Adjustments to Swiss principal company
Due to international pressure to abolish harmful tax competition, the Swiss government is reviewing the current tax regimes it has in place. In an official letter of the federal tax authorities to the cantons on March 6, 2015, it has announced that it will change it approach towards Swiss principal companies as from the financial year 2016.
In summary, the new approach of the authorities will result in the following modifications of previous policy:
- Substance: Principal companies must have sufficient substance. If a principal company outsources important principal functions to (affiliated) companies, it may result in a different profit allocation for the Swiss principal company.
- Limited risk distributors (LRD) and commissionaires must perform limited-risk distribution ‘exclusively’ (90%) for Swiss or other group principals. There will be grand fathering rules for existing distribution companies who cannot be restructured in a timely manner to meet this test due to organizational or legal constraints.
- 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.
Companies with Swiss principal company structures need to review the impact of this change in interpretation of the Swiss tax authorities. The upcoming Swiss corporate tax reform will also have a significant impact on other existing, favourable Swiss tax regimes (inter alia mixed holding). It seems that the international pressure on Switzerland to reform, is successful. It needs to be monitored whether new Swiss tax law remains to be attractive as it was in the past.back to overview