties and import tax). It is essential for companies to amend employment contracts and other internal regulations, where necessary, to reflect the intended use of vehicles. Moreover, a copy of the employment contract should be kept in the vehicle at all times.

(ii) The second case is more challenging because the employers must decide whether to continue to allow personal use of the vehicle.

If the employer were to prohibit the personal use of the vehicle, the employment contract would have to be modified, This has consequences, especially in terms of compensation, social security contributions and the tax regime of both the employee and the company.

If personal use is allowed to continue, the vehicle must be cleared through customs (10% customs duty, 20% non-refundable VAT) and several issues have to be resolved:

  • What is the value of the vehicles to be declared as there is no sale? The customs recommend Argus value but based on the French regulations in force and our experience it could be reduced.
  • What measures can be taken to reduce the customs duties? Is there an alternative to the temporary admission procedure to reduce the customs duties owed?
  • What formalities have to be respected?

Urgent action is needed, therefore, to ensure the use of company vehicles complies with European Union law. Our teams in France and Switzerland are at your disposal to assist you through the steps of the two approaches:

1. Clearing the vehicle through customs with the aim of maintaining stable employment contracts for cross-border commuters

Our teams can support you to:

(i) Minimise the impact of customs clearance of vehicles currently placed at the disposal of employees (clearance for personal use vs. other regime, determining the customs valuation);

(ii) Accelerate customs clearance (i.e. EORI registration, support in instructing customs agents as well as training HR teams to deal with the customs expenses now inherent when providing a company vehicle and with ‘crisis situations’ (e.g. if an employee’s vehicle is confiscated by French customs officers, negotiations over fines levied by customs, etc.).

2. Adapt current practices: prohibiting any purely personal use of the vehicle.

Our Swiss team supports you in making the required changes to employment contracts, internal regulations and other relevant documents while ensuring they comply with the other fiscal and social obligations of the company (the valuation of fringe benefits, social security contributions as well as personal and corporate tax).
Whatever the situation, we study the specific needs of your organisation and help you implement solutions tailored to your company’s fleet management.

Download this document

EU Tax News January – February 2015

EU direct tax law is a fast developing area. This presents taxpayers, in particular groups and multinational corporations that have an EU or European Economic Area (EEA) presence, with various opportunities.

The following topics are covered in this issue of EU Tax News:

1. EU Court of Justice (CJEU) Cases

  • Belgium: CJEU referral regarding Belgian fairness tax
  • Belgium: CJEU referral regarding interest withholding tax
  • Germany: CJEU judgment on German rules disallowing non-residents to deduct annuities linked to an anticipated succession inter vivos: Grünewald
  • Germany: AG opinion on exit taxation in case of cross-border transfer of assets from a partnership to a PE: Verder LabTec
  • Netherlands: CJEU judgment on the 150 kilometre distance requirement in the Dutch 30% ruling for foreign employees with specific expertise: Sopora
  • Sweden: AG opinion on deduction of FOREX losses in cross-border situations
  • United Kingdom: CJEU judgment regarding cross-border loss relief: Commission v UK

2. National Developments

  • Belgium: Antwerp Court of Appeal decision regarding Fokus Bank claims
  • Belgium: Constitutional Court annulment of tax on conversion of bearer securities
  • Belgium: Constitutional Court annulment of retroactive increase of net asset tax rate
  • Finland: Supreme Administrative Court decisions on withholding taxation on Finnish sourced dividends from publicly quoted companies received by two different types of US RICs
  • Netherlands: The Hague Court of Appeal decision on deduction of FOREX losses in cross-border situations
  • UK: Prudential (CFC & Dividend GLO) further High Court decision
  • UK: Court of Appeal decision on overcharging VAT on investment management fees: HMRC v Investment Trust Companies

3. EU Developments

  • EU: European Parliament ups the ante on tax transparency and rulings
  • EU: ECOFIN Council meeting of 27 January 2015
  • EU: Code of Conduct Group meeting of 4 February 2015
  • EU: Council High Level Working Party (Taxation) meeting of 5 February 2015
  • Spain: European Commission launches investigation into regulations imposing the obligation to declare certain assets located out of Spain
  • Sweden: Swedish Government disagrees with the European Commission on interest deduction limitations

4. Fiscal State aid

  • Belgium: European Commission announces investigation into the Belgian excess profit ruling system
  • Luxemburg: European Commission publishes non-confidential version of opening decision in Amazon State aid case
  • Hungary: European Commission announces in-depth investigation into Advertisement Tax and suspension injunction
  • Spain: European Commission appeals General Court decisions on Spanish financial goodwill amortisation before the CJEU
  • Spain: European Commission requests Spain to amend or abolish regional taxes on large retail establishments

This EU Tax Newsletter is prepared by members of PwC’s international EU Direct Tax Group (EUDTG).

