The Swiss Federal Tax Administration (SFTA) has provided the cantonal tax authorities with revised guidance on how to apply rules that affect the taxation of principal companies, which will impact both existing and new principal company rulings.

The SFTA has conducted tax audits of Swiss principal companies in recent years to assess whether the structures are in compliance with Circular Letter No. 8. Based on the experience gained from these audits, the SFTA has been reviewing the principal company allocation rules. Following numerous discussions with interested parties the SFTA has now provided revised interpretation guidelines to the cantonal tax authorities, including detailed calculation guidelines on how the circular letter should be applied.

 The new guidelines for a principal company allocation include the following:

 • 3% gross profit margin for commissionaires/low risk distributors (LRDs).

• Exclusivity of commissionaires/LRDs.

• Outsourcing of principal operating functions.

• Effect of mutual agreement procedure (MAP)/advance pricing agreement (APA).

 The SFTA’s new guidelines will impact both existing and new principal company rulings. All existing rulings likely will be reviewed by the competent cantonal tax authorities in cooperation with the SFTA, and where there is any deviation from the new guidelines, the rulings will have to be amended or they could be revoked. The SFTA has indicated that it will work with companies that may need to restructure their businesses as a result of the revised interpretation to find a practical and acceptable solution within the restructuring period, i.e. the period the company requires to adapt its supply chain to the new requirements.

Groups with existing Swiss principal structures should carefully review these structures and prepare for discussions with the tax authorities regarding the implementation of the new guidelines.