10 minute read 5 Feb 2024
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New 2024 SFTA safe-harbor interest rates for advances and intercompany loans

Fabian Berr
By Fabian Berr

Director, Transfer Pricing and Operating Model Effectiveness | Switzerland

More than 14 years of transfer pricing experience, Focus on financial and IP transactions, Master degree in Economics, regular CFA Institute member.

10 minute read 5 Feb 2024
Related topics Tax Tax planning Tax compliance Tax controversy
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The Swiss Federal Tax Administration (SFTA) has published new 2024 safe-harbor interest rates loans in CHF and in foreign currencies.

In brief

  • Publication of new 2024 safe-harbor interest rates
  • Rates for CHF and foreign currencies

On 29/30 January 2024 the SFTA has published the Circular Letters No. 207 and 208 defining the applicable safe-harbor interest rates for intercompany (“IC”) advances and loans denominated in Swiss Francs (“CHF”) and in foreign currencies. In line with the market trend, there were only minor changes in the interest rates compared to the significant increase in 2023.

Minimum and maximum safe-harbor interest rates applicable in 2024

At the beginning of each year, the SFTA updates the list of applicable safe-harbor interest rates. This is an important exercise since many taxpayers rely on this guidance to set the prices of many of their intragroup transactions for the year.

The minimum lending rate in CHF is again at 1.50% as in 2023, whereas the maximum borrowing rate decreased from 2.25% to 2.00% for loans above CHF 1 Mio. and remained constant at 3.75% for loans below CHF 1 Mio. For EUR, the safe-harbor minimum lending rate has decreased from 3.00% in 2023 to 2.50% in 2024. For USD, the minimum lending rate has again increased from 3.75% in 2023 to 4.25% in 2024. For avoidance of doubt, the previously mentioned safe-harbor minimum lending rates apply to transactions financed entirely by equity.

For debt-financed loans made by Swiss entities, the minimum rate is set at the respective debt interest rate plus a margin of 0.50% (0.25% for the portion of loans above 10 million in CHF only). The final interest rate should however not be lower than the minimum safe-harbor lending rate in the published currency.

For the determination of the maximum interest rate payable by Swiss entities under the safe-harbor rules, a spread is to be added. The spread stipulated in the Circular Letter No. 207 for CHF (Digit. 2.2) also applies on IC advances and loans denominated in foreign currencies. For example, for operating loans received by trading and manufacturing companies, a spread of 2.25% can be added to determine the safe-harbor maximum allowable rate for the portion of loan up to the equivalent of CHF 1 Mio., and this spread is then reduced to 0.50% for the portion above. In the case of holding and asset management companies, the applicable spreads are 1.75% and 0.25%, respectively.

Consequently, the maximum borrowing rates for loans from related parties denominated in CHF, EUR and USD can be summarized as follows:

Comparison with market rates

Every year the applicable safe-harbor rates are determined by SFTA based on several market references, including swap rates and long-term bonds. Therefore, it can be noticed that Swiss safe-harbor published rates generally show a correlation with market rates, for instance in the case of loans having a credit rating of around BBB and a tenor of five years.

While there was a huge discrepancy between the safe-harbor rates and actual market rates in 2022, reviewing the applicable safe-harbor rates and actual market rates for 2023 shows that, at least for EUR, there was generally a good fit for at least BBB and AA rated companies.

However, it remains clear that a single interest rate cannot capture all rating types. Therefore, even in years where interest rates remain relatively stable, the safe-harbor rates more or less resemble market rates for a very limited set of ratings. For instance, in the diagram above, for BB rated companies, the safe-harbor rates would never have provided a market rate throughout 2023, but these rates would have been significantly higher than the 2023 safe-harbor rates.

These differences could lead to conflicts in an international context, when other countries only admit interest rates calculated based on the market approach. For instance, this would mean that if a Swiss company with a BB rating borrowed from a foreign-related entity in Q1 of 2023 in EUR, the foreign tax authorities might have required an interest rate which would have been much higher than the maximum borrowing rate allowed by the SFTA.

Conclusion and recommendations

Nowadays, differences between market and safe-harbor rates are often increasing due to higher volatility and changes in the markets, and this puts more pressure on multinational companies which are relying on the safe-harbor rates to defend their position in Switzerland. However, even if the interest rate environment remains relatively stable as in 2023, the safe-harbor rates only resemble market rates for a very limited set of ratings.

The Circular Letters specify that interest rates deviating from the safe-harbor guidance are acceptable if it can be shown that the applied rates adhere to the arm’s length principle. In practice, such deviations are accepted by the Swiss tax authorities generally when taxpayers provide supporting evidence of such deviation. Appropriate transfer pricing analyses and corresponding documentation should be available to deliver this proof.

In addition, depending on the materiality of the transaction it is recommended to enter into a ruling with the Swiss tax authorities (SFTA and/or at cantonal level) in order to confirm upfront the arm’s length nature of interest rates in cases of deviations from those published in the Circulars.

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Summary

To avoid negative tax consequences in Switzerland, we strongly recommend reviewing and adjusting your interest rates on IC financing transactions – payable as well as receivable – to ensure their compliance with the new safe-harbor interest rates or ensure appropriate transfer pricing analyses are in place to support the chosen interest rates.

Acknowledgements

We thank Marc-Antoine Chevalley, Victor Denekamp, Joao Goncalves Ferreira and Michael Kornel for their valuable contribution to this article. 

About this article

Fabian Berr
By Fabian Berr

Director, Transfer Pricing and Operating Model Effectiveness | Switzerland

More than 14 years of transfer pricing experience, Focus on financial and IP transactions, Master degree in Economics, regular CFA Institute member.

Related topics Tax Tax planning Tax compliance Tax controversy
Upvote