Switzerland Tax Treaty

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United States-Switzerland Tax Treaty

Switzerland’s International Tax Compliance Rules

Quick Summary.  Situated between the Alps and the Jura mountains in Central Europe, Switzerland is a federation comprised of 26 sovereign cantons. Income tax is imposed at both the federal and cantonal levels. In addition, Switzerland’s 2,600 municipalities are generally empowered to levy their own taxes. The federation’s ability to impose taxes is limited by the Federal Constitution. 

A federal republic, Switzerland has a bicameral legislature (the Federal Assembly) with two chambers: the National Council and the Council of States.  Executive power is vested in the Federal Council, and the Federal Supreme Court of Switzerland oversees the judicial branch.

Sources of tax law include the following: Direct Federal Tax Law (DBG), Tax Harmonization Law (StHG), Withholding Tax Law (VStG), Stamp Tax Law (StG), and VAT Law (MWSTG).

Switzerland is a signatory to the OECD’s Multilateral Competent Authority Agreement on the Exchange of Country-by-country Reports, as well as the OECD’s Multilateral Instrument (MLI).

Effective in 2020, Switzerland enacted the Federal Act on Tax Reform and AHV Financing (TRAF).  The TRAF provides for several notable tax reforms, including a patent box, expansion of research and development (R&D) deductions, capital contribution reserve restrictions, and the removal of certain tax privileges.

Switzerland subjects resident companies to tax on worldwide income, whereas non-resident companies are potentially subject to branch taxation where they partner with a Swiss business, have a permanent establishment in Switzerland, own real property that is located in Switzerland or satisfy certain other tests.

U.S.-Switzerland Tax Treaty

Switzerland is a member of the Convention on the Organisation for Economic Co-operation and Development (OECD); the United Nations (UN); and the European Free Trade Association (EFTA).

U.S. Treaty Documents

Currency.  Swiss Franc (CHF)

Common Legal Entities.  Corporation (AG), limited liability company (GmbH), and branch.

Tax AuthoritiesFederal, Cantonal, and Communal Tax Administrations

Tax Treaties.  Switzerland is a signatory to more than 80 tax treaties and a signatory to the OECD multilateral instrument (MLI).

Corporate Income Tax Rate.  8.5% plus Contona and communal CITs.

Individual Tax Rate31%, various.

Corporate Capital Gains Tax Rate11.9%-21.6%

Individual Capital Gains Tax RateExempt for federal.

Residence.  Individual residents are taxed on their worldwide income, excluding certain activities carried out abroad.  Residence is established if an individual intends to establish his or her abode in Switzerland, is present with an intention to exercise gainful activities of at least 30 days or, if such intention, for 90 consecutive days.

Business Receipts Tax.

Withholding Tax.

            Dividends. 35%

            Interest. 0%-30%

            Royalties. 0%

            Commissions. 0%

Transfer Pricing.  Generally follows OECD transfer pricing guidelines and CbC reporting.

CFC Rules. No

Hybrid Treatment. No special rules in place.

Inheritance/estate taxExempt at federal level.


Switzerland is a federation of 26 sovereign cantons (states). Income taxes are levied at both the federal and cantonal levels. In addition, Switzerland’s 2,600 municipalities are generally empowered to levy their own taxes. The federation’s ability to impose taxes is limited to those set out in the Federal Constitution. The Swiss Federal Constitution provides the federation with the right to levy, among others, a direct federal income tax. The constitutions of the cantons enable the cantons to levy income taxes as well. The Swiss Federal Constitution states that increases to the top individual or corporate income tax rates require a constitutional amendment by popular referendum. The same holds true of new cantonal taxes, which require constitutional amendments and popular referenda at the cantonal level.


Capital gains are taxed at the federal level only if the underlying asset was held for business purposes. The same treatment applies at the cantonal level, except that the cantons impose a tax on real estate held as a private asset. Capital gains from business assets are generally taxed at ordinary income rates at both the federal and cantonal levels. The cantons impose a higher real estate gains tax on short-term gains than on long-term gains.

