The Swiss Federal Tax Administration (SFTA) has published two Circular Letters with the new 2022 safe-harbor interest rates for advances and intercompany loans in Swiss francs as well as in foreign currencies.

On 27 January 2022 the SFTA has published the Circular Letters No 195 and 196 defining the applicable safe-harbor interest rates for intercompany (“IC”) advances and loans denominated in Swiss Francs (“CHF”) and in foreign currencies. While there is no change for the interest rates applicable in CHF, the applicable safe-harbor interest rates for IC advances and loans in foreign currencies have been amended for 2022.

Minimum and maximum safe-harbor interest rates applicable in 2022

We find ourselves yet again at that period of the year when SFTA updates the safe-harbor interest rates for the year. This is a relevant exercise since many taxpayers rely on this guidance to set the prices of many of their intragroup transactions for the year. This is particularly relevant this year given the changes in reference rates applicable already from 2022 triggered by the IBOR transition.

While the safe-harbor minimum lending rate in CHF remains at 0.25% for 2022, the newly published rates for EUR and USD denominated loans have been increased. For EUR the safe-harbor minimum lending rate has increased from 0.25% in 2021 to 0.50% in 2022. The minimum lending rate has also increased from 1.25% in 2021 to 2.00% for USD (please refer to the table below for all the current interest rates for advances and IC loans denominated in foreign currencies). For avoidance of doubt, the previous 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. 195 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 2.75% 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 0.75% for the portion above. In the case of holding and asset management companies, the applicable spreads are 2.25% and 0.5% respectively.

Comparison with market rates

Every year the SFTA determines the applicable safe-harbor rates based on several market references, including swap rates and long-term bonds. Therefore, it can be noticed that Swiss safe-harbor published rates show a correlation with market rates in the case loans having a credit rating of BBB and a tenor of five years (see chart below). Safe-harbor rates are of course less volatile because published only once a year.

ey-switzerland-blog-chart2-interest rates

However, the situation is generally more complex in the corporate world and one can see that in the case of better or worse credit ratings (e.g., AA and BB), the differences start to be significant when comparing market trends with the safe harbor rates. Such differences could lead to conflicts in an international context when other countries only admit interest rates calculated based on the market approach.

Concretely, this would mean that if a Swiss company with a BB rating borrows from a foreign related entity, the foreign tax authorities might require an interest rate which is higher than the maximum borrowing rate allowed by the SFTA. On the other hand, if a Swiss company lends funds to a foreign affiliate with an AA rating by applying the minimum safe-harbor rates, the foreign tax authorities might challenge the applied rate based on the market approach and refuse the deduction of (part of) the interest expense.

Consequences and recommendations

Nowadays, differences between market and safe-harbor rates are often increasing due to higher volatility in the markets, and this put more pressure on multinational companies which are relying on the safe-harbor rates to defend their position in Switzerland.

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 the interest rate.

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.

Please do not hesitate to reach out to us at EY if you have any questions.

Note: For further background and explanations on the application of safe-harbor rates in Switzerland, please refer to the below article (available in German and French).

Safe harbor interest rates on advances and loans denominated in foreign currencies as of 2022:

European UnionEUR0.750.750.750.500.250.50
AustraliaAUD 2.50 3.00 3.00 1.50 1.00 1.50
BrazilBRL n.a. n.a. 9.50 6.00 5.75 11.25
BulgariaBGN 3.50 1.00 n.a. n.a. n.a. n.a.
ChinaCNY 3.75 3.50 4.25 3.75 3.75 3.75
DenmarkDKK 0.75 0.75 1.00 0.75 0.50 0.50
Great BritainGBP 1.50 1.75 1.75 1.50 1.00 1.25
Hong KongHKD 1.75 2.25 3.25 2.50 1.50 1.50
IndiaINR n.a. n.a. 7.75 7.50 6.25 6.25 
IsraelILS 1.25 n.a. 1.25 n.a. n.a. 1.25 
JapanJPY 0.75 0.50 0.50 0.50 0.50 0.50
CanadaCAD 1.50 2.75 3.25 2.50 1.50 2.50
CroatiaHRKn.a. n.a. n.a. n.a. n.a. n.a.*
MalaysiaMYR 4.00 4.25 4.25 4.00 3.00 3.50
New ZealandNZD 2.75 3.00 3.00 1.50 1.00 2.25
NorwayNOK 1.75 1.75 2.50 2.50 1.50 1.50
PolandPLN 2.50 2.75 3.00 2.50 1.50 1.50
RomaniaRON 3.25 4.50 4.50 n.a. n.a. 4.50
RussiaRUB n.a. 8.25 9.75 8.00 6.50 8.00
SwedenSEK 0.50 0.75 1.00 0.75 0.75 1.00
SingaporeSGD 2.25 2.25 2.75 2.25 1.25 1.50
South AfricaZAR 8.00 7.50 8.50 7.75 5.75 6.50
South KoreaKRW 1.75 2.50 2.50 2.00 2.00 2.00
ThailandTHB 2.50 2.50 2.50 2.00 1.50 1.50
Czech RepublicCZK 1.00 1.75 3.00 2.50 1.50 3.00
HungaryHUF 1.50 1.50 1.50 1.50 2.00 3.50
United Arab EmiratesAED 3.25 3.25 3.25 2.75 2.00 2.50

*Please note that no reference has been provided for HRK currency in 2022