Read the full newsletter here.

Further information about our service offerings in EU taxes: www.pwc.com/eudtg

Base erosion and profit shifting (BEPS) proposals address intangibles cost contribution arrangements

Multinational enterprises (MNEs) involved in the development and use of intangibles under cost contribution arrangements (CCAs) should note the 29 April 2015 discussion draft proposals under Action 8 of the Base Erosion and Profit Shifting (BEPS) Action Plan. The discussion draft proposes fundamental modifications to Chapter VIII of the OECD Transfer Pricing Guidelines:

  • with respect to measuring the value of contributions to CCAs and the tax characterisation of contributions, balancing payments and buy-in/ buy-out payments, and
  • to make it consistent with other BEPS amendments including those addressing the fundamental issues on risk, capital, recharacterisation and intangibles.

The primary goal is to ensure that contributions are commensurate with the benefits received under a CCA. This is a difficult task when the contributions are complex and cannot be valued at cost. The guidance suggested by the OECD, although it acknowledges the need to achieve simplification, may nevertheless increase complexity and disputes. The proposed requirement in the draft that a participant in a CCA must have the capability and authority to control the risks associated with the “risk-bearing opportunity” under the CCA, while consistent with the overall theme of the BEPS project of focusing on “substance,” would be a paradigm change for CCAs. Similarly, the proposal that all of the important R&D and other development activities contributed by the participants to a CCA would need to be accounted for at arm’s length prices, rather than at cost as under the existing Guidelines, would also represent a fundamental change and make “cost contribution arrangements” a misnomer.

Read more.

Let’s talk

For a deeper discussion of how these issues might affect your business, please call your usual PwC contact.

Modification of the federal ordinance on the granting of federal tax holidays

In March 2015 the Federal Council published a report on the contemplated modifications of the federal ordinance on the granting of federal tax holidays in application of the new regional policy. The consultation draft of the new federal ordinance can now be commented on by interested parties until July 8, 2015; entry into force of the final version is planned for July 1, 2016.

We have set out below a summary of the most relevant aspects of the consultation draft.

A) Granting of tax holidays according to current tax practice

As part of its regional policy, the Federal Council is endeavouring to strengthen the competitiveness of certain geographical areas. Under the terms of article 12 of the Federal Law on Regional Policy, federal tax holidays can be granted to industrial companies or production-related service providers located in structurally weak geographical areas that are willing to create new jobs or to maintain existing ones.

The cantons are responsible for submitting applications for federal tax holidays in accordance with the Federal Law on Regional Policy. A tax holiday applicant may only obtain a federal tax holiday if the canton of residence has already granted a tax holiday at cantonal/municipal level. The cantonal economic development agencies provide advice about the procedure.

Under current practice, a federal tax holiday can only be granted if the cantonal tax holiday decision contains a claw-back clause. The maximum duration of the tax holiday is 10 years, usually split into a first period of 5 years that is extended for a second period of 5 years if all the tax holiday conditions are met.

Source : http://www.seco.admin.ch/themen/05116/05118/05298/index.html?lang=en

B) Proposed modifications – new federal ordinance

The purpose of the current publication is only to highlight the material and procedural amendments the Federal Council wants to implement.

The amended federal ordinance should enter into force on July 1, 2016. Until then, the current practice will remain applicable. It is also worth mentioning that the amendments proposed by the Federal Council should not have a direct formal effect on cantonal tax practices; some cantons may, however, decide to change current practice and follow the new federal rules. This will have to be monitored in due time.

a.      Regional restrictions for federal tax holidays (articles 2 and 3 of the new ordinance)

The areas in which a taxpayer could apply for a federal tax holiday were significantly restricted in 2010. Currently, approximately 633 towns are located in the regions benefitting from the tax holiday.

