On 7 February 2020 the administrative court (Verwaltungsgericht) of the canton of Zurich issued a decision in a transfer pricing case involving a fund management agreement between a Swiss limited company (Aktiengesellschaft) and a related limited company in Jersey. The decision may set a new precedent for tackling artificial structures in the asset management industry and be a wake-up call for Swiss groups that have similar structures in place.

The Zurich Tax Authorities (“ZTA”), after a thorough analysis of the value chain contributions made by both the Swiss and Jersey entities, regarded the two Swiss nationals employed by the Swiss AG as the only two entrepreneurs in the structure that could have possibly taken any significant decisions. On this basis ZTA claimed that the 66% revenue sharing was artificial and inconsistent with the substance of the arrangements and argued instead that the Jersey Ltd should be remunerated with a cost plus, with a mark-up of 10%. This assessment was challenged and brought to the first instance of the cantonal court (Steuerrekursgericht) as well as to the second instance (Verwaltungsgericht). However, both courts ruled in favor of the ZTA’s view that the set-up was artificial and not in line with OECD standards, after applying a substance-over-form approach.

As set out in more detail below, Swiss-based asset managers should review carefully the remuneration of offshore entities in light of this decision.


In 2008, two Swiss individuals, A and B, introduced a structure for the management of a private equity fund in the form of a Jersey law limited partnership (“LP”). Each Swiss person held 50% of the shares in a Swiss AG (“AG” or “the advisor”) as well as 50% of the shares in a Jersey Ltd (“Ltd” or “the GP”). AG and Ltd entered into an investment advisory agreement which stipulated that the AG was the investment advisor (Vermögensberater) and the Ltd the investment manager (Vermögensverwalter), with AG carrying out (all of the) advisory activities on behalf of Ltd on a contractual basis. Any investment advice given by AG was reviewed and decided upon by Ltd and Ltd assumed all risk. A and B were employed by AG as part of the investment advisory team. Ltd had no employees.

The agreement further provided that Ltd would remunerate AG with 66% of the gross fee income.

LP is comparable to a Swiss Kommanditgesellschaft and the Ltd is comparable to the Komplementär. A and B’s interests in Ltd are held via wholly-owned personal holding entities domiciled in Zug.

ey-switzerland-blog-grafik Transfer pricing

In terms of functions and responsibilities it was contractually stipulated that the AG would carry out all relevant functions related to investment advisory: the evaluation and identification of investment targets, continuous risk management, supervision of the performance of underlying investments, etc. AG would then recommend to Ltd several acquisition targets which the latter evaluates and subsequently decides on.

Under such functional split, it would not seem unreasonable to assess that both entities are heavily involved in high value-added activities related to the full asset management cycle, with AG having a larger share of the workload but a lesser share of the risk. Thus, it was agreed that two-thirds of the total fees (of 2.25% on Assets under Management (“AuM”)) should go to the AG, with the remaining one-third remaining with Ltd in Jersey. Furthermore, AG prepared a benchmarking analysis confirming that independent private equity fund of funds (Dachfonds) typically earn management fees of between 0.75% and 1% on AuM, which, at first glance, seems to be in line with the 0.75% of total fees that Ltd withheld from the total 2.25% on AuM.

First tax assessment of 2014

The company was first assessed by the ZTA in the first quarter of 2014 in which they challenged the revenue sharing in place between AG and Ltd. The two Swiss asset managers raised an objection to this assessment based on which an opposition proceeding was opened in which the ZTA issued a detailed reasoning why they believed the current remuneration of Ltd was inappropriate.

The ZTA’s primary argument was that Ltd’s profit and loss account for the years 2008 and 2009 showed basically no expenses and particularly none related to wages or salaries. Indeed, Ltd’s sole personnel were two directors who received each CHF 15,000 (recorded under “audit charges” in the P&L). The ZTA alleged that “it seemed hard to believe” that these two directors would be those taking any final decisions on private equity investments, and even more so when their CHF 15,000 remuneration was compared to the salary and bonus costs of AG, which were CHF 1.6 million and CHF 1.9 million for the two years under consideration.

The authorities further rejected the argument initially brought up by the two Swiss asset managers that Ltd, aside from performing important functions related to portfolio management, would also assume 100% of the risks in case a deal did not happen given that Ltd would have to bear the sunk costs related to any preceding research activities. Even though it may be worth analyzing if this risk is at all material, the ZTA’s arguments rejected in principle outsourcing such a risk to an entity that does not also perform the corresponding people functions that are associated with such risk, effectively anticipating the OECD’s position released a year later in 2015 under the first wave of base erosion and profit shifting (“BEPS”) reports.