Taxes are withheld at the federal level only for certain passive income and on wages of some foreign resident workers.


Switzerland maintains a classical, two-level corporate tax system. In principle, resident corporations, defined as those incorporated in Switzerland or effectively managed or controlled from Switzerland, are taxed on their worldwide income, yet this principle is mitigated by the failure to tax foreign permanent establishments and by the tax relief granted to dividends from foreign participations. Capital gains and interest are taxed at ordinary income rates at the federal level. Some cantons impose a capital gains tax, instead of an income tax, on capital gains from real property.

In general, dividends are taxable; however, corporations receive a “participation deduction” for certain qualified dividends at the federal and cantonal levels. Dividends qualify for a participation deduction if the parent company owns (i.e., “participates in”) at least 10 percent of the total share capital of the subsidiary, or holds shares worth at least one million Swiss Francs (CHF).  Additionally, a parent corporation can receive the participation deduction if it is entitled to 10 percent of the profits of the subsidiary. Corporations also receive a deduction for capital gains from sales of qualifying participations. The deductible portion of the participating dividend is a fraction equal to the ratio of the net dividend over the corporation’s net total income. The net dividend is the participating dividend, less interest on loans, and less nonrefundable foreign withholding taxes.

Hybrid instruments do not qualify for the participation deduction. The participation deduction applies at the federal and cantonal levels. A resident corporation may also qualify as a cantonal holding company if its main activity is administering its participations. As such, it will be exempt from cantonal and municipal income taxes and will only pay reduced cantonal net worth taxes, but it will not be exempt from Swiss federal taxes. The latter, however, will be reduced by relief for qualifying dividend income.

Switzerland’s tax treaties and general federal tax law provide that certain items are not taxable to resident corporations, including income from a foreign permanent establishment or from real property outside of Switzerland. This exclusion applies even if no treaty is in force. Shareholder equity contributions, the conversion of debt into equity, and gains on like-kind exchanges are also exempt from tax. Additionally, various reorganization transactions are not subject to income tax.

Because Switzerland has three levels of taxation, corporate income tax rates vary significantly depending on the canton and municipality of a corporation’s residence. Dividends distributed to nonresidents from resident companies and investment funds are withheld at 35 percent, and this also applies to dividends distributed by holding companies.

Many tax treaties, however, reduce or even eliminate this withholding at the source. Bonds and bank accounts paying interest to nonresidents also withhold at the same rates. There are no taxes withheld on royalties at the federal level.

Other Taxes

Inheritance gift and wealth taxes

There are no inheritance or gift taxes at the federal level; however, the cantons may impose such taxes. In addition, the cantons impose an annual net worth tax on the share capital of corporations.

Social security taxes

The Swiss social security system is comprised of three mutually interdependent tiers or “pillars”—social security, company pension, and private savings. The government-run retirement, survivors, and disability plan is the first pillar, and it provides every resident with a minimum income. Employees and employers split the payment of premiums, and the premiums are deductible by both parties.

The second pillar is managed by employers’ pension funds. It is mandatory for all employees older than 24 with an annual salary over a threshold.  Taxpayers may deduct contributions to pension plans that correspond to the amount of retirement income insured by the second pillar.

The third pillar is made up of individual pension plans, personal savings, or life insurance. Contributions to such savings vehicles are deductible to a limited extent depending on the individual’s participation in the pension funds described in the second pillar.

Exchange of Information

Tax treaties establish the scope of information that can be exchanged between treaty parties. Exchange of information provisions first appeared in the late 1930s, and are now included in all double tax conventions to which the United States is a party. A broad international consensus has coalesced around the issue of bank transparency for tax purposes and strengthened in recent years, in part due to events involving one of Switzerland’s largest banks, UBS AG, the global financial crisis, and the general increase in globalization. As part of the greater attention to means of restoring integrity and stability to financial institutions, greater efforts have been made by the United States and other G-20 jurisdictions to reconcile the conflicts between jurisdictions, particularly between jurisdictions with strict bank secrecy, such as Switzerland and Luxembourg, and those seeking information needed to enforce their own tax laws.

