Transfer pricing: what SMEs need to know

Transfer pricing — the prices at which related parties transact — is often dismissed as a topic for multinationals. That is a mistake. It only takes a Swiss SME with a foreign subsidiary, a parent company across the border or a shareholder providing services to their own company in another country for the issue to become real. Every transaction between related parties must respect a principle that is simple to state and tricky to apply: the arm’s length principle.

What “arm’s length” means

The rule is this: transactions between companies of the same group must be valued as if they were concluded between independent parties under market conditions. If the Swiss subsidiary sells a product to the foreign parent at an off-market price, it artificially shifts profit from one state to another. The tax authorities of both countries have an interest in challenging it: whoever loses taxable base wants it back.

The transactions typically under scrutiny:

sales of goods between group companies;
intra-group services (management fees, administrative services, IT);
internal financing, with the related interest rate;
licences on trademarks, patents and know-how (royalties);
allocation of shared costs.

Why it concerns small structures too

In Switzerland there is no general obligation to prepare formal transfer pricing documentation for every business. But this does not mean there are no rules: the authorities can still adjust a non-compliant intra-group price, bringing the improperly shifted profit back into taxation. And the tax authority of the other state can do the same in the opposite direction, generating precisely the double taxation that treaties are meant to prevent.

For an SME the risk is not the volume of documentation, but the adjustment: an overstated management fee, an intra-group financing rate far from the market, an unjustified royalty can be reassessed with interest.

The methods for determining the correct price

The OECD guidelines, also followed by Swiss practice, indicate several methods for verifying the compliance of a price:

Comparable uncontrolled price (CUP): compared with similar transactions between independent parties.
Resale price: starts from the price at which the good is resold to third parties, subtracting a market margin.
Cost plus: a reasonable mark-up is applied to cost, typical for services and made-to-order production.
Transactional net margin (TNMM): net profitability is compared with that of comparable businesses.
Profit split: the combined profit is divided according to each party’s contribution.

Not all methods apply to all transactions: the choice depends on the nature of the transaction and the availability of reliable comparables.

What to keep in order

Even without a heavy formal obligation, an SME should be able to demonstrate that intra-group prices are at market level. In practice this means keeping:

the contracts between group companies, with written and consistent terms;
a description of the functions performed, risks assumed and assets employed by each entity;
the rationale by which the price or margin was set;
any benchmarks or market references.

This documentation is not bureaucracy for its own sake: it is what turns a potential challenge into a defensible position.

The ruling tool

For recurring transactions of significant amount, Switzerland offers the possibility of a tax ruling: an advance agreement with the authorities confirming the treatment of a given pricing structure. It gives certainty in advance and avoids surprises during an audit. It is not suited to every situation, but for an SME with stable intra-group flows it can be an investment in peace of mind.

Recurring mistakes

“Ballpark” prices between related companies, with no justification whatsoever.
Flat-rate management fees without proof of the service actually rendered.
Intra-group financing at off-market rates.
Missing contracts: without paper, the reconstruction is done by the tax authority in its own favour.

How we address it

At SIH ONE we map the intra-group transactions, define the appropriate method for each, build the supporting documentation and, where worthwhile, negotiate a ruling to lock in the treatment in advance. The goal is for every internal price to hold up to an audit on both sides of the border.

Do you have transactions between your Swiss company and abroad? Let’s bring your intra-group prices into line.