16 May 2017 / article

This is how Switzerland implements BEPS

Switzerland only implements minimum standards under Base Erosion and Profit Shifting (BEPS). Therefore measures such as CFC rules or interest deduction limitations are currently not planned. However, the BEPS implementation will impact private equity investments and investment advisory firms in Switzerland. This is what you need to know.

The OECD has published detailed actions and measures for governments aimed at reducing BEPS strategies. In addition to BEPS, the EU adopted the Anti-Tax Avoidance Directive (ATAD).

The ATAD obliges EU member-states to implement these anti-tax avoidance measures in their local corporate income tax legislation based on certain minimum standards. In the meantime, many individual countries are in the process of adopting anti-BEPS measures in their domestic legislation in line with, or even stricter than, the various BEPS action plans and the ATAD. However, as Switzerland is not a member state of the EU the European BEPS implementation can significantly differ from the domestic implementation adopted in Switzerland.

Switzerland: International minimum standards only

When the OECD published its Final Reports on the BEPS project little was known about the way OECD member states would implement the proposed actions. Switzerland follows the general rule to only implement international minimum standards agreed upon by all OECD member states in order to achieve a level playing field.

Status of Swiss BEPS implementation

Currently, the planned abolishing of Swiss tax regimes expected with the revised proposal of the Swiss Corporate Tax Reform III is the main focus of many Swiss operations of MNEs. However, other BEPS-related measures are of more interest to private equity funds, investment advisory firms and fund managers.

Due to a lack of international consensus, Switzerland currently does not intend to implement anti-hybrid measures, CFC rules or interest limitation deductions. In fact, Switzerland already applies certain anti-hybrid rules. For instance, the participation exemption regime only applies to investment income if such income was not tax deductible in the source state (although it does not have to be subject to tax in that state).

BEPS measures will impact Swiss private equity funds and investment advisory firms for instance due to:

  • GAAR: The consensus to apply a general anti-abuse rule (GAAR) for double tax treaties will have a significant impact on the private equity industry. Offshore jurisdictions are subject to increased scrutiny even though there are multiple investment related reasons for private equity funds to be located in such jurisdictions.

  • Substance / transfer pricing: Local substance such as office premises and qualified staff are a significant aspects of attention for Swiss tax authorities when looking at private equity investments. Further, the revised transfer pricing guidelines likely require a review of existing advisory fee and carried interest models.
BEPS divided in three main topics

Action required

Swiss private equity funds and investment advisory firms should review the substance and transfer pricing related impact on current fee models as transfer pricing aspects will become an even greater focus of Swiss domestic and international tax compliance.

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