Switzerland

  1. In your jurisdiction, what are the legal bases for eliminating double taxation further to a transfer pricing reassessment (European Arbitration Convention, mutual agreement procedures provided for by tax treaties)? In addition to the procedures set forth by such tax treaties, is there any other (formal or informal) domestic procedure in your jurisdiction?
  2. In addition – as the case may be – to the European Arbitration Convention, did your jurisdiction sign tax treaties with other States including an arbitration procedure? If yes, can you give the list of such States?
  3. In your experience, in your jurisdiction, how long does it take generally to eliminate the double taxation under the European Arbitration Convention and/or mutual agreement procedures set forth by tax treaties (and/or the domestic procedure if it exists)?
  4. In your jurisdiction, what are the starting point and time limit to initiate a procedure to eliminate double taxation resulting from a transfer pricing reassessment?
  5. If a reassessment is issued by your tax authorities, which State must receive the application for the international procedure to eliminate double taxation The terms "international procedure to eliminate double taxation" mean the European Arbitration Convention or a mutual agreement procedure set forth by a tax treaty. (your State? the other State concerned? both States?)
  6. What are the formal conditions to initiate an international procedure to eliminate double taxation? Is there a list of documents to provide? To which department of the tax authorities (name, address) must the request be sent?
  7. In which cases would the competent authority of your jurisdiction refuse to engage/participate to the international procedure to eliminate double taxation?
  8. Is tax collection suspended during the procedure?
  9. Assuming the procedure results in an agreement on a way to cancel double taxation, how is generally such agreement implemented in your jurisdiction?
  10. In your jurisdiction, is it possible to engage concomitantly an international procedure to eliminate double taxation and litigation in front of courts? If yes, is it necessary at some stage to abandon the litigation in order to conclude/finalize the international procedure?

As a third party state, Switzerland is not a party to the 90/436 EEC Convention of 23 July 1990 on the elimination of double taxation in connection with the adjustment on profits of associated enterprises (also referred to as the European Arbitration Convention). The legal bases for the procedures to eliminate double taxation further to a transfer pricing reassessment are set forth in the applicable Swiss Double Taxation Treaties (hereinafter “DTTs”).

In principle, the Swiss DTTs do not provide for any specific provisions concerning the applicable procedure for corresponding adjustments.

In practice, adjustments are made as follows:

  • In case of a not finally assessed tax year: A corresponding adjustment is possible unilaterally in the ordinary assessment procedure under the following conditions:
    • The competent Swiss tax authority comes to the conclusion that it would have carried out a primary adjustment too if it were in the position of the foreign tax authority;
    • The transfer pricing modalities were applied in good faith and not obviously wrong;
    • Limitation period of assessment is not expired.
  • In case of a finally assessed tax year: A corresponding adjustment is possible on the basis of a mutual agreement according to the applicable DTT when Article 25 of the OECD Model Tax Convention (“OECD-MTC”) is included.

However, even without a mutual agreement procedure it is under exceptional circumstances possible that the Swiss tax authorities come to the conclusion that the double taxation has to be fully remedied unilaterally on the Swiss side even in case of a finally assessed tax year. In such cases, the implementation of the corresponding adjustment could only be carried out with the consent of the competent cantonal authorities due to procedural reasons.

2. In addition – as the case may be – to the European Arbitration Convention, did your jurisdiction sign tax treaties with other States including an arbitration procedure? If yes, can you give the list of such States?

As per July 2014 the following double tax treaties included an arbitration procedure:

  • Article 25 paragraph 5 of the DTT with Australia;
  • Article 25 paragraph 5 of the DTT with Austria;
  • Article 25 paragraph 5 of the DTT with Belgium;
  • Article 24 paragraph 6 of the DTT with Canada;
  • Article 25 paragraph 5 of the DTT with Denmark (including Faroe-Island);
  • Article 27 paragraph 5 of the DTT with France;
  • Article 25 paragraph 5 ff. of the DTT with Germany;
  • Article 24 paragraph 5 of the DTT with Great Britain
  • Article 24 paragraph 5 of the DTT with Greece;
  • Article 24 paragraph 5 of the DTT with Hong Kong;
  • Article 25 paragraph 5 of the DTT with Iceland;
  • Article 25 paragraph 5 of the DTT with Kazakhstan;
  • Article 25 paragraph 5 of the DTT with Luxemburg;
  • Article 25 paragraph 5 of the DTT with the Netherlands;
  • Article 25 paragraph 5 of the DTT with Poland;
  • Article 25 paragraph 5 of the DTT with Romania;
  • Article 25 paragraph 5 of the DTT with Slovakia;
  • Article 25 paragraph 5 of the DTT with Slovenia;
  • Article 24 paragraph 5 of the DTT with South Africa
  • Article 25 paragraph 5 of the DTT with Spain
  • Article 25 paragraph 6 ff. of the DTT with the US.

