Safe Harbour Interest Rates for Intra-Group Loans. 1. Safe Harbour Interest Rates for Intra-Group Loans in Swiss Francs. No.

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1 N. 01/February 2012 Dear Sir r Madam, We are pleased t send yu the first editin 2012 f ur TaxBulletin in English. This publicatin is intended t regularly keep yu up-t-date abut current tpics and news regarding Swiss tax laws, as well as infrmatin abut apprpriate tax planning. Safe Harbur Interest Rates fr Intra-Grup Lans The Swiss Federal tax authrities issue annually safe harbur interest rates fr intra-grup lans. Whereas the intra-grup interest rates fr lans in Swiss Francs applicable in 2012 have been published n February 21, 2012, the respective safe harbur interest rates fr lans in freign currencies have been published n February 22, 2012 by the Swiss Federal tax authrities. The TaxBulletin at hand fcuses mainly n intra-grup interest rates fr lans denminated in freign currencies. Hwever, we als summarize in the fllwing the rules fr interest rates fr intra-grup lans in Swiss Francs. 1. Safe Harbur Interest Rates fr Intra-Grup Lans in Swiss Francs The circular letter frm the Swiss Federal tax authrities prescribes the minimum interest rates fr lans granted by a Swiss cmpany t its sharehlders r related parties and maximum interest rates fr lans granted by the sharehlders r related parties t a Swiss cmpany in Swiss Francs. Please find belw a summary f the applicable interest rates fr lans in Swiss Francs: DOCX

2 Lans granted t sharehlders/related parties Safe Harbur Minimum Interest Rates Fully equity r interest-free debt financed 1.50% Fully debt-financed n amunts up t CHF 10m actual csts plus 0.50% at least 1.50% Fully debt-financed n amunts exceeding CHF 10m actual csts plus 0.25% at least 1.50% Lans granted frm sharehlders/related parties Safe Harbur Maximum Interest Rates In case f trading and prductin cmpanies 3.75% In case f hlding and wealth management cmpanies 3.25% Special rules apply fr the financing f real estates. Therefre, shuld yu need such infrmatin, please d nt hesitate t cntact us. In additin t the befre-mentined safe harbur interest rates, the Swiss thin capitalizatin rules have t be taken int cnsideratin when determining the interest rates n lans received. The thin capitalizatin rules are laid dwn in the circular letter n 6, published by the Swiss Federal tax authrities n June 6, 1997 and are described in brief belw (see figure 3). 2. Safe Harbur Interest Rates fr Intra-Grup Lans in Freign Currencies In cmparisn t the circular fr intra-grup lans in Swiss Francs, the circular fr interest rates in freign currencies has tw peculiarities: In case f lans granted: Equity financed: interest rate as published (if the published interest rate fr freign currencies is belw the interest rate in Swiss Francs, the higher interest rate in Swiss Francs is applicable); Debt financed: the taxable interest spread in the case f back-t-back (debt financed) lans has always t amunt t 0.5% (i.e. n graduated interest spread f 0.25% respectively 0.5%). In case f lans received: In case the interest rate fr freign currencies is belw the interest rate in Swiss Francs, then the interest rate may be increased t the interest rate in CHF; It is hwever pssible t apply higher interest rates based n arm s length transactins. In such a case the prf has t be prvided, why n lans have been issued in Swiss Francs, which interest rate wuld be lwer. Please find in the fllwing the applicable safe harbur interest rates fr lans in freign currencies fr the majr cuntries. Shuld yu need the applicable interest rates fr lans in ther currencies, please d nt hesitate t cntact us. Page 2 f 5

