Monetary benefits in the intercantonal relationship

Case 1: Primary adjustment of transfer prices 

1. facts of the case

The A. AG has its registered office in the canton of Zurich. Its sister company, D. AG, has its registered office in the Canton of Zug. The joint shareholder is C. AG, also domiciled in the canton of Zug. D. AG is the owner of the trademarks W. and X. In November 2015, D. AG concluded a license agreement with A. AG, according to which it allowed the latter to use the W. trademark. A. AG, as licensee, had to pay an amount of CHF 100,000 for the granting of the right of use and, in addition, to pay an ongoing license fee in the amount of 10 % of the assessment basis, whereby the net sales from the respective project were designated as the assessment basis. 

In the 2016 tax return, A. AG declared a taxable net profit of CHF 53,882. AG declared a taxable net profit of CHF 53,882. In the relevant financial statements for 2016, it had recorded expenses of CHF 728,032. under the heading "License payments to D. AG". 

The Zurich tax authority considered this license payment to be excessive and increased the taxable profit to the extent of CHF 655,228 (primary adjustment). 

D. AG has already been legally assessed in the Canton of Zug for the 2016 tax period. 

Questions

- On the basis of which legal bases can transfer prices be corrected in intercantonal relations? 

- According to which standard are transfer prices to be determined in the intercantonal relationship? 

- What documentation is required? 

- What should be considered when setting an appropriate trademark fee? 

- What are the effects of the profit adjustment on the common parent company (C. AG)? 

- Does the profit adjustment lead to impermissible intercantonal double taxation? If so, can this be eliminated? What is the legal procedure? 

- What applies to the direct federal tax? 

- What changes if the 2016 tax period for D. AG has not yet been legally assessed? 

Case 2: Countercorrection / procedural aspects

1. facts of the case

Basic variant:

Same facts as in case 2.

Variant 1:

The joint shareholder of A. AG and D. AG is C., a natural person resident in the Canton of Zug.

Questions

- What are the material requirements for a counter adjustment?

- How should the countercorrection be formally asserted? 

- When should the counterclaim be filed? 

- How is the counter adjustment made under tax law?

- How is the situation to be assessed if, in 2016, D. AG made a

loss (despite the payment by A. AG)?

- How is the situation to be assessed if A. AG despite profit adjustment

still shows a loss?

- Does a countercorrection necessarily require a decision of the Federal Supreme Court?

present?

- Can a claim for countercorrection be forfeited?

- Variant 1: How should the overall situation be assessed with reference to C.?

Case 3: Main tax domicile in intercantonal relationship

1. facts of the case

Preliminary remark: This case serves as an introductory example in order to briefly elaborate or repeat some points for the following case 4 on the basis of the "classic" double taxation situation (tax sovereignty) without claiming to be complete. Consequently, this case does not (yet) deal with transfer pricing issues. Max Meier, resident in Solothurn, is the sole shareholder of MeiMax AG, which has its registered office in Sarnen. MeiMax AG is active in wood manufacturing and has 15 employees. During the audit of Max Meier's securities register, the Solothurn tax authorities came across MeiMax AG. Clarifications lead to the following findings:

- MeiMax AG is domiciled in Sarnen at a c/o address. Mail is regularly forwarded to Solothurn. On the homepage it says legal address Sarnen, postal address Solothurn.

- The recorded rental expenses amount to CHF 100,000 per year, of which only CHF 2,000 are incurred in Sarnen and the rest in Solothurn.

- In Sarnen, MeiMax AG has an office workstation in the hot desking system, a lockable filing cabinet and a meeting room for shared use. In Solothurn, the company has manufacturing and office space at its disposal.

- The accounts of MeiMax AG are kept in Sarnen by a mandated trustee. The meetings of the Board of Directors are also held in Sarnen several times a year. Otherwise, the management and staff, including Max Meier, work in Solothurn.

MeiMax AG has been definitively assessed in the canton of Obwalden for cantonal and municipal taxes as well as for direct federal tax up to and including the tax period 2021. The definitive assessments of October 12, 2022 have become legally effective without being contested.

On December 1, 2022, the Canton of Solothurn will make the final assessments for its state and municipal taxes as well as for the direct federal tax 2021. Prior to this, on August 17, 2022, it had sent MeiMax AG a written file requesting information and documents on the business activities in Sarnen and Solothurn and holding out the prospect of MeiMax AG claiming unlimited tax liability.

Case 4: Tax domicile vs. transfer pricing adjustment

1. facts of the case

Lucrum AG has its statutory registered office in Herisau and is domiciled there with its Board of Directors, an independent and mandated accountant (c/o address). The meetings of the Board of Directors take place in Herisau, where the Board of Directors occasionally also signs individual contracts for the company, which is active in the clothing trade. No other activities take place in Herisau. In particular, the Company does not have its own staff.

Adlatus AG has its registered office in Bern, where it has office space and staff (4 full-time employees). It is also active in the clothing trade. During an audit of Adlatus AG's accounts for the 2018 tax period in 2019, the Bernese tax authorities came across an invoice from Adlatus AG to Lucrum AG in which the following services were charged:

- 40% of rental and infrastructure costs in Bern

- Salary and social security expenses for two full-time positions in Bern 

The costs charged correspond to the effective expenses incurred by Adlatus AG for Lucrum AG. Adlatus AG carries out the billing "at cost" without markup. A written contract does not exist. Adlatus AG reports a current account position vis-à-vis Lucrum AG as a receivable from related parties.

