A Swiss resident corporation is subject to various taxes which are administered by different tax authorities. The Swiss Federal Tax Administration (SFTA) is responsible for VAT, withholding tax and stamp taxes. The cantonal tax authorities are responsible for corporate income tax and the OECD top-up tax. A tax audit is usually limited to one tax but can also be expanded to other taxes.
Secondary tax audits
A tax audit that is closed without any adjustments, does normally not trigger other tax audits. However, if the tax inspector is of the view that there are circumstances which are relevant for other taxes, the tax inspector will notify the division or tax authority in charge of that tax.
A tax audit can result in adjustments which are limited to one tax, only. For example, in case of excessive depreciation or provisions without commercial justification, the adjustment would be limited to corporate income tax. Also, most adjustments in VAT audits are not relevant for other taxes. As such adjustments do not impact other taxes, no other tax audits would be triggered by the first tax audit, even if this first tax audit is closed with adjustments. However, if a tax audit ends in adjustments which are relevant also for other taxes, this is regularly communicated to the division in charge of the other tax or to the competent tax authority. It may be that the report of the first tax audit is used for the other tax or that a separate comprehensive tax audit is conducted. Any adjustment concerning related party transactions including transfer pricing results in secondary adjustments or tax audits because it affects corporate income tax, withholding tax, possibly VAT, possibly issuance stamp tax and in certain instances, also payroll tax and social security contributions.
As the OECD minimum tax has only been introduced, there is no experience with tax audits. However, the regulations for the Swiss top-up tax apply the same mechanism to tax adjustments as corporate income tax by referring to the Federal Income Tax Act.
Most common adjustments in Swiss tax audits
The most common adjustments in tax audits concern related party transactions with group companies or shareholders. Goods or services are under- or overpriced or no consideration at all is provided by the counterparty. In these instances, any missing income or unjustified expense is imputed for purposes of corporate income tax, withholding tax, possibly VAT and social security contributions. If a company is subject to the top-up tax, most adjustments for corporate income tax will also trigger an adjustment for top-up tax.
Additional tax liabilities
Adjustments in tax audits result in additional tax liabilities for the audited company. Certain taxes have to be borne by the company, such as corporate income tax or issuance stamp tax, whilst others have to be charged to the counterparty or beneficiary such as withholding tax and payroll tax. With regard to VAT, it depends on the contract between the parties and social security contributions have to be shared by the company and the employee.
All taxes that have to be charged to the counterparty such as withholding tax, payroll tax and social security contributions, are grossed up if they cannot be charged to the counterparty and the company ends up bearing the cost. In such instances, the tax authorities assume that the monetary benefit provided to the counterparty is the benefit after deduction of the tax which entails substantial tax liabilities.
For purposes of corporate income tax, taxes, except the top-up tax, are considered tax deductible expense. This includes taxes concerning previous years. This fact should always be taken into account when calculating the overall cost of adjustments in a tax audit.
Late payment interest
A tax audit usually covers several tax years and happens significantly after the legal due date of the taxes concerned. Adjustments, therefore, not only lead to additional tax liabilities but also to late payment interest. Particularly, if the adjustments are contested, interest amounts can be substantial. The applicable interest rate in 2026 is 4% for VAT, withholding tax, stamp taxes, federal income tax and top-up tax. For cantonal taxes, each canton determines its own rates. Social security contributions bear an interest of 5%. Interest is only charged on the tax amount. There is no compound interest. For purposes of corporate income tax, any late payment, default or debit interest is treated as a tax-deductible expense.
Statute of limitation
Because the different taxes have different statutes of limitations, a secondary audit may cover fewer years than the original tax audit. Inversely, a secondary audit can also cover additional tax years. Most Swiss taxes have a statute of limitation of five years. As a special rule, the relative statute of limitation for withholding tax and stamp taxes is the same as for the criminal prosecution of the tax evasion which means an extension of the statute of limitation to seven years.
Certain actions by the tax authorities such as assessments, tax audits or announcements of tax audits, interrupt the statute of limitation. The absolute statute of limitation lies between ten and fifteen years, depending on the tax. For withholding tax, there is no absolute statute of limitation.
As corporate income tax is assessed annually by the cantonal tax authorities, an audit is only possible, as long as no assessment has been rendered, yet. An exception to that is a reassessment which can be initiated based on new facts within ten years of the concerned tax year. Circumstances detected in an original tax audit of a different tax will often result in such a reassessment because the detected circumstances qualify as new facts. In practice, this can lead to substantial additional tax liabilities which should be taken into account when calculating the overall cost of the original tax audit.
Any audit or adjustment does not interrupt the statute of limitation of another tax. An explicit interruption of the statute of limitations is required. If a tax audit takes a long time, it can happen that the division or tax authorities responsible for other taxes are not notified and some or all the tax years concerned are time-barred.
