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February 16, 2023
2023-5200

Switzerland significantly increases safe harbor interest rates for 2023

  • The Swiss Federal Tax Administration (SFTA) published the 2023 safe harbor interest rates for Swiss Franc (CHF) and foreign currencies for loans to and from shareholders and related parties. The rates significantly increased from the 2022 rates.

  • The new safe harbor interest rates are applicable for calendar year 2023 (period from 1 January 2023 until 31 December 2023).

  • The increased safe harbor interest rates generally allow higher interest expense deductions on related party debt of Swiss companies. On the other hand, the interest on receivables from related parties held by Swiss compa-nies may need to be increased to comply with the safe harbor rate.

  • It is critical to ensure compliance for calendar year 2023 or to confirm that interest rates deviating from the safe harbor rate are at arm’s length and properly documented. Otherwise, adverse Swiss corporate income tax and withholding tax implications may arise.

Swiss safe harbor interest rates for 2023

On 7 and 8 February 2023, the SFTA published its annual Circular Letters concerning the safe harbor interest rates for loans to and from shareholders and related parties. The two Circular Letters (one for loans denominated in CHF and a separate one for loans denominated in foreign currencies) can be downloaded from the SFTA website:

Loans in CHF: German, French, Italian

Loans in foreign currency: German, French, Italian

2023 increase of minimum lending interest rates (equity financed)

Compared to last year, the following changes have been made:     

  • The safe harbor minimum lending rate for equity financed CHF-denominated loans increased from 0.25% in 2022 to 1.50% in 2023.

  • The safe harbor minimum lending rate for equity financed USD-denominated loans increased from 2.00% in 2022 to 3.75% in 2023.

  • The safe harbor minimum lending rate for equity financed EUR-denominated loans increased from 0.50% in 2022 to 3.00% in 2023.

  • The safe harbor minimum lending rate for equity financed GBP-denominated loans increased from 1.25% in 2022 to 5.25% in 2023.

2023 increase of minimum lending rates (debt financed)

For debt-financed loans granted by Swiss lenders, as per prior years the applicable minimum lending rate is the respective debt interest rate plus a margin of 0.50% (0.25% for the portion of loans above 10 million in CHF only) but not lower than the minimum safe harbor lending rate for equity financed loans in the respective currency (e.g., 1.50% for CHF).

2023 increase of maximum borrowing rates

The maximum borrowing rate is the minimum lending rate as shown above plus a spread. The published Circular Letters received the following updates:

  • Trading and manufacturing companies

    • 2.25% spread for the portion of a loan up to the equivalent of CHF1 million (compared to 2.75% in 2022)

    • 0.75% spread for the portion of a loan above the equivalent of CHF1 million (unchanged)

  • Holding and asset management companies

    • 1.75% spread for the portion of a loan up to the equivalent of CHF1 million (compared to 2.25% in 2022)

    • 0.5% spread for the portion of a loan above the equivalent of CHF1 million (unchanged)

These spreads are applicable irrespective of the currency of the loans. Compliance with the Swiss thin cap rules are nevertheless still to be adhered to.

Consequently, the 2023 Swiss safe harbor interest rates for CHF and the most common foreign currencies are as follows:

Minimum lending interest rates

Equity financed

Debt financed

CHF

1.50%

up to CHF10m:

Debt interest rate + 0.50% spread (min. 1.50%)

above CHF10m:

Debt interest rate + 0.25% spread (min. 1.50%)

USD

3.75%

Debt interest rate + 0.50% spread (min. 3.75%)

EUR

3.00%

Debt interest rate + 0.50% spread (min. 3.00%)

GBP

5.25%

Debt interest rate + 0.50% spread (min. 5.25%)

              

Maximum borrowing interest rates

 

Trading and manufacturing companies

Holding and asset management companies

 

up to CHF1m

above CHF1m

up to CHF1m

above CHF1m

CHF

3.75%

2.25%

3.25%

2.00%

USD

6.00%

4.50%

5.50%

4.25%

EUR

5.25%

3.75%

4.75%

3.50%

GBP

7.50%

6.00%

7.00%

5.75%

Different safe harbor interest rates are applicable to real estate loans denominated in CHF. See Circular Letter for loans in CHF. The minimum lending interest rate for other currencies can be retrieved from the Circular Letter for foreign currencies (refer to last page of the PDF, column 2023 and the particular currency). See further below regarding the spread to be added to determine the maximum borrowing interest rate.

Implications

In general, Swiss tax authorities do not challenge the interest deduction and interest income at the level of a Swiss company if the published minimum interest rates for loan receivables and the published maximum borrowing interest rates for loan payables are adhered to.

The published Circular Letters specify that interest rates deviating from the safe harbor interest rates provided by the SFTA are accepted as long as the applied rates adhere to the arm’s-length principle. In practice, such deviations are generally accepted by the Swiss tax authorities when taxpayers can provide supporting evidence. Appropriate transfer pricing analyses and corresponding documentation need to be available to demonstrate arm’s-length terms and conditions.

Interest rates not at arm’s-length result in adverse Swiss tax implications including:

  • Additional corporate income tax for imputed interest income and/or add back of interest expense

  • Withholding tax on constructive dividends

It is strongly recommended to review and potentially adjust interest rates on loan transactions of a Swiss company with shareholders and related parties. The increased safe harbor interest rates generally allow higher interest deductions on payables of Swiss companies. For loans granted by Swiss companies, it should be ensured that the interest income is still in line with the minimum lending safe harbor interest rate or proper analysis and documentation is available to demonstrate the arm’s length terms and conditions.

In addition, depending on the materiality of the loans taxpayers should seek an advanced tax ruling with the Swiss tax authorities (SFTA and cantonal tax authority) in order to confirm the arm’s-length nature of the conditions and terms of the loans including typically the level of interest rate but also the applied spread and/or debt to equity ratios.

_______________________________________

For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP (United States), Switzerland Tax Desk

Ernst & Young Ltd, Zurich

Ernst & Young Ltd, Bern

Ernst & Young Ltd, Geneva

 
 

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