In the final 2018 assessment of Adlatus AG dated January 5, 2022, the Bernese tax authorities add a 30% profit surcharge to the service charges. Adlatus AG objects to this and demands to be assessed on the basis of the submitted 2018 tax return.

Lucrum AG has already been definitively assessed for the 2018 tax period. The assessments are legally binding. Lucrum AG had also confirmed to the Ausserrhoden tax authorities in the assessment proceedings that it had staff in Herisau and carried out business activities there. After counter-adjustment of the Berne set-off, only a marginal routine profit would remain for it.

The Bernese tax authorities reject Adlatus AG's objection, against which it appeals to the Tax Appeals Commission of the Canton of Bern. After it is also defeated there on January 13, 2023, it does not continue the proceedings in the Canton of Berne. On the other hand, Lucrum AG in the Canton of Appenzell-Ausserrhoden files an appeal against its definitive assessments for 2018 on January 16, 2023. It requests that the offsetting carried out at Adlatus AG be taken into account in a manner that reduces profits.

Variant 1:

In the run-up to the final assessments, the Bernese tax authorities send Adlatus AG a proposal for an assessment in which they announce and explain in detail the planned offsetting of a profit surcharge. Adlatus AG returns the assessment proposal signed without reservation.

Variant 2:

In its objection, Adlatus AG argues that it is not aware of the shareholders of Lucrum AG, but that the two companies are certainly not related, which is why any offsetting is prohibited. There is a third-party price per se, as the companies are precisely not related parties. The current account position was erroneously shown as related party for accounting purposes, and the company did not have an auditor who could have noticed this due to the opting-out.

Questions

- Could the canton of Berne also claim the main tax domicile or place of assessment for direct federal tax for the 2018 tax period?

- How to decide on the request for revision?

- Variant 1: Do special features arise in the revision procedure if Adlatus AG signs the assessment proposal.

- Variant 2: Who must prove the existence of a close relationship?

Case 5: Discretionary assessment

1. facts of the case

Alpha AG has its registered office in Zug, Beta AG in Zurich. Both companies are active in international general merchandise trading and belong to the Gamma Group. They have infrastructure with personnel at their registered offices. Alpha AG regularly purchases goods from Beta AG and resells them to third parties. The Zurich tax authorities consider the reported profit margin of Beta AG to be too low and would like to examine it more closely. Despite a reminder, Beta AG does not respond to a corresponding request for documentation. Ultimately, the Zurich tax authorities add a larger profit margin for Beta AG, which they estimate at their discretion. Alpha AG has already been definitively and legally assessed in the Canton of Zug. Immediately after the final assessment of Beta AG, Alpha AG submits a timely audit request in the Canton of Zug and demands a corresponding counter-adjustment.

Questions

- How to decide on the request for revision?

- Variant: How should the audit request be decided if Beta AG has sound transfer pricing documentation in its files and the transfer prices in relation to Alpha AG were determined "state of the art", but the Zurich tax authorities nevertheless add a discretionary profit surcharge at Beta AG based on their own empirical values/key figures. Assumption: The transfer pricing documentation was provided to the tax authorities when responding to the request.

Case 6: Transfer pricing and tax segregation

1. facts of the case

The A. AG has its registered office in the Canton of Valais. Its purpose is the operation of an architecture and general contracting office, the operation of hotels, cafés and restaurants, the development and support of sports activities as well as all trading, movables and real estate transactions which are suitable to further the company's purpose. As part of its activities, the Company owns real estate for sale or lease in other cantons, including the Canton of Fribourg.

A. AG has a sister company, D. AG. The latter controls the football club V. Both companies are held by B. AG, whose owner is C.. C. is the sole governing body of the three companies.

In the 2018 tax return, A. AG declared a taxable profit of CHF 4,884,395. AG declared a taxable profit of CHF 4,884,395, taking into account an expense item of CHF 3,725,000 for sponsoring expenses in favor of D. AG. Within the framework of the intercantonal tax allocation, an amount of CHF 1,327,362 was allocated to the Canton of Fribourg.

The tax authorities of the Canton of Fribourg took the view that this expense should be allocated in full to the canton of domicile and corrected the profit to be allocated to the Canton of Fribourg within the scope of the intercantonal tax equalization accordingly.

The tax authority of the Canton of Valais has allowed the expense of CHF 3,725,000 to be deducted in full and has accepted the intercantonal segregation in accordance with the Company's segregation proposal.

The Cantonal Court of the Canton of Fribourg ultimately ruled that there was a hidden distribution of profits and did not even grant the loss assumption granted by the tax authorities in the objection proceedings.

Questions

- Can the canton of Fribourg unilaterally adjust the intercantonal segregation?

- Can the canton of Fribourg, as the property canton, check the sponsorship relationship for third-party conformity, even though the canton of Valais has already accepted the corresponding effort?

- Would it change anything if the Canton of Valais had issued a ruling with regard to the sponsorship relationship?

- Under what conditions is a sponsorship relationship between affiliated companies also recognized for tax purposes?

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