“H Borrower and Lender A/S”, a Danish subsidiary in the H Group, had placed deposits at and received loans from a group treasury company, H4, where the interest rate paid on the loans was substantially higher than the interest rate received on the deposits. Due to insufficient transfer pricing documentation, the tax authorities (SKAT) issued a discretionary assessment of taxable income where the interest rate on the loans had been adjusted based on the rate received on the deposits. Decision of the Court The National Tax Tribunal stated that the documentation was deficient to such an extent that it could be equated with a lack of documentation. The tax authorities had therefore been entitled to make a discretionary assessment. The National Tax Court referred, among other things, to the fact that the company’s transfer pricing documentation lacked a basic functional analysis of the group treasury company with which the company had controlled transactions. “The National Tax Tribunal finds that the company has not proved that SKAT’s estimates are not in accordance with the arm’s length principle. It is hereby emphasized that the company has received a loan from H4, where the interest rate is based on a base interest rate plus a risk margin of 130 bps. Thus, the interest paid on these loans has been higher than the interest received by placing liquidity with H4. The National Tax Tribunal does not find it proved by the company that these two cash flows should constitute different financing instruments with different risks, and that the interest rates must therefore be different. The lack of functional analysis for H4 in the TP documentation means, in the opinion of the National Tax Tribunal, that it cannot be considered to be in accordance with the arm’s length principle, that H4 must receive a proportionately higher interest payment from the company than what is paid to the company. In this connection, it is taken into account that H4 has no employees and thus cannot be considered to have control over the risks associated with the various controlled transactions. The fact that the company has entered into different contractual obligations for the two cash flows is given less weight due to the lack of a functional analysis for H4. The company’s argument that the interest rate for deposits with H4 according to the National Tax Court’s previous decision, published by SKM2014.53.LSR, must be determined without risk margin, as there is a full set-off against the company’s loan from H4, can not either taken into account, as the interest rates for the two cash flows in this way would be different. The National Tax Tribunal finds that the decision in SKM2014.53.LSR must be interpreted as meaning that the interest rates for comparable cash flows that are fully hedged between two group parties must bear interest at the same rate, as the cash flows in this way cancel out each other.” Click here for translation ...

A GmbH, based in Zurich, was a subsidiary of the D group operating mainly in the field of consumer electronics worldwide, headquartered in country E. A GmbH was primarily responsible for acquiring exploitation rights to … and other related activities. The D Group also owned company F in Land H, which was responsible for the global treasury and cash pooling of the Group. On December 1 2008 A GmbH had entered into an agreement with Company F for the short-term deposit of excess capital and short-term borrowing. Under the terms of the agreement, if the balance was in A GmbH’s favor, A GmbH would be credited interest based on the one-month London Interbank Bid Rate (LIBID) minus 6.25 basis points, but not less than 0.05%. Following an audit in relation to the tax periods of 1.4.2009-31.3.2010 and 1.4.2010-31.3.2011, the tax authorities took the view that the cash pool credit contains a proportion of long-term loans to company F and insofar as the interest rate (determined on the terms of short-term deposits ) was too low compared to third-party terms. In the two financial years a minimum balance of Fr. … resp . … had never fallen below the base amount as a long-term loan. An assessment was issued on May 26, 2014 as a result of insufficient interest resulting in a hidden profit distributions based on the LIBOR interest rates. The appeal against the decision was dismissed by the Tax Appeals Court on 25 November 2016 with regard to the direct federal tax of the 2009/10 tax period and was partially approved with regard to the federal tax period 2010/11. The partial approval was made because the court of appeal reduced the applicable interest rate for 2011 from 2.25% to 2.0%, resulting in a reduction of the hidden profit distribution. A GmbH was charged for the direct federal tax of 1.4.2009-31.3.2010 with a taxable net profit of Fr. … and for the period from 1.4.2010-31.3.2011 with a taxable net profit of Fr. …. The Administrative Court partially upheld the complaint filed by A GmbH against the decision of the Tax Appeals Court by judgment of 7 December 2016 (SB.2016.00008) and dismissed the case for further investigation and for a new decision to the Tax Appeals Tribunal. It considered that the deposit in the cash pool that qualifies as a longer-term credit must be recalculated in the light of the considerations. On the basis of the facts presented by A GmbH and the evidence submitted, the administrative court concluded that the interest rates applicable in the D Group for longer-term loans to company F were in line with market conditions and, in the specific case, for the longer-term interest rates qualifying assets are decisive. The tax recourse court partially upheld the complaint in the second case by decision of 25 July 2017 and assessed the complainant for the direct federal tax of 1.4.2009-31.3.2010 with a taxable net profit of Fr. … and for the period of 1.4.2010- 31.3.2011 with a taxable net profit of Fr. …. The case was appealed to the Administrative Court on 29 August 2017, by the Swiss Federal Tax Administration (FTA). The Federal Tax Administration requested that the decision of the Tax Appeals Tribunal should be set aside and the taxable net profit with regard to the direct federal tax of 1.4.2009-31.3.2010 be set at CHF. … and for the tax period from 1.4.2010-31.3.2011 to Fri …. In a statement of objection dated 21 September 2017, A GmbH requested the dismissal of the complaint under costs and repercussions Click here for translation ...