According to an oral information by the competent Swiss tax authorities, Switzerland has not yet been involved in any arbitration procedure.

3. In your experience, in your jurisdiction, how long does it take generally to eliminate the double taxation under the European Arbitration Convention and/or mutual agreement procedures set forth by tax treaties (and/or the domestic procedure if it exists)?

It is not possible to predict the duration of a mutual agreement procedure. It is recommended to plan a duration of several years in this context.

4. In your jurisdiction, what are the starting point and time limit to initiate a procedure to eliminate double taxation resulting from a transfer pricing reassessment?

In a first step, the competent tax authorities issue an assessment decision or an assessment proposal subject to further discussions. Thereafter, the transfer pricing reassessment has to be challenged in an appeal procedure. Only then, it is possible to apply for the initiation of a mutual agreement procedure.

If the transfer pricing reassessment results from a foreign tax assessment and the relevant tax year has already been finally assessed in Switzerland at that time, it is recommended to immediately initiate the mutual agreement procedure (or revision procedure under internal Swiss law, see above).

It has to be emphasized that the deadlines set forth in the Swiss DTT may differ from the 3-year period of limitation provided for by Article 25 section 1 of the OECD-MTC.

5. If a reassessment is issued by your tax authorities, which State must receive the application for the international procedure to eliminate double taxation The terms "international procedure to eliminate double taxation" mean the European Arbitration Convention or a mutual agreement procedure set forth by a tax treaty. (your State? the other State concerned? both States?)

From a Swiss point of view, the procedure should normally be initiated in the residence state of the parent company, at least in a parent-subsidiary context. In case of profit adjustments in the framework of flows between sister companies, the procedure can be initiated in the residence state of the sister companies concerned.

6. What are the formal conditions to initiate an international procedure to eliminate double taxation? Is there a list of documents to provide? To which department of the tax authorities (name, address) must the request be sent?

There are no specific administrative guidelines in Switzerland providing for a list of documents to be filed. The general rules according to OECD-MTC apply.

The competent Swiss authority is the State Secretariat for international Financial Matters (hereinafter “SIF”), Bundesgasse 3, 3003 Bern. In case of practical or procedural issues the SIF very often takes into consideration the OECD manual on effective mutual agreement procedures (also referred to as “MEMAP”).

7. In which cases would the competent authority of your jurisdiction refuse to engage/participate to the international procedure to eliminate double taxation?

In the following cases the SIF might refuse to initiate a mutual agreement procedure:

  • If an unilateral reassessment is still possible (e.g. unilateral adjustment of not finally assessed tax years [see question 1]; remission of the taxes in Switzerland because it seems impossible to reach a successful implementation of a mutual agreement procedure with the other contracting state);
  • In cases the taxpayer did apparently not act in good faith (contradictory behaviour);
  • If it was not possible in similar cases for the SIF to reach mutual agreements.

8. Is tax collection suspended during the procedure?

The tax collection is basically not suspended in case of an ongoing mutual agreement procedure.

9. Assuming the procedure results in an agreement on a way to cancel double taxation, how is generally such agreement implemented in your jurisdiction?

The implementation of the agreement does not occur automatically. The taxpayer has to apply for a revision vis-à-vis the competent cantonal Swiss tax authorities.

A possible refund of taxes generally includes a credit of late interest. The refund procedure may vary from canton to canton.

If the correlative adjustment and its tax consequences in Switzerland are explicitly addressed in a mutual agreement, the correlative adjustment is exempt from Swiss withholding taxes. If the mutual agreement does not address the Swiss tax treatment of the secondary adjustment it is still possible that the respective transactions trigger Swiss withholding taxes.

10. In your jurisdiction, is it possible to engage concomitantly an international procedure to eliminate double taxation and litigation in front of courts? If yes, is it necessary at some stage to abandon the litigation in order to conclude/finalize the international procedure?

It is possible to engage in parallel an international procedure to eliminate a double taxation and an appeal against a tax assessment in front of a Swiss court.

A mutual agreement requires the unconditional consent of a tax payer. Therefore and in order to avoid any conflicting court decisions, the competent authorities require from the tax payer to abandon any pending tax litigation before giving the formal consent to the mutual agreement.

In certain cases, the competent authorities allow the tax payer to wait with the consent to the mutual agreement procedure until the internal tax court procedure is terminated.

Authors

David Hürlimann
Attorney at Law, Certified Tax Expert