Based on the amended federal ordinance, tax holidays may be granted to companies located in municipalities considered to be rural centres, small or medium sized urban centres including the surrounding areas (i.e. Alternative 2 – 136 cities), or alternatively smaller and less urban areas with a central function (i.e. Alternative 4 – 157 cities).

b.      Introduction of a cap for the determination of the tax holiday

Federal tax holidays will be subject to a cap determined using a specific formula (article 11 of the new ordinance). According to the current estimates made by the Federal Council, each new job created could lead to a tax credit ranging from CHF 71,594 to CHF 143,188 per year; each job retained should lead to a tax credit ranging from CHF 35,797 to CHF 71,594 per year.

The cantons should still be able to determine the method used to fix the cap in granting tax holidays in their own right (i.e., application of the tax credit similar to the federal approach or of a percentage of exemption).

c.       Transparency of tax holidays

Once a year the State Secretariat for Economic Affairs (SECO) will publish information connected with newly granted federal tax holidays, e.g., the name of the company, its location, information on the magnitude of the cap on the tax holiday and the number of jobs to be created or saved. Nevertheless, the effective amount of the tax credit granted will not be disclosed. In principle, no information will be published in connection with cantonal tax holidays.

Only a new tax holiday granted under the amended terms of the federal ordinance will be subject to public disclosure; tax holidays granted under the current version of the federal ordinance will not be affected by this new provision.

d.      Miscellaneous

In application of the proposed federal ordinance, compliance with the conditions for the tax holiday will have to be certified by the company’s statutory auditors. This rule will only apply to the tax holidays granted by the federal authorities after the new ordinance enters into force.

Similar to current practice, provisions for a claw-back will still be included when a federal tax holiday is granted.

The conditions for granting a federal tax holiday will not be drastically modified. Here are the main conditions to be met to be granted a federal tax holiday:

(i)   The canton has agreed to grant a cantonal tax holiday to the company

(ii)   Tax holidays may be granted to newly created companies or to companies developing a new activity

(iii)   At least 20 new jobs will be created.

C) Conclusions

The tax holiday practice at federal level is clearly defined and should be seriously taken into consideration when non-Swiss entities contemplate expanding in Switzerland.

The prospect of a future decrease in cantonal tax rates within the framework of Corporate Tax Reform III creates great incentives for multinational companies.

Our tax specialists remain at your disposal should you want to discuss in detail the possibility of being granted a tax holiday according to current or future practice.

Daniel Gremaud
PwC
Avenue C.-F. Ramuz 45
Case postale, 1001 Lausanne
daniel.gremaud@ch.pwc.com
+41 58 792 81 23
Gil Walser
PwC
Avenue C.-F. Ramuz 45
Case postale, 1001 Lausanne
gil.walser@ch.pwc.com
+41 58 792 67 81

Swiss Tax Authorities Confirm Modified Interpretation of Principal Company Taxation

In brief

Swiss principal companies have long benefited from the rules of Swiss Federal Tax Administration (SFTA) Circular 8 (2001). On 6 March 2015, the SFTA confirmed in an official letter to the cantonal tax authorities (see enclosure) that it has adopted new interpretations of circular 8 that vary from those the SFTA issued in January 2014. Circular 8 remains applicable for existing and new principal companies, with the following modified interpretations effective as from financial year 2016 for existing and immediate effect for new principal companies.

  • Substance: Principal companies applying Circular 8 must prove sufficient substance in Switzerland. Also when a company meets the overall principal company qualification outsourcing of core principal functions now needs to be reviewed as it may result in an adjustment of the principal tax allocation.
  • Exclusivity test for limited-risk distributors (LRDs) or commissionaires: LRDs and commissionaires must perform limited-risk distribution ‘exclusively’ for Swiss or other group principals. Exclusivity means that at least 90% of the net profit of the distribution company is derived from LRD activities. There will be an available grace period through the beginning of Corporate Tax Reform III — which is not expected to enter into force until 2018-2020 — for existing distributor companies that do not meet the 90% exclusivity test and cannot be restructured in a timely manner to meet the exclusivity test due to legal and operational constraints.
  • Margin test: The principal tax allocation calculation must be adjusted if gross margin/compensation of the LRD or commissionaire exceeds 3%. Companies that cannot meet the 3% gross margin test can use a ‘fall-back’ test that considers the ‘higher costs’ of distributor companies, which now include a 5% mark-up on the higher costs. If the effective LRD remuneration exceeds the new margin test, a respective adjustment to the principal allocation under circular 8 has to be considered.

