Switzerland: Tax authorities challenge transfer pricing of asset management offshore structures

Switzerland: Tax authorities challenge transfer pricing

Asset management offshore structures are being challenged, for transfer pricing purposes, by the Swiss tax authorities.


Swiss court decisions (described below) reveal the outcome of such challenges to the transfer pricing policies of asset managers and demonstrate that:

  • Offshore structures characterized by a low level of substance are scrutinized by the Swiss tax authorities, leading to an increased risk of corporate income tax adjustments, late-payment interest, and penalties.
  • The Swiss tax authorities are following a pragmatic and substance-based methodology when dealing with similar issues.
  • Remuneration of entities in offshore jurisdictions must be consistent with the substance of the arrangements.

Overview of transfer pricing considerations in asset management

Guidelines from the Organisation for Economic Cooperation and Development (OECD) aim at aligning companies’ value creation with the taxation of their profits. These principles also apply to the asset management industry.

Transfer pricing complexity materializes when the management company 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 or performance fee) is to be split across the different group entities or branches based on their value contribution. A set of questions can help the asset manager in defining the most appropriate transfer pricing policy:

  • Which functions contribute to value creation within the asset management group?
  • Which are the functions delegated to related-party companies and which are the functions performed by the management company?
  • Which are the key contributing entities?
  • How is the management company remunerated? Is this remuneration aligned with its functional profile?
  • How are the related parties remunerated for the activities delegated by the management company?
  • What is the most appropriate transfer pricing method (e.g., CUP, cost-plus or profit-split)?

Tax authorities have recently started to enhance their transfer pricing know-how in the asset management area—an industry which has historically not been intensively audited for transfer pricing purposes—with a focus on asset management structures designed to shift taxable profits to offshore locations.

Overview of recent court decisions in Switzerland

The trend observed in Switzerland is very much aligned with the global effort for increased audits of asset managers for transfer pricing purposes, as observed in two Swiss court cases when the transfer pricing of the asset managers was challenged.

Federal Supreme Court (case n° 2C_1073/2018, 2C_1089/2018 (20 December 2019))


  • In 1999, “A” (a Swiss asset management company incorporated in Geneva) established “C Ltd” (a subsidiary in Guernsey). C Ltd acted as the fund investment manager for different funds and had no employees until 2005 (and four employees since 2008).
  • The investment advisory activities were outsourced by C Ltd to third parties and as of 2001, to A in Switzerland.
  • In addition to the investment advisory services, A was also in charge of order-placement services as well as marketing and distribution activities (thus, C Ltd benefited from the customers’ network of A).
  • For the activities carried out and risks borne, C Ltd paid A a 0.75% management fee.
  • For the activities carried out and risks borne, C Ltd paid the third-party investment advisor the same 0.75% management fee, plus a performance fee (40% to 70% of the total).
  • C Ltd retained the residual profit once both A and C Ltd had been remunerated.

Geneva tax authorities’ position

 In 2010, the tax authorities opened a procedure against A for tax evasion. The tax authorities asserted that the remuneration received by A was insufficient considering the functions performed by A, the functions carried out by C Ltd and those by the third-party investment advisors.

Federal Supreme Court’s decision

In December 2019, the Federal Supreme Court confirmed the position of the tax authorities and specifically found that:

  • The lack of remuneration in the form of performance fees did result in an insufficient remuneration of the investment advisory services performed by the Swiss company and that a performance fee ought to have been paid by C Ltd to the third-party advisors as well as to A.
  • C Ltd was to have compensated A for the order-placement services and for the marketing and distribution activities.

Zurich court case (Administrative court of Zurich Verwaltungsgericht) (7 February 2020)


  • A private equity fund located in Jersey was being managed by Jersey Ltd (“investment manager”), with some functions delegated to a related party, Swiss AG, located in Switzerland (“investment advisor”).
  • Swiss AG was involved in investment advisory services (identification of investment targets, evaluation of these targets, risk management services, and supervision of the performance of the investments). The investment manager allegedly reviewed the suggestions made by the Swiss investment advisor, approved the investment decisions, and accepted the full investment risk.
  • The investment manager retained one-third of the management fee, remunerating the investment advisor with the remaining portion.

Zurich tax authorities’ position

  • The Zurich tax authorities focused on the lack of substance of the company located in Jersey. Specifically, it was asserted that almost no wages or salary expenses were recorded by Jersey Ltd (only CHF 15,000 paid to two external directors, compared to almost CHF 4 million earned by the two Swiss employees of Swiss AG). It was therefore deemed unlikely that such two directors could have taken any final decisions on private equity investments.
  • It was also contended that Jersey Ltd was not bearing 100% of the risk. In the event that a deal did not happen, Swiss AG had to bear the sunk costs associated with the preliminary preceding research activities.

Zurich Court’s decisions
The first of the Zurich courts (Steuerrekursgericht) agreed with the tax authorities that:

  • Under the model, risk (market risk) was outsourced to an entity that did not perform the corresponding people functions (i.e., DEMPE / KERTs functions) associated with such risk. This was not supported by the OECD transfer pricing principles.
  • None of the other relevant functions involved in a typical private equity deal (due diligence, negotiation with owners and managers of potential investments or sales and distribution) could have possibly been carried out by anyone other than the two Swiss asset managers of Swiss AG.
  • None of the investment recommendations made by Swiss AG had ever been challenged or turned down by the alleged ultimate decision-maker Jersey Ltd. Recommendations were directly approved by Swiss AG and then only formalized by Jersey Ltd.
  • Based on the functional analysis, the investment manager Jersey Ltd would be regarded as a routine entity entitled to a cost-plus remuneration only, while all residual remuneration would be retained by Swiss AG.

The taxpayer appealed to the Verwaltungsgericht which eventually rejected the appeal and upheld the position of the tax authorities. 

KPMG observation

In order to minimize the risk of being audited for transfer pricing purposes, and to reduce potential adjustments and penalties if there is an audit, Swiss-based asset managers need to consider the following key topics, currently under the lens of the Swiss tax authorities:

  • Presence or substance in low tax jurisdictions or tax havens, and profit allocation
  • Outsourcing of decision-making responsibilities to related parties that do not possess the relevant capabilities or resources
  • Intra-group prices deviating from third-party internal comparables

Read an April 2021 report prepared by the KPMG member firm in Switzerland

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