Penalties
Penalties are imposed in case of a criminal offense which can be anything from a minor misdemeanor to a qualified crime. Penalties range from fines to a prison sentence up to five years and may only be imposed in a separate criminal procedure. The penalties are imposed on the offenders, which are the individuals who have committed the criminal acts, or to a certain extent, the company itself. For corporate income tax, any fine for tax evasion is based on the amount of tax evaded. The standard fine corresponds to the amount of the evaded tax. For slight negligence, the amount is lower, at least one third of the evaded tax, and in severe cases, up to three times the evaded tax. The same rule applies to the top-up tax. Withholding tax and stamp taxes use the evaded tax as alternative to determine the maximum penalty (three times the evaded tax) and VAT uses an absolute amount as maximum penalty.
Adjustments in tax audits regularly result in criminal proceedings for tax evasion, unless the reason for the adjustment is an incorrect transfer pricing within a certain tolerance. The charging of private expenses of the shareholder to the company is commonly viewed as willful or negligent tax evasion by the tax authorities and fined correspondingly. Involved individuals such as company officers or the shareholder can be fined as accessory to the tax evasion of the company.
Joint liability for other taxpayers’ tax
Persons other than the taxpayer can be liable for taxes, for example the company liquidators for the tax on the liquidation or an accessory to a tax evasion for the evaded tax. In practice, it is often the company officers who are liable for taxes of the company in case of a tax evasion or a de facto liquidation. For unpaid social security contributions, there is general liability of company officers. Therefore, an individual cannot only be fined as an accessory to a tax evasion of a company, he or she may also be liable for the evaded tax.
Corresponding adjustment
There is no automatic corresponding adjustment based on the primary adjustment in a tax audit, in Switzerland. The counterparty has to formally ask for the corresponding adjustment. Based on domestic law, it will be granted only if the tax year concerned is not yet assessed and final. Particularly, when a tax audit takes a long time to close, double taxation is not uncommon. A non-Swiss counterparty can claim a corresponding adjustment based on a tax treaty, provided the counterparty resides in a treaty jurisdiction or based on local legislation of the jurisdiction it is resident in.
Withholding tax refund
If because of a tax audit, withholding tax was levied, it may be possible to obtain a full or partial refund of such withholding tax. Swiss resident beneficiaries of a monetary benefit can obtain a full refund of withholding tax. A corporation is entitled to a withholding tax refund if it has recorded the benefit as income in its accounts. As this requirement is typically met in case of incorrect transfer pricing, a refund is usually possible. The refund requirement for Swiss resident individuals is the declaration of the benefit as income. A late declaration or even a retroactive taxation by the competent tax authority, will not result in the forfeiture of the refund claim as long as the non-declaration was only negligent. In practice, the tax authorities often assume eventual intent, which leads to forfeiture of the refund claim.
Any refund claim of non-Swiss resident beneficiaries resides on the possibility to claim a tax treaty. The applicable treaty also determines the amount of the refund. Unlike for Swiss resident beneficiaries, no additional requirements have to be met beyond the status as beneficial owner of the income subject to withholding tax and the recognised tax residence in the treaty jurisdiction. Formally, however, the beneficiary has to file a refund form with the SFTA which mentions not only the relevant income and withholding tax but also requires the stamp of the tax authority of the jurisdiction of residence. Indirectly, this ensures knowledge about the income concerned by tax authority of the jurisdiction of residence. In fact, this makes a declaration in the jurisdiction of residence a refund requirement.
In addition to the above conditions for a withholding tax refund, there is a three-year filing deadline after the end of the calendar year in which the withholding tax was triggered. As tax audits typically lead to retroactive adjustments, a withholding tax refund would not be possible in many cases. For that reason, there is an exception which provides for a withholding tax refund in case of adjustments due to tax audits if the refund claim is filed within 60 days of the tax payment. For Swiss tax residents, this deadline is easy to maintain. For non-Swiss residents, this may pose practical difficulties as obtaining the necessary stamp by the tax authority of the jurisdiction of residence on the refund form is not within the control of the claimant. In order to be able to meet this formal requirement, the payment of the withholding tax may have to be deferred which entails additional late payment interest and necessitates negotiation with the SFTA for the suspension of debt collection proceedings.
Conclusion
A tax audit in Switzerland can have wide-ranging and expensive consequences for the corporation and the involved individuals. In a worst case scenario, various taxes are levied retroactively at company level, covering a long period of time, late payment interest is owed, heavy fines for tax evasion of various taxes are imposed, corresponding adjustments are not possible and withholding tax refunds are forfeited. In addition to that, company officers or other involved individuals face imprisonment and fines as well as joint liability for company taxes.
Therefore, in any Swiss tax audit, the possible consequences should be considered from the beginning, and the potential exposure should be tracked throughout the tax audit. The reflex to quickly settle a tax audit with as little discussion as possible, if the adjustments seem acceptable at a first glance, should be resisted. Only after careful consideration of all the likely consequences, a settlement should be agreed to and if relevant for a withholding tax refund, the timing should be negotiated with the tax authority in charge of the audit. In international settings, it should be ascertained that the line of argumentation in a Swiss tax audit does not contradict the group transfer pricing policy and does not otherwise put the tax position of the group at risk. Even if litigation rarely leads to a satisfactory result in such cases, it may be necessary to maintain a position for other taxes, in other jurisdictions or in future tax years.
Victoria Riep
Senior Advisor
[email protected]
Stephanie Eichenberger
Partner
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