Although they have had a bilateral income tax treaty in force since 1951, the United States and Switzerland historically engaged in limited exchange of information under the tax treaties, due principally to strict bank secrecy rules under Swiss law and a commitment by the Swiss to protect such secrecy. The countries subsequently entered into a protocol in response to that history as well as part of the international trend in exchange of information.

The following discussion addresses matters specific to the U.S.-Swiss experience, including the background of the U.S.-Swiss exchange of information up to the date of that protocol, how both the United States and Switzerland have addressed the issue of transparency, and the extent to which the protocol is expected to avoid future problems.


The exchange of information article in the 1951 treaty was limited to “prevention of fraud or the like.” Under the treaty, Switzerland applied a principle of dual criminality, requiring that the purpose for which the information was sought also be a valid purpose under local law. Because “fraud or the like” was limited to nontax crimes in Switzerland, information on civil or criminal tax cases was not available. The provision was substantially revised for the 1996 treaty, and accompanied by a contemporaneous protocol that elaborated on the terms used in the exchange of information article. That 1996 Protocol was intended to broaden the circumstances under which tax authorities could exchange information to include tax fraud or fraudulent conduct, both civil and criminal. It provided a definition of “tax fraud” to mean “fraudulent conduct that causes or is intended to cause an illegal and substantial reduction in the amount of tax paid to a contracting state.” In practice, exchange apparently remained limited, leading the competent authorities to negotiate a subsequent memorandum of understanding that included numerous examples of the facts upon which a treaty country may base its suspicions of fraud to support a request to exchange information.  “Mutual Agreement of January 23, 2003, Regarding the Administration of Article 26 (Exchange of Information) of the Swiss-U.S. Tax Convention of October 2, 1996.”

In response to difficulties compelling production of information across-borders, the United States has enacted a variety of statutory measures to require greater enhanced information reporting and encourage voluntary disclosure, at the risk of incurring penalties or adverse findings. These measures range from third-party information reporting and withholding at source rules, as well as enforcement measures such as specific authority for the Tax Court to order foreign entities invoking its jurisdiction to provide all relevant information and a statutory exclusionary rule affecting admissibility of foreign-based documents that had not been provided to the government earlier in administrative or judicial proceedings. Each is a valuable governmental tool, but is limited to the situation in which an offshore transaction has been identified and selected for examination; they do not assist in identifying an offshore transaction. In the latter situation, the IRS may make use of its authority to issue so-called “John Doe” summonses, although recent experience has shown that enforcement of these summonses can be particularly difficult when the information sought is located in jurisdictions with restrictive bank secrecy laws.

The private banking scandals

The difficulties faced by the IRS and the Department of Justice (“DOJ”) in obtaining information needed to enforce U.S. tax laws against U.S. persons who utilize foreign financial accounts or foreign entities have long concerned administrators and legislators alike. These difficulties were brought into focus by two scandals in 2008 involving private banking practices (i.e., wealth management services), one involving a Liechtenstein bank and the second, UBS AG, a Swiss financial institution.

In February 2008, the first global tax scandal erupted after a former employee of Liechtenstein Global Trust (“LGT”) provided German authorities with data on hundreds of persons with accounts at LGT in Liechtenstein. The Liechtenstein information consisted of information about German clients of LGT as well as clients from other countries. Germany shared the information it received with other OECD countries who are members in the Forum for Tax Administration. In February 2008, Germany announced it had taken a number of enforcement actions on the basis of that information. In late February 2008, a number of other jurisdictions, including the United States, followed suit

The second occurred in May 2008, when the United States arrested Bradley Birkenfeld, a private banker formerly employed by UBS AG, on charges of having conspired with a U.S. citizen and business associate to defraud the United States of $7.2 million in taxes owed on $200 million of assets hidden in offshore accounts in Switzerland and Liechtenstein. UBS, based in Switzerland and one of the world’s largest financial institutions, entered into an agreement with the IRS, effective January 1, 2001, to act as a qualified intermediary (“QI”) for withholding with respect to U.S.-source income earned by non-U.S. persons. The conduct of Birkenfeld and his associates resulted in violations of the QI agreement.