The distinction between cash pool receivables and long-term loans. A GmbH is a group company of the global A-group. The A Group also includes company F Ltd, which is responsible for the global treasury and cash pooling of the A Group. In 2008, A GmbH entered into an agreement with F Ltd on the short-term deposit of excess liquidity and short-term borrowing (cash pool). Under the terms of the agreement, if the balance were in A GmbH’s favor, recievables would be credited interest based on the one-month London Interbank Bid Rate (LIBID) less 6 , 25 basis points, but at least 0.05%. The Swiss tax administration argued that a portion of the cash pool receivable had to be treated as a long-term loan bearing higher interest rates. The long-term loan was set to the minimum cash pool receivable balance of each fiscal year. The interest rate on the long-term loan was set to the Swiss „Safe Habor Rates“ according to the annual circular letters published by the Swiss Federal Tax Administration. The Tax Appeal Court largely confirmed the decision of the tax administration. However, it reduced the applicable interest rate for the calendar year 2011 from 2.25% to 2.00%. The Tax Appeal Court argued that the tax administration had unreasonably deviated from its longstanding method when determining the 2011 safe haven interest rate, so that the 2.25% mentioned in the circular letter were too high. A GmbH. appealed the decision to the Administrative Court. Based on the overall circumstances, the amount of the assets invested in the cash pool did not comply with the arm’s length principle according to the Administrative Court. In this respect, it was correct to qualify a portion of the cash pool receivable into a mid- or long-term loan. Concerning the size of the long term loan, the simple average of the cash pool receivable balance at the beginning and closing of the fiscal year could be taken as a starting point according to the Administrative Court. This question was referred back to the tax administration. Concerning the applicable interest rate on the long-term loan, the Administrative Court stated, that the tax authorities cannot in every case refer to the Swiss “Safe Habor Rates”. The Court concluded that the interest rates offered by F Ltd. for long-term intra-group loans were in line with the arm’s length principle. Click here for other translation ...

In the Nestlé Finance case, a cash pool/treasury activity was transferred to a related Swiss entity. The function had been purely administrative, carried out exclusively for the benefit of parties related to the French company. The French company did not receive any compensation for the transfer of the cash pooling activity. First the Administrative Court concluded that the transfer of an internal administrative function to a foreign entity – even if the function only involved other affiliated companies ‘captive clientele’ – required the payment of arm’s-length compensation. This decision was then appealed and later revoked by a decision of the Administrative Court of Appeals. Click here for translation . . . Click here for translation ...