Further, the ZTA commented on the applicable benchmarking study, criticizing that it only showed average figures of what funds received as total fees on the market calculated on AuM, but not how much an entity such as Ltd should receive for the actual functions performed as a percentage of the total fee. They also stated that the fact that the total annual fees of 2.25% on AuM exceeded what other funds typically charge does not justify a shift of excess fees to offshore jurisdictions. Thus, the ZTA considered that the benchmarking exercise did not support the taxpayer’s position.

Finally, based on the argument outlined above, the ZTA then assessed the actual functions performed by Ltd, concluding that the entity cannot be considered as performing more than routine functions (fund administration, net asset value calculations, etc.) for which they should receive a fixed mark-up of 10% on their costs incurred. On the other hand, AG was identified as the only entrepreneur in the structure, supported by the two Swiss-resident asset managers performing the important key-entrepreneurial risk taking (“KERT”) functions, to which the residual profit should be allocated after remunerating Ltd with the cost-plus 10%. A corresponding tax adjustment for AG related to financial years 2008 and 2009 was made by the Tax Authorities.

Decision of the Steuerrekursgericht in 2018

The claimant appealed the Tax Authority’s decision to the first instance of the Zurich courts (Steuerrekursgericht), which issued its decision by mid-2018.

The court not only stated that the value analysis already performed by the ZTA was accurate, but also emphasized the particularities pertaining in private equity funds in contrast to traditional open-ended funds investing in highly liquid assets. The court did not see that any of the relevant functions involved in private equity deals (due diligence, negotiation with owners and managers of potential investments or sales and distribution) could have possibly been carried out by anyone else than the two Swiss asset managers. The two directors in Jersey with an annual salary of CHF 15,000 plainly did not possess such knowledge or at any rate did not perform such services. Further, they added the fact that Ltd did not even occupy offices in Jersey.

In addition, upon being questioned how many of the investment recommendations made by AG were ever challenged or turned down by the ultimate decision-maker Ltd, the claimant responded that this had so far never been the case. In each occasion, the recommendations were directly approved and then only formalized by Ltd. The assumption that the two Swiss asset managers would have delegated their ultimate decision power to Ltd did not only appear unlikely to the court, it also appeared to contradict the private placement memorandum in which the two Swiss asset managers were presented as the main selling point of the fund.

The court therefore based its final decision largely on the views of the ZTA and approved the reclassification of Ltd as a routine service provider that should earn a fixed cost-plus 10% remuneration. The court went even further and stated that the 10% should be considered generous as for such low value-added functions it would not seem unreasonable to apply a fixed 5% mark-up based on the latest recommendations made by the OECD.

Decision of the Verwaltungsgericht in 2020

The claimant appealed against the decision of the Steuerrekursgericht to the Verwaltungsgericht in second instance. The main grounds of appeal was that the first instance had wrongfully omitted to obtain or consider an expert opinion procured by AG, (i.e. a separate benchmarking analysis expected to support the implemented revenue sharing). The Verwaltungsgericht held that the first instance had based its opinion on the functional analysis the ZTA had carried out in the first place, and that this analysis correctly represented the facts and circumstances and hence rendered a separate benchmark unnecessary. Therefore, also the second instance turned down the appeal and upheld the approach of the ZTA.   


This court decision clearly shows that:

  • Offshore structures, especially if equipped with little substance, might increasingly be challenged by the Tax Authorities and appear difficult to sustain in the post-BEPS world,
  • Taxpayers will be exposed to more scrutiny by the Swiss Tax Authorities and the Swiss courts, and
  • The Swiss Tax Authorities rely on a pragmatic, substance-based and results-oriented approach when dealing with similar issues.

It is therefore critical that the remuneration of entities in offshore jurisdictions be anchored in objective facts and consistent with the substance of the arrangements as reflected in salaries and in communications to external stakeholders.

Swiss-based asset managers should review carefully the following elements that are likely to come under focus in all Cantons following this decision:

  • Presence and substance in low tax jurisdictions;
  • profit/fee splits for KERT activities;
  • delegation of decision-making to a related party that does not possess the relevant knowledge/resources;
  • outsourcing of investment/portfolio management activities to lean entities; and
  • deviations between what the contractual agreements state compared to the substance of the arrangement.

Please feel free to reach out to Ralf Eckert, Luis Sanchez or Thomas Steinbach to discuss individually how EY could assist you in running an assessment to identify, assess, manage, document or mitigate such risks.