A QI is defined as a foreign financial institution or a foreign clearing organization, other than a U.S. branch or U.S. office of such institution or organization, which has entered into a withholding and reporting agreement (a “QI agreement”) with the IRS.  A foreign financial institution that becomes a QI is not required to forward beneficial ownership information with respect to its customers to a U.S. financial institution or other withholding agent of U.S.-source investment-type income to establish their eligibility for an exemption from, or reduced rate of, U.S. withholding tax. Instead, the QI is permitted to establish for itself the eligibility of its customers for an exemption or reduced rate, based on information as to residence obtained under the “know-your-customer” rules to which the QI is subject in its home jurisdiction as approved by the IRS or as specified in the QI agreement. The QI certifies eligibility on behalf of its customers and provides withholding rate pooled information to the U.S. withholding agent as to the portion of each payment that qualifies for an exemption or reduced rate of withholding.

In exchange for entering into a QI agreement, the QI is able to shield the identities of its customers from other intermediaries (for example, other financial institutions in the chain of payment that may be business competitors of the QI) in certain circumstances and is subject to reduced information reporting duties to the IRS compared to those that apply in the absence of the QI agreement. This ability to shield customer information is limited, however, with respect to accounts of U.S. persons for which it acts as QI, because the QI is required to furnish Forms 1099 to its U.S. customers if it has assumed primary reporting and backup withholding responsibility for these accounts, or to provide Forms W-9 or information sufficient to complete a Form W-9, to the withholding agent in cases in which the QI has not assumed such primary responsibility.

Many of UBS’s U.S. clients apparently did not wish to be identified nor did they agree to have taxes withheld, or in the alternative, to sell their U.S. assets as required under the QI agreement. Despite its obligations under the QI agreement, UBS later acknowledged, as part of the deferred prosecution agreement described below, that its bankers assisted U.S. customers in concealing their ownership of the assets held in UBS accounts by helping to create nominee and sham entities. These entities were set up in various jurisdictions, including Switzerland, Liechtenstein, Panama, the British Virgin Islands, and Hong Kong. The UBS bankers and their U.S. customers then claimed that the accounts were owned by these nominee and sham entities and were therefore not subject to the reporting requirements imposed by the QI agreement.

Administrative response to the private banking scandals

Enforcement measures against UBS and its clients

On February 18, 2009, the United States District Court for the Southern District of Florida accepted a deferred prosecution agreement between the United States and UBS.  As part of the agreement, UBS acknowledged that, beginning in 2000 and continuing through 2007, it participated in a scheme to defraud the United States and the IRS by actively facilitating the creation of accounts in the names of offshore companies and allowing U.S. taxpayers to conceal their ownership of, or beneficial interest in, the accounts in an effort to evade U.S. tax reporting and payment requirements.

On February 19, 2009, the government filed a petition with the United States District Court for the Southern District of Florida to enforce a previously issued John Doe summons and to order UBS to disclose to the IRS the identities of the bank’s U.S. customers with undeclared Swiss accounts.  The lawsuit alleged that there may be as many as 52,000 undeclared accounts with approximately $14.8 billion in assets as of the mid-2000s. UBS stated that its ability to comply with the summons was restricted by Swiss law; in particular, Swiss law prohibited UBS from producing information located in Switzerland. UBS took the position that it could produce only information located in the United States. UBS also expressed concern that further enforcement of the summons would be in violation of the original QI agreement and the information exchange provisions of the income tax treaty between Switzerland and the United States. In particular, the QI agreement entered into between UBS and the IRS in 2001 expressly recognized that UBS would open and maintain accounts covered by Swiss financial privacy laws for U.S. clients who chose not to provide a Form W-9, as long as those accounts held no U.S. securities.

