Interest rates on intra group loans are a recurring topic. The Swiss Federal Tax Administration (FTA) publishes safe harbour interest rates on an annual basis in advance. Their application will usually prevent unwelcome surprises. But there is more to it.
Annual guidance published by the FTA
In its annually published advance guidance on intra group interest rates the FTA differentiates whether the Swiss company acts as creditor or debtor, what currency the loan was granted in and whether (real estate) security was provided. Excessive or insufficient interest rates may trigger tax consequences in particular for corporate income and withholding tax purposes (WHT).
CHF loans granted by Swiss companies
Equity financed loans in CHF granted by a Swiss company to its shareholders or affiliates must bear a minimum interest rate of 0.25% in 2017. Debt financed intra group loans must bear interest of the higher of 0.25% and actual interest + 0.5% on amounts up to CHF 10m (actual interest + 0.25% on amounts exceeding CHF 10m) in 2017. These minimum requirements aim at insuring a minimum level of interest income for Swiss companies lending to affiliates.
CHF loans granted to Swiss companies
In the case of loans granted by an affiliate to a Swiss company the FTA prevents undue erosion of the Swiss company‘s profit base by setting maximum interest rates. Working credits in CHF granted to a Swiss trading or manufacturing company are subject to a 2017 maximum interest rate of 3% on amounts up to CHF 1 m (1% on amounts exceeding CHF 1 m). For loans granted to Swiss holding and asset management companies the maximum is 2.5% on amounts up to CHF 1 m (0.75% on amounts exceeding CHF 1 m) in 2017.
Loans secured by real estate may bear a maximum rate between 1% and 2.25%, depending among other things on the property‘s purpose (building land, residential or industrial property etc.) and market value.
Non CHF loans
Loans in currencies other than CHF are in principle subject to separate interest rates published in their own circular. Contrary to CHF loans, the interest rate is the same irrespective of the Swiss company acting as lender or borrower. The 2017 interest rates for EUR loans is 0.75% and for USD loans 2.50%.
However, in cases where the interest rate for a non CHF loan granted by a Swiss company to affiliates is lower than the applicable corresponding CHF loan rate the higher CHF rate as minimum rate applies. Conversely, if a loan is granted to a Swiss company and the interest rate for a non CHF loan is lower than the one for a CHF loan, it is admissible to apply the higher CHF rate as maximum rate.
If down or cross-stream loans are granted to Swiss companies financing ratio becomes relevant too. Excessive intra group debt financing will usually be subject to a requalification for tax purposes whereby part of the debt will be deemed to be (non-interest bearing) equity. Any interest paid on such deemed equity will be requalified as hidden profit distribution for tax purposes resulting in tax adjustments both at profit tax and WHT level.