3 Cuntry / Unin Currency Eurpean Unin EUR 4.5% 5% 4.5% 3.5% 3% 2.5% United States USD 5.5% 4.5% 4% 3.5% 2.5% 2% Great Britain GBP 5.5% 5.5% 5% 4% 3% 2.5% Australia AUD 6.5% 7.5% 5% 6% 6% 5% Canada CAD 5% 4.5% 4.5% 3.5% 3% 2.25% Denmark DKK 4% 4% 3.5% 3% 3% 2.5% Nrway NOK 5% 5% 3.5% 4% 4% 3.75% Republic f Suth ZAR 8% 9.5% 9.5% 9% 8% 7.75% Africa Singapre SGD 3.5% 3.5% 4% 3% 2.5% 2% Sweden SEK 4.5% 5% 3.5% 3.5% 3.5% 3% Hungary HUF n.a. 6.5% 9% 7.5% 7% 7.75% Pland PLN n.a. 5.5% 5% 5.5% 5.5% 5.5% As in cnnectin with the determinatin f the applicable interest rates fr lans in Swiss Francs, the thin capitalizatin rules in cnnectin with lans denminated in freign currencies have als t be taken int cnsideratin when determining the applicable interest rates. In the fllwing, we utline the majr elements f the Swiss thin capitalizatin rules in brief. 3. Thin Capitalizatin Rules On June 6, 1997, the Swiss Federal tax authrities published safe harbur thin capitalizatin rules in the circular letter n 6. Accrding t such circular letter, a unique asset base test is used t determine whether a cmpany is adequately financed. Accrding t the thin capitalizatin rules, each class f asset has t be financed by a certain equity prtin, i.e. a debt financing by the sharehlder respectively related parties is nly allwed up t a certain amunt (e.g. a certain percentage accrding t the circular letter multiplied by the underlying asset). The calculatin is based n fair market values f the assets, but in practice the lwer bk values are usually als acceptable t substantiate cmpliance with the rules. 4. Interactin f Thin Capitalizatin Rules and Applicable Interest Rates 4.1 Determinatin f Debt Financing and Interest Rates The determinatin f the maximum debt (respectively the hidden equity) and accrdingly the maximum interest expense and as well as the respective tax impacts can be dne in fur steps: Step 1: Have lans been granted by sharehlders / related parties Hidden equity (respectively tax-wise nt accepted debt) is given nly, in case debt is granted directly r indirectly by sharehlders / related parties. In case debt is granted frm unrelated parties (withut guaranties frm related parties), n hidden equity is given (e.g. all interest paid is tax deductible). Step 2: Calculatin f maximum debt financing In case f debt granted by sharehlders / related parties, the maximum debt financing has t be determined based n the circular letter n 6. Therefre, the assets are multiplied by the percentages accrding t the circular letter. Shuld the effective debt f the cmpany, accrding t the balance sheet, exceed the maximum debt accrding t the circular letter n 6, generally hidden equity is given. Page 3 f 5

4 Step 3: Calculatin f the maximum interest expenses In case hidden equity is given, it has t be checked whether the interest expenses are cmmercially justified and therefre tax deductible. In rder t calculate the maximum tax deductible interest expenses, the maximum debt (Step 2) is multiplied with the applicable safe harbur interest rates ( cmpensatin methd ). Shuld the bked interest expenses at the cmpany level exceed the befre calculated maximum interest expenses, there exists the risk that the excess interest expenses are generally nt tax deductible and culd lead t negative tax cnsequences (see figure 4.2) Step 4: Prf f arm s length Shuld the rules, accrding t the circular letter n 6 in cmbinatin with the circulars relating t the applicable interest rates, nt be met, the taxpayer can generally apply the arm s length prf. In case such prf can be made, the effective interest expenses shuld be tax deductible. Nnetheless, the requirements f such prf are accrding t ur experience pretty high. In thery, the crpratin can verdue these guidelines by prviding an uncnditinal ffer frm a third party (e.g. bank) with n additinal guarantee etc. which has the same terms (interest, repayment etc.) as the cntract at hand. 4.2 Tax Cnsequences in Case the Tax Rules Are Nt Met Shuld the rules, accrding t the circular letter n 6 in cmbinatin with the circulars relating t the applicable interest rates, nt be met and n arm s length prf can be prvided, the fllwing tax cnsequences will be triggered. The hidden equity (excess debt) will be added t the taxable capital fr cantnal/cmmunal tax purpses and, as such, will be subject t cantnal/cmmunal capital taxes. In additin, any interest payments which are allcated t the hidden equity will be qualified as a hidden prfit distributin. Furthermre, shuld the interest rates n lans granted / received frm sharehlders / related parties nt met the interest rates accrding t the circulars, again a hidden prfit distributin will be assumed. As such, the hidden prfit distributin will be added t the taxable incme with the respective incme tax cnsequences. In additin, the hidden prfit distributin is als subject t 35% Swiss withhlding tax. Whether r nt such Swiss withhlding tax is (fully r partially) refundable depends n varius factrs (e.g. cuntry f residency, applicable duble tax treaty, relatinship between recipient and debtr). 5. Summary In rder t avid in particular the Swiss withhlding tax cnsequences as well as Swiss direct tax cnsequences, we recmmend reviewing the intra-grup interest rates as well as the interest spread n a regular basis. In additin, we als suggest taking int accunt the Swiss thin capitalizatin rules in cnnectin with back-t-back financing. We wuld be pleased t assist yu in cnnectin with the analysis f the intra-grup lans receivables and payables and the prper applying f the rules f the Swiss Federal tax authrities. Page 4 f 5

5 Tax Advisrs & Assciates AG is yur specialist cnsulting cmpany fr cmplex tax affairs bth natinal and internatinal. We d nt fcus n standard prducts, but cncentrate n cmplex situatins that demand flexible, structured and individually tailred slutins. We wuld be pleased t assist yu in crprate tax matters. Please feel free t cntact us, shuld additinal questins arise regarding the frmal requirements in using the applicable interest rate fr Swiss Francs and freign currencies accrding t the circulars published by the Swiss Federal tax authrities. If yu have any questins, ur specialists, Mr Matthias Erik Vck (Partner) r Mr Christph Nef (Partner), are standing by t assist yu at telephne number: Page 5 f 5