For many years, the Organization for Economic Cooperation and Development (“OECD”) has introduced guidelines aiming at aligning companies’ value creation with the taxation of their profits. These principles also apply to the Asset Management industry.
Transfer Pricing (“TP”) complexity materializes when the Management Company (“ManCo”) delegates part or the totality of its asset management activities to other entities or branches within the same group. Such contracted out activities can either consist of value adding functions such as investment advisory/sub-advisory, investment management, and distribution services, or routine functions such as mid-office or back-office support services.
The key challenge is determining how the income earned from the fund (i.e. management fee/performance fee) should be split across the different group entities/branches based on their value contribution. A set of questions can help the Asset Manager with defining the most appropriate Transfer Pricing policy:
Tax authorities worldwide have recently started to enhance their TP knowhow in the Asset Management area, an industry which has historically not been intensively audited for Transfer Pricing purposes. The result is a widespread effort to clamp down on Asset Management structures designed to shift taxable profits to offshore locations.
The trend observed in Switzerland is very much aligned with the global effort to increasingly audit Asset Managers for TP purposes. This is supported by two recent court cases where the transfer pricing set up of Asset managers was challenged.
Facts and circumstances
Geneva Tax authorities’ position
Federal Supreme Court’s decision
After several appeals and decisions pronounced by various Swiss courts, in December 2019 the Federal Supreme Court confirmed the position of the GTA. Specifically, the Federal Supreme Court stated that:
Facts and allocation of functions
Zurich tax authorities’ position
Zurich Court’s decisions
The first of the Zurich courts (“Steuerrekursgericht”) embraced the decision of the ZTA confirming that:
The claimant appealed against the decision of the Steuerrekursgericht to the Verwaltungsgericht in second instance, which eventually turned down the appeal and upheld the argumentation of the ZTA.
The abovementioned court cases demonstrate that:
In order to minimize the risk of getting audited for TP purposes, and reduce potential adjustments and penalties in the case of one, it is recommended that Swiss-based Asset Managers focus their attention on the following key topics, currently under the lens of the Swiss tax authorities: