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Switzerland: Revised guidance on the taxation of Swiss principal companies

Jackie Hess
Daniel Stutzmann
The taxation of Swiss principal companies is based on Circular Letter no. 8, which was published by the Swiss Federal Tax Administration (SFTA) on December 18 2001. Provided the requirements set out in the Circular Letter are met, the Swiss principal can for direct federal tax purposes allocate a fixed percentage of trading profits abroad (an international tax allocation), which renders those profits exempt from the Swiss tax base.

The SFTA has recently provided the cantonal tax authorities with revised guidance including detailed calculation guidelines on how this Circular Letter should be applied.

The new guidelines are expected to become effective for companies with existing principal company rulings in most cantons as per tax year 2016 (although some cantons have yet to confirm from the effective date). For new principal company rulings the new guidelines have already to be complied with today. The new guidelines that have to be considered in connection with the principal company allocation for direct federal tax are the following:

  • 3% gross profit margin for commissionaires/LRDs: The trading profit that benefits from the international tax allocation is newly linked to the margin/commission generated at the level of the commissionaire/LRD. As a result, a maximum allocation of 50% of the trading profit abroad is permitted only where the margin/commission at the level of the commissionaire/LRD does not exceed 3% of the gross revenue (or, if higher, the costs of the commissionaire/LRD: the respective costs are comprised of the operational cost and taxes according to the local financial statements of all qualifying commissionaires/LRDs). If the effective remuneration of the commissionaires/LRDs exceeds the allowed remuneration (3% or higher cost) this has to be taken into account for the international tax allocation. The tax allocation will be corrected in the extent of 50% of the exceeding remuneration of the commissionaires/LRDs.
  • Exclusivity of commissionaires/LRDs: An international tax allocation may be claimed only if the distributing company makes sales exclusively for the principal or other principals of the group, that is where the distributing company is entirely dependent on the principal. A dependent relationship will be presumed where at least 90% of the distributor's profit derives from trade with goods of the principal or other principals of the group. The 90% criterion has generally to be met on a long term basis and is assessed on an entity-by-entity basis.
  • Outsourcing of principal operating functions: The outsourcing of principal operating functions to foreign group companies does generally lead to a complete denial of the principal company allocation for direct federal tax. The principal allocation may however still be granted if only individual principal functions are outsourced. In such case however the principal company allocation to abroad will be reduced by 50% of the profit generated by the foreign companies on the outsourced principal functions.
  • Effect of mutual agreement procedure (MAP)/advance pricing agreement (APA): A MAP or an APA no longer will result in an automatic denial of the international allocation to the relevant country (which previously was the case); instead, there only will be an adjustment of the allocation quota.

Groups with existing Swiss principal structures should carefully review these structures and prepare for discussions with the tax authorities regarding the implementation of the new guidelines.

Jackie Hess (
Tel: +41 (0)58 279 6312

Daniel Stutzmann ( )
Tel: +1 (212) 492 4083

Jacques Kistler (
Tel: +41 58 279 8164