In detail

Modified exclusivity test
Only distribution companies that exclusively or almost exclusively act as LRDs or commissionaires qualify for principal allocation. To meet the test, at least 90% of the net profit of the distribution company must originate from the limited-risk distribution activity for the Swiss or other group principal. This requirement must be met by each distribution company on a stand-alone basis. A ‘short-term’ violation of the 90% rule will not be disqualifying. Based on recent confirmations from the SFTA, the test can be performed on the basis of local GAAP financial statements or management accounts (e.g. IFRS or US GAAP). This test applies to all principal companies that have obtained a new ruling since 2014 or that apply for principal company treatment for the first time.

Existing (pre-2014) principal companies whose distributors do not fully meet the 90% test will be granted a grace period to restructure their distribution companies. The SFTA has confirmed that the exclusivity rule will not be enforced with respect to existing companies when:

  • The distribution companies will not meet the 90% test.
  • Restructuring under local commercial law cannot be achieved within a reasonable period (i.e., before Corporate Tax Reform III comes into force in 2018-2020).
  • The burden of proof lies with the principal companies.

Modified margin test
Distribution margin affects the principal allocation level under Circular 8 as follows:
Maximum compensation for distribution companies will be the higher of 3% of gross revenues or the higher costs of the distribution companies plus a mark-up of 5% on those costs. If a distributor company also performs non-distribution activities, separate divisional accounts must be provided. Based on the SFTA letter, qualifying costs for the mark-up will include the distributor’s ‘own’ operating costs as well as taxes of the qualifying distribution companies. Third-party costs will not qualify for the mark-up.

Observation: In practice, some uncertainty remains regarding which costs are seen as ‘own’ costs versus ‘third-party’ costs. The SFTA indicates that the cantonal tax authorities should give some flexibility to simplify the cost basis identification and act in favor of the tax payer for such assessment of the cost base.

If effective compensation of the distributors exceeds total permissible compensation, the excess compensation must reduce the principal allocation on the principal company’s tax return, although the 50% deduction under the principal allocation rules will apply. As previously announced, the margin test will be applied in average taking into account all qualifying distributors.
The modified rule will take effect for tax year 2016. Rulings concluded since 2014 under the 2014 rules can be amended to include the cost plus test but apply immediately.

Example of the modified margin test:

Consolidated LRD Basis

Total Sales 1’000
COGS -700
Gross profit 300
Operating expenses -270
Profit before tax 30
Taxes -10
Profit after tax 20

Margin Test Calculation

Effective gross margin: 300 (30% of 1’000)
Permitted gross margin: 30 (3% of 1’000)
Higher costs: 280 (270 operating expenses + 10 taxes)
Higher costs + 5%: 294 (280 * 1.05; assuming all costs qualify as “own” costs)
Difference: 6 (300 effective gross margin ./. 294 higher costs+5%)

Impact on Principal Allocation

Reduction of principal allocation on principal tax return level:  3 (50% of difference)

Other aspects
The head of the SFTA confirmed in a recent meeting that the outsourcing of support or auxiliary functions to shared service centers and similar facilities will not lead to a reduction of the principal profit allocation. (This point was not included in the new letter.) If core principal functions are outsourced, this will still lead to an adjustment of the profit allocation provided overall principal substance in Switzerland is otherwise sufficient. In the case of potential outsourcing of core principal functions, the taxpayer must present its case to the SFTA for resolution.

The takeaway
Existing Swiss principal companies may need to review their positions with respect to the modified interpretation that will take effect in 2016. The SFTA has indicated there will be some leeway during the transition to the new interpretation. Newly established principal companies must take the new interpretations into account immediately.
Switzerland remains an attractive principal location considering its operational business environment. The upcoming Swiss Corporate Tax Reform III is expected to add new measures to maintain the country’s attractiveness.

Let’s Talk

For a deeper understanding of how these issues might affect your business, please reach out to one of the PwC professionals listed below, or your local Swiss contact:

Urs Landolf
PwC
Birchstrasse 160
Postfach, 8050 Zürich
urs.landolf@ch.pwc.com
+41 58 792 43 60
Armin Marti
PwC
Birchstrasse 160
Postfach, 8050 Zurich
armin.marti@ch.pwc.com
+41 58 792 43 43
Christoph Pauli
PwC
Birchstrasse 160
Postfach, 8050 Zurich
christoph.pauli@ch.pwc.com
+41 58 792 44 24
Swiss Tax Desk New York
Martina Walt
PwC
martina.m.walt@us.pwc.com
+1 646 471 6138