On August 19, 2009, the U.S. and Swiss governments signed an agreement under which (1) the IRS subsequently submitted a separate request under the U.S.-Switzerland income tax treaty for information regarding approximately 4,450 accounts of certain U.S. customers of UBS, and (2) the Swiss government has agreed to process the request and to direct UBS to turn over information on those U.S. customers.  The agreement required the Swiss government to establish a task force to expedite its decisions as to disclosure under the treaty request. The Swiss Federal Tax Administration was required to render final decisions on 500 accounts within 90 days after the IRS submitted the treaty request and to render final decisions on the remaining accounts within 360 days after the treaty request. The Swiss government also agreed to review and process additional requests for information for other banks in cases in which an equivalent pattern of facts and circumstances exist. An annex to the agreement set forth the criteria used to determine which U.S. accounts were subject to the agreement. On November 16, 2010, the IRS announced that it had received information on over 4,000 accounts in response to the treaty request and anticipated receiving information on account holders whose objections to disclosure were pending in proceedings before the Swiss Federation Administration Court. Having received substantially all of the information requested under the treaty, the IRS withdrew the summons served on UBS AG.

Voluntary disclosure initiatives

On March 26, 2009, as part of its efforts to manage the use of enforcement resources on offshore banking cases, the Commissioner of the IRS announced a voluntary compliance initiative under the terms of which it proposed to waive a significant portion of penalties in return for voluntary disclosure of previously undisclosed offshore accounts.  This initiative was the second compliance initiative available to the population of U.S. taxpayers who used offshore accounts to avoid paying taxes. The IRS had first attempted such an initiative in 2003, under the Offshore Voluntary Compliance Initiative (“OVCI”).  That program encouraged the voluntary disclosure of offshore accounts accessed through credit card or other financial arrangements similar to those targeted by an IRS enforcement program known as the Offshore Credit Card Program. It was not, however, limited to those who used credit cards; its terms were broad enough to extend the partial amnesty to clients of offshore private banking. Under the OVCI, the IRS waived the civil fraud penalty and certain penalties relating to failure to file information and other returns, but taxpayers remained liable for back taxes, interest, and certain accuracy-related and delinquency penalties.

Although the IRS reported that, as of July 31, 2003, it had received OVCI applications from 1,299 taxpayers who paid over $75 million in taxes and identified over 400 offshore promoters of abusive credit card or other financial arrangements, success of the initiative was difficult to measure. Then IRS Commissioner Mark Everson discussed the limited success of the OVCI initiative at a hearing on August 1, 2006, during which he stated, “In reality, we did not have a good idea of the potential universe of individuals covered by this initiative. As a result, the incentive for taxpayers to come forward and take advantage of this initiative was diminished due to the fact that we did not have the ability to identify immediately and begin examinations for all non-participating individuals.”

With the high-profile prosecution of UBS AG and the efforts to identify its clients, the risk that bank customers who did not participate in the second initiative would nonetheless be discovered by the IRS was greater. Under the terms of the guidance issued to field agents, no FBAR penalty would be imposed on any delinquent FBAR filer who was otherwise in compliance with the tax laws. Those who were not in compliance with the tax laws but who voluntarily disclosed and submitted delinquent FBARs and other information returns by September 23, 2009, were subject to an “offshore penalty” in lieu of the otherwise applicable FBAR penalties. The offshore penalty equaled 20 percent of the aggregate account balances at their highest point in any of the six years covered by the voluntary disclosure. Taxpayers who made voluntary disclosures were required to make all delinquent filings (e.g., FBARs, or information or income tax returns) for the six years covered and to pay all taxes, interest, and an accuracy or delinquency penalty. The offshore penalty amount could be reduced to five percent if the taxpayer did not open the account, there was no account activity while the taxpayer controlled the account, and all taxes were paid on the account.

