After a delay of almost ten years, the US Senate has finally approved the protocol (the 2009 Protocol) to amend the double tax treaty between the Swiss Confederation and the United States of America.
The 2009 Protocol was originally negotiated and signed by Switzerland and the US on 23 September 2009 and approved by the Swiss parliament in June 2010. Following the recent approval by the US Senate, the 2009 Protocol will enter into force as soon as Switzerland and the US exchange their respective instruments of ratification.
The 2009 Protocol includes three main amendments to the 1996 Swiss/US double tax treaty:
- The 2009 Protocol extends the definition of qualifying retirement arrangements under Article 10 - Dividends to include individual plans such as Swiss Pillar 3a or US individual retirement accounts (IRAs). This amendment will allow Swiss Pillar 3a plans to qualify for 0% withholding at source on US source dividends received (provided the Pillar 3a plan in question does not control the company paying the dividend). The 0% withholding at source will be effective on or after the first January of the year following the entry into force of the 2009 Protocol. Assuming the instruments of ratification are exchanged during 2019, this means that the 0% withholding at source would begin on payments made on or after 1 January 2020.
- The 2009 Protocol amends the arbitration clause in Article 25 to require arbitration (replaces “may” with “shall”) in cases where the competent authorities cannot reach a mutual agreement. The amended arbitration clause is effective for cases that are under consideration as of the date on which the 2009 Protocol enters into force and for any cases that come under consideration after said date.
- The 2009 Protocol replaces Article 26 - Exchange of Information (described in detail in the next section). With respect to requests made on or after the date of entry into force of the 2009 Protocol, the new exchange of information provisions apply either as of the date of signature of the 2009 Protocol (i.e. 23 September 2009) or as of 1 January 2010 depending on the information requested.
Amendments to Article 26 - Exchange of Information
In accordance with Article 26 of the 1996 treaty, the exchange of information was permitted “for the prevention of tax fraud or the like”. The 2009 Protocol replaces Article 26, and in particular broadens the wording to permit exchanges of information “as may be relevant...to the administration or enforcement of the domestic laws concerning taxes”.
Although the previous wording was quite restrictive, in reality increasing pressure from the US due to the Swiss bank dispute led to information being provided in the past in certain cases where the US was able to outline specific patterns of behaviour adopted by numerous US persons. Nevertheless, the new wording will bring Article 26 into line with the current OECD standard and will make it easier to exchange information under the treaty.
The amended Article 26 and its related paragraphs provide a list of information that a requesting State must provide, which includes:
i) information sufficient to identify the person under examination or investigation (typically, name and, to the extent known, address, account number or similar identifying information);
ii) the period of time for which the information is requested;
iii) a statement of the information sought, including its nature and the form in which the requesting State wishes to receive the information from the requested State;
iv) the tax purpose for which the information is sought; and
v) the name and, to the extent known, address of any person believed to be in possession of the requested information.
The 2009 Protocol further stipulates that items (i) to (v) should be interpreted so as to not frustrate the effective exchange of information, but that they are intended to prevent “fishing expeditions”.
Impact on Swiss Banking Institutions
FATCA Group Requests
In accordance with Article 5 of the Agreement between Switzerland and the United States of America for Cooperation to Facilitate the Implementation of FATCA (the Swiss IGA), the US Competent Authority may make group requests to the Swiss Competent Authority, based on the aggregate information reported by the Reporting Swiss Financial Institutions (Reporting Swiss FIs). Under such requests, the US Competent Authority is permitted to request all of the information about non-consenting US accounts and about foreign reportable amounts paid to Nonparticipating Financial Institutions (NPFFIs).
The language used in Article 5 of the Swiss IGA explicitly provides that such requests will meet the terms of the amended exchange of information clause in the 2009 Protocol and that such requests are not permitted prior to the entry into force of the 2009 Protocol. Requests made under the Swiss IGA will pertain to information for the time period beginning on or after the entry into force of the Swiss IGA (i.e. 30 June 2014).
Although the terms of the US Program were not written as explicitly as the terms contained within the Swiss IGA, it is worth noting that the US Program contains a requirement for the Swiss banks to not only comply with any treaty request but also help draft such requests and maintain all records that would be relevant.
US Program: Section II (Category 2 banks), paragraphs D(4) and D(5)
"As a condition of any NPA, the Swiss Bank will provide all necessary information for the United States to draft treaty requests to seek account information; such cooperation will include but not be limited to the development of appropriate search criteria."
"As a condition of any NPA, the Swiss Bank will collect and maintain all records that are potentially responsive to such treaty requests to facilitate prompt responses."
Next Steps for Swiss Banks
With the entry into force of the 2009 Protocol, it can be safely assumed that the US will submit group requests under the FATCA IGA. The US already makes such requests on a regular basis in other Model 2 countries such as Hong Kong or Austria. Given the tight timeframe (ten days) that a Reporting Swiss FI has to provide the data to the Swiss Federal Tax Administration (FTA), any Reporting Swiss FI that has submitted an aggregate FATCA report to the IRS for non-consenting US accounts and/or non-consenting NPFFIs is advised to review the FATCA group request information available on the FTA website as soon as possible.
It is less certain precisely how the US will proceed with respect to information requests as they relate to the US Program, but any prudent person would expect that it is only a matter of time before such requests are submitted. Any Swiss bank with an NPA is therefore advised to review their current situation and consider their ability to respond to such a request.
Please do not hesitate to contact us for more information or in case of any questions.