KPMG report: Implications of Zug case and Switzerland’s commitment to calendar year-based transfer pricing enforcement

In most businesses, pricing between independent parties reflects commercial realities. Economic cycles, strategic investments, and seasonal patterns are all considered. However, in transfer pricing, tax authorities often require that each fiscal year stands alone, disconnected from the broader business.

This tension became particularly evident after the Administrative Court of Zug reaffirmed the periodicity principle on December 5, 2024. The ruling established that each tax year must be assessed individually, rejecting multi-year averaging to defend transfer pricing results. One year later, practitioners continue to navigate the implications. Must related-party pricing set aside economic realism to satisfy legal periodicity?

The Zug case and the court’s reasoning

The landmark case (A 2023, 1) involved a Zug-based subsidiary of a pharmaceutical multinational that reported an unusually high margin in 2018. The taxpayer defended its performance by referencing a three-year average operating margin of 1.2% (from 2016 to 2018), which was consistent with a benchmarking range of 1.1% to 7.3%.

The Cantonal Tax Authority disagreed, applying the 1.1% lower quartile solely to 2018 and imposing a CHF 9 million upward adjustment. The taxpayer’s restructuring that year – from a full-risk entrepreneur to a limited-risk distributor – further complicated the analysis.

The Court upheld the adjustment based on two findings:

• Legal basis: Article 58 of the Federal Direct Tax Act requires yearly determination of taxable income.
• Economic reasoning: A limited-risk distributor should earn stable returns; no extraordinary event justified a sharp deviation.

Shifting Swiss transfer pricing landscape

This decision confirmed Switzerland’s transition toward stricter, period-based enforcement. Since the Swiss Federal Tax Administration (SFTA) established its specialized transfer pricing unit in 2018 and released comprehensive guidance in 2024, the authorities have consistently emphasized annual testing aligned with OECD principles.

Recent audits reveal three clear patterns:

• Single-year testing dominance: Multi-year averaging is rarely accepted, even for cyclical sectors.
• Heightened benchmarking scrutiny: Annual results must fall within interquartile ranges; deviations often trigger adjustments and potential withholding tax.
• Limited tolerance for volatility: Commercial fluctuations alone seldom justify deviations.

Swiss adjustments can also produce secondary tax exposure. Deemed dividends may attract up to 35% withholding tax, and the SFTA retains enforcement authority even if cantonal assessments differ.

The OECD vs. Swiss approach

While the OECD Guidelines endorse multi-year data to enhance comparability, they permit averaging only to improve reliability, not to justify annual outliers. Switzerland mirrors this interpretation: taxpayers may use multi-year data to set ranges, but actual tested results must comply annually.

Implications for in-house teams

 For multinational groups operating in Switzerland, compliance now means applying the periodicity rule:

• Annual testing discipline: Ensure each year’s margin falls within the benchmarking range, particularly for limited-risk entities. Integrate testing and reconciliation into the year-end close process.
• Prudent year-end adjustments: True-ups remain common but carry risks. Foreign authorities may challenge upward adjustments, and downward corrections can raise customs or substance questions.
• Structural reviews: Persistent deviations may indicate inconsistent functional profiles rather than temporary market effects.
• Enhanced contemporaneous documentation: Authorities increasingly require detailed local files and justifications supported by contemporaneous evidence.
• Proactive monitoring: Quarterly reviews using analytical dashboards can detect deviations early, allowing timely corrective actions.
• Contractual and substance alignment: Intercompany agreements should include legally enforceable true-up clauses, and the entity’s conduct should reflect its low-risk characterization.
• Strengthen economic substance: The Zug decision underscores that intercompany contracts, day-to-day conduct, and financial results must be aligned. Limited-risk distributors cannot shift from double-digit profits to significant losses without demonstrable business drivers.

Looking ahead

The Zug case has crystallized Switzerland’s commitment to annual, calendar-based transfer pricing enforcement. While this approach may create friction with business realities, where independent parties balance performance across cycles, taxpayers have little choice but to adapt.

Until future guidance bridges the gap between economic logic and legal periodicity, the compliance playbook is clear: treat every fiscal year as self-contained, maintain robust annual documentation, and reinforce internal processes to defend results on a stand-alone basis.

For now, in Swiss transfer pricing, the calendar sets the rules.

For more information, contact a KPMG tax professional:

Gerhard Foth | gerhardfoth@kpmg.com

Caroline Chua | carolinechua@kpmg.com