The IRS subsequently announced the 2011 Offshore Voluntary Disclosure Initiative, under terms similar to, but less generous than, those under the 2009 initiative. The maximum offshore penalty under that program was 25 percent of the aggregate account balance at any time in the years 2003 through 2010. As before, the offshore penalty could be reduced under certain circumstances. The penalty could be reduced to five percent if the taxpayer did not open the account, there was no account activity while the taxpayer controlled the account, and all taxes were paid on the account. In addition, taxpayers whose accounts did not exceed $75,000 in any year were eligible for a reduced offshore penalty of 12.5 percent. All participants were required to pay taxes, interest, and an accuracy or delinquency penalties for all eight years in that period.

The 2011 program was followed by subsequent voluntary disclosure programs and a streamlined compliance procedure.

Expansion and modernization of U.S. exchange of information network

In response to the private banking scandals, efforts were made to modernize the exchange of information articles in bilateral treaties to which the United States is a party to ensure that exchange of information was required without regard to countries’ domestic bank secrecy laws and to expand the U.S. exchange of information network. The exchange protocol is illustrative of those efforts. In addition to the protocol, the United States and Luxembourg signed a protocol amending the U.S.-Luxembourg income tax treaty to conform that treaty to the exchange of information article in the U.S. Model treaty, as part of its efforts to bring all treaties to which the United States is a party into accord with OECD standards.  Expansion of the exchange of information network was also accomplished by expanding the network of countries with which the United States has executive agreements known as Tax Information Exchange Agreements (“TIEAs”).

TIEAs are entered into by the executive branch, without the advice and consent of the Senate. In contrast to the bilateral tax treaties, TIEAs are generally limited in scope to mutual exchange of information, and entered into with countries that impose little or no income tax, or with which the United States has no tax treaty. The objective of a TIEA is to promote international cooperation in tax matters (civil and criminal) through exchange of information. A country must have adequate process for obtaining information; if the country is required to enact measures providing such process, then the entry into force of the TIEA may be delayed until such requirements have been met. The provisions of the TIEA generally require a country to override its domestic laws and practices pertaining to disclosure of information regarding taxes.

The OECD adopted and published a model TIEA in 2002, with commentary; to date, the U.S. Treasury Department has not published its own model TIEA.  Since the 1980s, the United States has entered into over 20 such agreements. The recently intensified expansion efforts resulted in execution of a TIEA with Liechtenstein, signed on December 8, 2008, with Gibraltar, signed March 31, 2009, with Monaco, signed September 8, 2009, and with Panama, signed November 30, 2010.33 The terms of the TIEAs generally conform to the OECD model TIEA.

Legislative response to the private banking scandals – FATCA

Hearings before the Senate Permanent Subcommittee on Investigations, Senate Finance Committee, and House Committee on Ways and Means all addressed the problem of the evasion of U.S. tax through the use of offshore accounts in the wake of the whistleblower disclosures and the UBS summons proceedings. Expanded reporting obligations were enacted in the Hiring Incentives to Restore Employment (“HIRE”) Act in 2010. Subtitle A of Title V of the HIRE Act, entitled “Foreign Account Tax Compliance,” was based on legislative proposals in the Foreign Account Tax Compliance Act (“FATCA”), a bill introduced in both the House and Senate on October 27, 2009.

The HIRE Act made a number of changes to U.S. tax law to improve tax compliance, including changes with respect to foreign accounts and cross-border transactions. The Act added new Chapter 4 to Subtitle A of the Code, a reporting and withholding regime. Chapter 4 requires reporting of specific information by third parties for certain U.S. accounts held in foreign financial institutions (“FFIs”). Information reporting is encouraged through the withholding of tax on payments to FFIs unless the FFI enters into and complies with an information reporting agreement with the Secretary of the Treasury.

