The Swiss Federal Tax Administration (SFTA) has published two Circular Letters with the new 2021 safe-harbor interest rates for advances and IC loans in Swiss francs as well as in foreign currencies.
The SFTA has published Circular Letter No. 189 published on the 28 January 2021 for CHF denominated advances and IC loans and Circular Letter No. 190 on the 29 January 2021 for foreign-currency denominated advances and IC loans. While there is no change in the interest rates applicable to CHF denominated advances and IC loans, the applicable safe-harbor interest rates for advances and loans in foreign currencies have been amended for 2021.
Minimum and maximum interest rates as of 2021
The new safe-harbor interest rates on EUR and USD denominated loans have been substantially reduced. For EUR the safe-harbor interest rate has dropped from 0.50% in 2020 to 0.25% in 2021. The USD interest rate has dropped from 2.25% in 2020 to 1.25% in 2021 (please refer to the table below for all the current interest rates for advances and IC loans denominated in foreign currencies).
The interest rates depicted in the table below apply to advances and IC loan receivables when financed entirely by equity. For debt financed receivables the respective debt interest rate plus a margin of 0.50% applies, at least however the interest rate is as shown in the table. In a case where the foreign currency interest rate for advances and IC loan receivables is below the respective CHF interest rate – according to Circular Letter No. 189 – the CHF interest rate applies.
For the determination of the maximum interest rate payable under the safe-harbor rules a spread is to be added. The spread stipulated in the Circular Letter No. 189 for Swiss francs (Digit. 2.2 for operating loans) also applies on advances and IC loans denominated in foreign currencies. Therefore, for operating loans up to the equivalent of CHF 1 Mio., the spread amounts to 2.75% in the case of trading and manufacturing companies and to 2.25% for holding and asset management companies. For advances and IC loans exceeding the equivalent of CHF 1 Mio., the applicable spread is 0.75% and 0.50% respectively.
Consequences of interest rates deviating from the safe-harbor rates
Interest rates not in line with the safe-harbor rules may be considered as a payment-in-kind with the corresponding withholding tax consequences of 35% (Art. 4 (1) lit. b WHT Act and Art. 20 (1) WHT Ordinance) and may also have income tax consequences.
However, deviating interest rates are generally accepted by the Swiss tax authorities for WHT and income tax purposes if it can be shown that these adhere to the arm’s length principle. Appropriate transfer pricing analyses and corresponding documentation are necessary to deliver this proof.
To avoid negative tax consequences, we strongly recommend to review and adjust your interest rates on advances and IC loans – 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.
Please do not hesitate to reach out to us at EY if you have any questions.
Safe-harbor interest rates on advances and loans denominated in foreign currencies as of 2021:
