Recent case-law developments in the field of Transfer Pricing could have a substantial impact on Swiss VAT obligations.

ACo, a Swiss entity incorporated in Geneva, performed asset management activities. ACo was a direct shareholder in CLtd, an entity incorporated in Guernsey acting as a fund manager. CLtd was the fund manager for several funds, having no employees of its own between 1999 and 2005. The first office sublease agreement was signed by CLtd in 2007 and as of 2008 CLtd employed four people. CLtd charged management and performance fees to the funds.

Since 1999 CLtd outsourced investment advisory activities to third parties. From 2001, CLtd also delegated investment advisory activities to ACo. The third-party advisors were compensated with 0.75% of the net asset value of Assets under Management plus between 40% and 70% of the performance fee, whereas ACo was only remunerated with a portion of the management fee. In addition to investment advisory activities, ACo was also providing order placement services for certain funds managed by CLtd, as well as marketing and distribution activities.

In July 2010 the Geneva Tax Authorities (GTA) opened a procedure against ACo, challenging the remuneration of ACo’s services rendered to CLtd. In December 2019, the Federal Supreme Court finally concluded that ACo had indeed been insufficiently remunerated for the investment advisory, order placement, marketing and distribution services rendered. More details on the TP implications of the Court’s ruling can be found in the original blog post.

The court decision demonstrates that offshore structures are increasingly challenged by the Tax Authorities and are difficult to sustain in the post-BEPS world. Legacy intragroup structures involving offshore locations with low substance can translate into material tax and reputational risks, and taxpayers are likely to face increased scrutiny by the Swiss Tax Authorities and the Swiss courts.

Swiss VAT comments

As Transfer Pricing and VAT are intrinsically connected, these developments are also crucial for businesses from a Swiss VAT perspective.

Proper renumeration of intragroup supplies

The Swiss VAT Act (VATA) outlines rules governing the pricing of transactions between closely related parties. Art. 24 para. 2 VATA thus stipulates that these are to be remunerated based on the principle of “dealing at arm’s length”. The purpose of this, is to ensure that related party transactions do not trigger undue tax benefits which would not be achievable in transactions between third parties. This is particularly relevant for transactions between related parties in the financial services and insurance industries, where a limited right to input VAT recovery could otherwise be a driver for inappropriate pricing between related parties.

As per the above, Art. 24 para. 2 VATA thus applies if the remuneration of a supply between related parties is lower than the third-party price for the same supply. The rule also applies if no payment has been made by the recipient. In transactions between related parties within Switzerland, this means that the supplier needs to ensure that the supply is appropriately remunerated, as the supplier is liable to charge and declare the correct amount of VAT.

Offshore structures and the relevance of substance

One of the principles of Swiss VAT is the principle of territoriality. In simple terms, this principle means that Swiss VAT can only be applied to supplies of goods and services on Swiss territory, or where the place of supply is in Switzerland.

For the provision of services, the general rule is that the so-called place of supply (the place of taxation for VAT purposes), is where the service recipient is established or domiciled. When it comes to transactions between businesses, the seat of the economic activity is generally considered the place of establishment.

In the case of offshore companies, substance is factored in when determining the place of supply from a Swiss VAT perspective. The SFTA practice distinguishes between active and passive investment companies (“PIC”), stating that a company is active if it disposes of sufficient infrastructure and personnel to operate the business. With respect to passive investment companies, the SFTA considers the following four cumulative criteria as indications that an entity should be viewed as a PIC:

  • The entity is established in a ‘tax haven’, does not have its own office facilities and does not employ any staff;
  • The entity does not perform any business activities;
  • The entity is a mere investment holding vehicle;
  • The entity acquires management services for e.g. asset management purposes.

If a company constitutes a PIC based on the criteria of the SFTA, services rendered to it by a Swiss service provider may be subject to Swiss VAT under certain circumstances. Namely, services rendered to a PIC are considered to have their place of supply in Switzerland if the ultimate beneficiary of more than 50% of the shares (or equivalent) of the PIC is a Swiss or Liechtenstein resident. Effectively, this means that PICs are treated as transparent entities from a VAT perspective, as the place of supply of any services rendered to a PIC is in fact determined based on the domicile of the ultimate beneficiaries.

For scenarios such as the one recently assessed by the Court, the PIC practice, combined with the rules on arm’s length pricing of transactions between related parties, mean that not only is there an obligation for Swiss suppliers to ensure that the pricing of their supplies is adequate, but they also need to know whether the recipient of those supplies could qualify as a transparent entity for Swiss VAT purposes.


The case at hand is interesting for VAT purposes, since it raises the very relevant question of whether legacy Transfer Pricing arrangements can be relied on for VAT reporting purposes. It is possible that the impact for an entity such as ACo could be limited for VAT purposes, as some of the activities of ACo could be VAT exempt, and other services could qualify as having been “supplied abroad”, unless they are captured by the PIC rules, in which ACo could be subject to a VAT reassessment as well. Whenever TP adjustments are required, it is crucial to ensure that the VAT reporting is also appropriately updated to reflect the adjustments to different revenue streams. If the revenues cannot be reconciled to the filed VAT returns, companies face a risk of VAT reassessment in the event of an audit.

Another critical aspect to be mindful of, is the fact that amendments to the declared revenue amounts generally have an impact on the recovery of input VAT. If for instance the input VAT recovery rate is turnover based, and thus determined based on the ratio of taxable turnover to total turnover, a TP adjustment could substantially skew the recovery rate for past tax periods.

While the arm’s length provisions in the VAT Act and the practice of the SFTA regarding PICs are two effective means of nipping any attempts to lower the VAT burden in the bud, the recent developments suggest an increased focus on the remuneration of supplies between related parties, which is likely to have substantial spillover effects on VAT.

We strongly recommend Swiss-based financial groups not only to review their internal cash flows with regard to possible TP challenges, but also to examine the impacts any adjustments could have on their VAT reporting, both in terms of the reporting of turnover figures, as well as recovery rates. Even if TP and VAT are pulling in the same direction, it is important to be aware of possible VAT stumbling blocks in connection with the application of TP methods.

Please do not hesitate to reach out to us at EY if you have any questions in this area. Kaisa Sparks, Gerd Jäger and Edgar Berger are gladly at your disposal for a discussion.