Financing

Case 1: Simulated loans in SME structures

1. facts of the case

Paul Pleite (Switzerland) is the sole owner and Chairman of the Board of Directors of Reich AG (Switzerland). In order to avert the threat of personal insolvency, Reich AG grants the sole owner an unsecured loan of CHF 500,000, which corresponds to almost the entire net assets of Reich AG. There is no written loan agreement. Repayment of the loan is extremely unlikely in the next few years due to Paul Pleite's poor financial situation. The loan bears interest at 5%, but the interest is added to the loan debt each year.

Question

• How should this situation be assessed for direct tax purposes?

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Case 2: Simulated loans in group structures

1. facts of the case

An American group has a subsidiary in Switzerland that has high non-operating cash and cash equivalents (CHF 200 million). These are made available to the Irish sister company as part of a cash pooling arrangement without further collateral. There is no written agreement. Although standard market interest rates are applied, these are not paid out to the Swiss subsidiary but added to the debt. In the last four calendar years, the contribution to the cash pooling has increased continuously from the subsidiary's perspective and there has never been a partial or full repayment, not even in the short term. The Swiss subsidiary is subject to an ordinary audit. The auditors consider the receivable to be recoverable and do not insist on a value adjustment or write-down of the cash pool receivable (option: the Group waives an audit of the individual financial statements of the Swiss subsidiary under commercial law as part of an opt-out).

In the course of an audit by the FTA, the latter took the view that the entire loan of CHF 200 million was simulated and therefore subject to withholding tax (subject to partial reclaim under the DTA Switzerland/Ireland).

Questions

• What needs to be considered from a stock corporation law perspective?
• How should this situation be assessed from the perspective of national tax law (in particular withholding tax)?
• How should this situation be assessed from the perspective of the OECD Transfer Pricing Guidelines?

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Case 3: Determination of hidden equity

1. facts of the case

Fitness Software AG is an ETH start-up which, after many years of high R&D expenditure and losses, has developed successful software for monitoring blood pressure with smartphones and has been making this available to a Korean smartphone manufacturer by means of a license agreement since 1 January N. The start-up is purchased on 15 January N by a US private equity investor for CHF 300m. The start-up company is purchased by a US private equity investor for CHF 300 million on January 15, N. Shortly after the purchase, the private equity investor grants the start-up company a subordinated loan of CHF 30 million at an arm's length rate of 3.3% due to the threat of over-indebtedness.

The (simplified) annual financial statements for the financial year as a whole are as follows:

*) with subordination
**) high balance sheet losses due to many years of R&D activities until market maturity

*) incl. depreciation of property, plant and equipment 1

The private equity investor prepares its annual financial statements in accordance with IFRS and shows the following purchase price allocation ("PPA") for the purchase of Fitness Software AG as at February 1, 2008 in the notes to the consolidated financial statements:

Questions

• How high is the hidden equity of Software AG according to circular 6a?
• With reference to the OECD Transfer Pricing Guidelines, how could it be proven that the shareholder loan of CHF 30 million is at arm's length?

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Case 4: Interest outside the FTA circular

1. facts of the case

X. AG has received an (unsecured and subordinated) loan of CHF 4 million from its sole shareholder X., which bears interest at 5% for the 2024 interest period. For a bank loan of CHF 1.5 million (personally guaranteed by X.), X. AG pays interest of 4.75% in the same interest period.

Questions

• Is the payment of interest of 5% to X. a pecuniary benefit within the meaning of Art. 4 para. 1 lit. b VStG?
• Option 1: How would the case be assessed if X. had granted X. AG (a holding company) had been granted a loan of USD 1 million with an interest rate of 6.5% p.a. and X. AG would have to pay a third party interest of 4% p.a. on its USD loan?
• Variant 2: How would the case be assessed if there were a bank offer with an interest rate of 5% for a loan of CHF 4 million?
• Option 3: How would the case be assessed if X. were to acquire the bank loan (which still has a remaining term of 2 years)?

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Case 5: Hidden equity with guaranteed bank loan

1. facts of the case

X. AG takes out a bank loan of CHF 10 million guaranteed by X. at 6% p.a. interest. In addition, X. grants X. AG with an interest-bearing shareholder loan of CHF 1 million at 5% p.a. According to the rules of KS 6a, X. AG only has a debt capacity of CHF 6 million.

Questions

• How are interest payments to be treated for withholding tax purposes?
• Option 1: How would the case be assessed if X. does not guarantee the bank loan but pledges the shares of X. AG in favor of the bank?
• Variant 2: How would the case be assessed if X. (who guarantees the bank loan) was resident in Germany and X. AG would be held via an intermediate holding company (Y. AG)?