Transfer pricing for trading functions

The arm's length principle in Swiss law

Swiss tax law contains no general transfer pricing statute comparable to the detailed rules of Germany, Italy or the United States. The arm's length principle follows from the definition of taxable profit in Article 58 DBG and the corresponding cantonal provisions. They add to the accounting profit any expenses not justified by business needs and any profits not credited to the income statement. The doctrine of hidden profit distributions (verdeckte Gewinnausschüttung) and of hidden capital contributions applies these provisions to transactions with shareholders and related parties. A payment by a company to a related party that an independent third party would not have made, or would have made on other terms, is added back to the company's profit.¹ The Federal Tax Administration applies the OECD Transfer Pricing Guidelines as the reference for determining arm's length terms, and the cantons follow the same approach. The ESTV publishes annually safe harbour interest rates for loans between related parties in Swiss francs and foreign currencies, which are of direct importance for the financing of trading companies by their shareholders.²

Switzerland has no statutory transfer pricing documentation requirement for most companies. It does, however, require country-by-country reports from Swiss parent companies of groups with consolidated revenue of at least CHF 900 million under the Federal Act on the International Automatic Exchange of Country-by-Country Reports of 16 June 2017.³ In practice Swiss trading companies within international groups prepare a master file and a local file because the tax authorities of the counterparties' states require them. A Swiss tax audit or ruling request is also more easily handled with documentation in hand. The burden of proof for a hidden profit distribution lies in principle with the tax authority, which must show that the terms were not at arm's length. The taxpayer must then demonstrate a business justification. This distribution follows the general principle of the Federal Supreme Court that the tax authority proves the facts that create or increase the tax liability, whereas the taxpayer proves those that reduce or extinguish it.⁴

The OECD guidance on commodity transactions

Action 10 of the OECD/G20 project on base erosion and profit shifting led to new guidance on commodity transactions. It was incorporated into Chapter II of the OECD Transfer Pricing Guidelines in 2017 and retained in the 2022 edition at paragraphs 2.18 to 2.22. Paragraph 2.18 states that the comparable uncontrolled price (CUP) method "would generally be an appropriate transfer pricing method for establishing the arm's length price for the transfer of commodities between associated enterprises". Commodities are defined as physical products for which a quoted price is used as a reference by independent parties in uncontrolled transactions. A quoted price includes prices obtained from international or domestic commodity exchanges as well as from recognized price reporting or statistical agencies and governmental pricesetting agencies, where independent parties use them as a reference.⁵

Paragraph 2.19 explains that the arm's length price may be determined by reference to comparable uncontrolled transactions and to the quoted price, which reflects the agreement of independent buyers and sellers on the market. Paragraph 2.20 requires that the economically relevant characteristics of the controlled transaction and of the uncontrolled transactions or arrangements represented by the quoted price be comparable. These include the physical features and quality of the commodity and the contractual terms such as volumes, periods, delivery terms, transportation, insurance and foreign currency terms. The functions performed by the parties also count and may require comparability adjustments. Paragraph 2.21 requires the taxpayer to document its price-setting policy for commodity transactions, including the pricing method, the quoted price used and the adjustments made.⁶

Paragraph 2.22 deals with the pricing date, the specific time, date or period selected by the parties to determine the price. The taxpayer should provide reliable evidence of the pricing date agreed at the time the transaction was entered into. If the pricing date in the written agreement is inconsistent with the actual conduct of the parties or other facts, the tax administration may determine a different date consistent with the conduct and with industry practice. Where there is no reliable evidence of the agreed pricing date, the tax administration may deem it to be the shipment date shown by the bill of lading and use the average quoted price on that date.⁷ The rule responded to practices in which related parties chose, after the event, the most favourable price within a period. Argentina and other producer countries had sought to counter such practices with the so-called sixth method, which imposed the quoted price on the shipment date.

Notes

1. Federal Act on Direct Federal Taxation of 14 December 1990 (DBG), SR 642.11, Art. 58 para. 1 lit. b (amounts not used to cover expenses justified by business needs, including "offene und verdeckte Gewinnausschüttungen") and lit. c (income not credited to the income statement), https://www.droit-bilingue.ch/fr-de/6/64/642.11-58-66.html; StHG, Art. 24 para. 1, https://www.droit-bilingue.ch/fr-de/6/64/642.14-24-38.html. ↩
2. ESTV, circular letters Steuerlich anerkannte Zinssätze for advances and loans in Swiss francs and in foreign currencies, e.g. Nos. 2-213 and 2-214 of 27 and 28 January 2025 and Nos. 2-218 and 2-219 of 29 and 30 January 2026, listed at https://www.estv.admin.ch/de/rundschreiben-direkten-bundessteuer. ↩
3. Federal Act of 16 June 2017 on the International Automatic Exchange of Country-by-Country Reports of Multinationals (ALBA), SR 654.1; Ordinance of 29 September 2017 (ALBAV), SR 654.11, Art. 3 (threshold of CHF 900 million), text at droit-bilingue.ch, https://www.droit-bilingue.ch/fr-de/6/65/654.11-3-6.html. ↩
4. Federal Supreme Court, BGE 133 II 153 of 16 May 2007, E. 4.3 ("il appartient au fisc de démontrer l'existence d'éléments créant ou augmentant la charge fiscale, alors que le contribuable supporte le fardeau de la preuve des éléments qui réduisent ou éteignent son obligation fiscale"), https://servat.unibe.ch/dfr/bge/c2133153.html. ↩
5. OECD, Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (Paris, 2022), para. 2.18, text reproduced at TPcases.com, https://tpcases.com/tpg2022-chapter-ii-paragraph-2-18/. ↩
6. OECD TPG 2022, paras 2.19–2.21, reproduced at TPcases.com (above). ↩
7. OECD TPG 2022, para. 2.22, text reproduced at TPcases.com, https://tpcases.com/tpg2022-chapter-ii-paragraph-2-22/. TPcases.com lists court decisions applying these paragraphs, among them Argentina v ADM Argentina S.A. (Supreme Court, October 2021) and Colombia v Carbones El Tesoro S.A. (September 2021). ↩

For general information only. This article does not constitute legal or tax advice, does not replace advice on an individual case and creates no lawyer-client relationship. It reflects the legal position as of August 2025.