As mentioned in our blog article on 18 March 2014, the Big 4 founded an Interest Group (IG Principal) allowing Swiss principal companies to combine forces against the new guidelines.
In the last couple of months, we had several internal discussions and working group meetings regarding the individual aspects of the new guidelines. IG Principal also had a first meeting with the Swiss Federal Tax Authorities (SFTA) last year where some points were still left open. In February this year IG Principal had a second meeting where most points have been discussed.
We would like to give you a brief update of the meeting with the SFTA of 3 February 2015.
- General remark: The SFTA will not return to the previous practice. A number of new principal company rulings were meanwhile signed on the basis of the new rules. The SFTA wants to find appropriate solutions for each Principal company.
- Margin: The primary 3% gross margin test will remain as it is. The fall-back test considering the “higher costs” will be amended in a way that the higher costs plus a mark-up of 5% on these costs will be accepted. The mark-up will most probably not be applicable on external costs. How the qualifying costs for the mark-up will be determined and what they will include has to be discussed with the cantonal tax authorities.
- Exclusivity: There are no basic changes to the rules. For existing Principal companies where the exclusivity test will be a severe problem i.e. where many of the distribution companies will not meet the 10% test and where it would take unreasonable effort to reorganize the distribution companies just to fulfil the rules for the relevant years 2016, 2017 and maybe 2018 (in anticipation of the corporate tax reform 3 becoming effective in 2018 or very soon thereafter), the SFTA will be open to discuss individual cases and most likely not enforce the exclusivity rules.
- Outsourcing: Outsourcing support or auxiliary functions to shared service centers will not lead to a reduction of the profit allocation to the PE abroad. Outsourced principal functions will lead to an adjustment of the profit allocation to the PE abroad or the principal company taxation will not be granted. Individual case will be reviewed in order to find an appropriate solution.
- Timing: The SFTA confirmed that the first tax year where the new practice becomes applicable is FY 2016.
- Next steps: IG Principal will monitor how the new rules apply in the individual cases and whether the objective of the SFTA to find good solution for each of the Principal Companies will be achieved. If the IG Principal comes across issues for individual Principal companies which could be resolved in a better way, the SFTA can be contacted. Should certain issues recur regularly, IG Principal could try to find a conceptual solution for this problem.
We believe the SFTA accepted our solution of cost plus 5% for the margin also because IG Principal brought forth some good arguments, illustrating them with examples. Furthermore, if a company has an existing Principal company ruling and prepares well for the exclusivity question, we are of the opinion that solutions can be found to bridge the time until the CTR III will be implemented. This could help as companies don’t need to change their business models now based on the new practice. The outsourcing topic will probably be tricky in practice. It has to be demonstrated that the core principal functions are carried out by people with the appropriate qualification and seniority who reside in Switzerland.
The SFTA will send the official communication on the modified practice and amended excel templates to the cantonal tax authorities shortly. Companies should continue to prepare their scenario calculations under the modified practice, including the cost-plus approach.
Since the new rules are quite flexible and it is difficult to get an advanced confirmation from the Swiss tax authorities whether a principal company fulfills the new requirements, it is advisable to obtain a second opinion.
- Corporate Tax services at KPMG
- Blog article: Update on Swiss Principal Structures 18 March 2014
- Blog article: Update on Wiss Principal Structures 4 February 2014