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Switzerland: Decision of the Geneva Administrative Court in relation to safe haven interest rates on loans to related parties



Ferdinando Mercuri

Maja Magnard

According to the respective Circular Letter published annually by the Swiss Federal Tax Administration (SFTA) a minimum interest rate has to be applied on loans to shareholders or related parties. This minimum interest rate is a safe haven rate in the sense that a lower rate could be applied if the taxpayer were able to sufficiently prove that the safe haven rate is not at arm's length in given circumstances. This safe haven minimum interest rate has to be applied in situations where the loan is fully equity financed and the company has no interest-bearing liabilities. In case the interest charged on the loan to the shareholder or related party were not to meet such safe haven rates and the taxpayer were not able to prove that the actual rates applied were at arm's-length, the tax authorities could i) add back the amount of interest considered to be too low to taxable income and ii) reclassify such interest as a deemed dividend to the borrower, subject to 35% withholding tax (to be grossed up to 53.84 % on the notion that the deemed dividend is equal to 65%, that is net of 35% withholding tax), which may be fully or partly recoverable depending on the case, that is an applicable double tax treaty in case of a foreign recipient.

However, where the loan is funded through liabilities with third parties, the applicable interest rate should amount to the average interest rates paid by the company during the two past financial years, increased by a spread of 0.5% for loans up to CHF10 million ($11 million) and by a spread of 0.25% for loans above this amount. In any case, the minimum interest rate established by SFTA for the relevant tax period has to be applied, even if the interest paid plus above spread would lead to a lower rate.

The above principle was applied by the Geneva Administrative Court (GAC) in a judgment issued on February 19 2013 in the following case:

A Geneva corporation, X SA, granted a loan to its shareholder. The interest rate applied by X SA was in accordance with the SFTA's minimum safe haven rates as above.

However, X SA paid interest on mortgage debt to a third party during the tax period. Although the mortgage debt clearly was related to real estate, the CAG confirmed the view of the tax authorities that since the company paid interest on third party debt, the loan should be considered funded by third party debt and a spread of 0.5 % or 0.25% respectively was to be added to the average interest paid.

Ferdinando Mercuri (

Tel: +41 58 279 9242

Maja Magnard (

Tel: +41 58 279 9240


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