“LT Loan AG” had entered into a cash pool agreement with two related parties, A Ltd. and C Ltd. According to the agreement, the interest rate on deposits in the cash pool were negative, and LT Loan AG therefor paid interest to A and C on the deposits it had in the cash pool.
Following an audit the tax authority issued an assessment of additional taxable income in the form of interest on “LT Loan AG” deposits in the cash pool, set according to the Swiss Safe Harbour interest rates.
“LT Loan AG” lodged a complaint or appeal with the Tax Appeals Court, which was dismissed.
An appeal was then filed by “LT Loan AG” with the Administrative Court.
Decision
The Administrative Court upheld the decision of the Tax Appeals Court and dismissed “LT Loan AG”‘s appeal.
The Swiss safe harbour rates only apply to long term loans (12 month or more). However, based on the facts of the case, the deposits in the cash pool could not be considered short term. The Safe harbour interest rates therefore applied, since “LT Loan AG” was unable to prove that the negative interest on its deposits in the cash pool were at arm’s length.
Excerpt in English
“6.2 As the lower court considered, the cash pooling at issue here is in principle a legal relationship that is not objectionable under civil and tax law (cf. E. 2 of the contested decision), which is reflected in the accounts in (loan) receivables of the tax payer from the cash pool or C Ltd. These receivables were recognised by the tax payer in the tax periods at issue in fixed assets (“non-current assets”); from this – expressly endorsed by the auditor of the tax payer (cf. E. 4d/ee of the contested decision) and confirmed as compliant with commercial law (cf. E. 4d/gg of the contested decision) – the lower court concluded that the accounting was in accordance with commercial law, referring to the principle of authoritativeness (see E. 4f/bb of the contested decision) that the loan receivables were acquired with the intention of long-term use or long-term holding, i. e. a period of more than twelve months (Art. 959 para. 3 sentence 2 i. V. m. Art. 960d para. 1 and 2 of the Swiss Code of Obligations [CO]; see E. 3e and 4c/aa of the contested decision). According to the lower court, the intention to hold for the long term manifested itself not only in the accounting method, but also in other respects: Firstly, it should be noted that the loans from the tax payers to C Ltd. had already existed since the 2009 financial year; in the notes to the balance sheet for the 2016 financial year, it was expressly stated with regard to the loans that the tax payer had already been participating in the cash pool system of the entire A-Group since the 2009 financial year and had receivables from the group-internal cash pools due to the “zero cash pooling principle”; In addition, it was stated there that the agreements regarding the cash pool (i.e. i.e. the legal bases under civil law) had been concluded for an indefinite period (see E. 4d/aa of the contested decision). At the end of the 2014 tax period, the cash pool holdings of the tax payers amounted to CHF …; in the 2015 financial year, a receivable from group companies of CHF … was then recognised in the balance sheet (of which CHF … from group companies). … to C Ltd. and Fr. … to A Ltd.), and in the 2016 financial year a receivable of Fr. … (of which Fr. … to C Ltd. and Fr. … to A Ltd.) (see E. 4d/cc of the contested decision). The receivables from the cash pool leaders had therefore existed for more than twelve months at the balance sheet dates for the 2015 and 2016 financial years – in line with the intentions of the tax payers – and had also existed during the year – in relation to C Ltd. with one one-day exception (see E. 4f/oo of the contested decision) – showed a consistently positive balance (see E. 4d/dd and E. 4d/ff of the contested decision). According to the lower court, the fact that a short notice period of 45 days had been agreed in the contracts between the tax payer and C Ltd. and that funds could be withdrawn at any time within three days did not change the qualification as a long-term investment. The allocation of an asset to fixed assets does not depend on its actual condition or the possibility of obtaining it under civil law through cancellation or withdrawal; rather, the purpose or the intentions of the tax payer must be taken into account. In the present case, these were aimed at long-term use, which was expressly confirmed by the auditor/auditor of the tax payer (see E. 4f/rr of the contested decision).
6.3 First of all, with regard to the considerations of the lower court, it must be pointed out that the principle of the authority of the commercial balance sheet for the question, whether a short or long-term loan exists in a specific case and whether – subsequently – the interest rates agreed between two group companies can withstand a third-party comparison. If an overall consideration of the contractual basis and the purpose of a loan suggests it, the tax authorities can and must assume a short-term loan (or, conversely, a long-term loan despite this loan being recognised in the balance sheet under fixed assets) without having to make a balance sheet amendment or balance sheet correction (in this respect, the complaint is correct, p. 11). However, since it can be assumed that an annual financial statement (certified by an auditor as compliant with commercial law) fulfils the principles of completeness, truth and verifiability (Art. 957a para. 2 items 1 and 5 CO), there must be valid reasons for such a deviation. If a company recognises a loan granted within the group – as in the present case – under fixed assets, this only (but still) constitutes a – weighty – indication that a long-term loan exists (cf. analogously VGr, 16 December 2015, SB.2015.00005, E. 4.7).”
“6.5 In summary, it should therefore be noted that the lower court correctly – and in accordance with the criteria developed by doctrine and practice (see E. 5.4, second paragraph above) – qualified the loans granted by the tax payer to C Ltd. as long-term loans. The safe harbour interest rates issued by the FTA can therefore (in principle) be used as a basis for examining whether the loan interest received complies with third-party comparisons (see E. 5.5 above).
7.
The loan interest charged by the tax payer in relation to C Ltd. (-0.85 % and -0.84 %, cf. para. I.D and I.E above) are outside the range specified by the safe harbour interest rates of the FTA for the tax periods in dispute (see E. 5.4 above). This gives rise to a rebuttable presumption of the existence of a pecuniary benefit (cf. E. 5.5 above). In this initial situation, the tax payer is free to prove that the interest rates in relation to C Ltd. stand up to a third-party comparison after all.”
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