The HIRE Act repeals certain foreign exceptions to the registered bond requirements, treats certain dividend equivalent payments received by foreign persons as U.S. source dividends for withholding tax purposes, and modifies certain rules in respect of foreign trusts. In addition to the added responsibilities of foreign financial institutions, changes in the reporting required of taxpayers were also enacted. U.S. individuals and, to the extent required by regulations, any domestic entity availed of by such individuals must disclose on their federal income tax returns their foreign financial assets and foreign financial accounts if the aggregate value of such assets exceeds $50,000. Failure to do so results in both a failure to disclose penalty as well as an increase in the otherwise applicable accuracy-related penalty. In addition, the HIRE Act extends the statute of limitations for taxpayers who do not comply with foreign financial asset disclosure obligations or significantly under-report income associated with foreign assets.

Multilateral efforts gain momentum

In addition to purely domestic measures such as FATCA, the United States is one of many jurisdictions seeking new ways to ensure an adequate network of bilateral exchange of information agreements, whether by tax treaty or TIEA and exploring multilateral programs to complement those domestic efforts. To the extent that there is less than near universal acceptance of any emerging norms on the desirability of greater exchange of information, countries that are implementing international standards on exchange of information are understandably concerned that capital for investment will flow to noncompliant jurisdictions.

Several jurisdictions previously reluctant to commit to OECD standards of transparency (“the OECD standards”) have done so. The development of international norms in recent years owes a great deal to the work done on transparency and exchange of information by the OECD Global Forum on Transparency and Exchange of Information (the “Global Forum”), begun in 1996. The OECD Standards require:

The OECD Standards have been endorsed by the G-20 Ministers of Finance. Also initiated in 1996 was the OECD’s Harmful Tax Practices Project, which is carried out through the Forum on Harmful Tax Practices (“FHTP”). FHTP focuses on (1) eliminating harmful tax practices of preferential tax regimes of OECD Member states; (2) identifying tax havens and pursuing their commitments to OECD Standards; and (3) encouraging other non-OECD counties to associate themselves with FHTP work.  As of 2000, FHTP had identified more than 40 jurisdictions with harmful tax practices. By 2005, 35 of these had become “committed jurisdictions,” that is, jurisdictions that formally documented their commitment to the OECD Standards. While seven jurisdictions on the original list initially refused to become committed jurisdictions, by early 2009, the list of noncooperative jurisdictions was reduced to three: Andorra, Monaco, and Liechtenstein.

The Swiss Response and the Proposed Protocol

As discussed above, Switzerland announced its commitment to the OECD standards at a time when it appeared that it could be included in a list of jurisdictions considered by the G-20 to be noncooperative. In March 2009, the Swiss Federal Council withdrew its reservation regarding Article 26 (Exchange of Information) of the OECD Model treaty, thus adopting the OECD standards on administrative assistance in tax matters.  It simultaneously announced key elements that it would require in implementing this position. These conditions can be read as a statement of the Swiss negotiating position, much as the U.S. Model treaty is the starting point for U.S. negotiators. The Swiss conditions established by the Federal Council are the following: (1) limitation of administrative assistance to individual cases and thus no fishing expeditions; (2) limitation to the exchange of information upon specific and justified request; (3) maintenance of procedural protections; (4) fair transitional solutions; (5) limitations to taxes governed by the agreement; (6) principle of subsidiarity in accordance with the OECD Model treaty; (7) willingness to eliminate discrimination; and (8) prohibition of retroactivity.

The protocol, by replacing Article 26 (Exchange of Information and Administrative Assistance) of the present treaty and amending paragraph 10 of the 1996 Protocol, closely adheres to the principles announced by Switzerland. It also conforms to the standards, if not the language, of the exchange of information provisions in the U.S. Model treaty in many respects. As a result, the protocol will facilitate greater exchange of information than had occurred in the past, chiefly by eliminating the present treaty requirement that the requesting treaty country establish tax fraud or fraudulent conduct or the like as a basis for exchange of information and providing that domestic bank secrecy laws and lack of a domestic interest in the requested information are not possible grounds for refusing to provide requested information. Lack of proof of fraud, lack of a domestic interest in the information requested, and Swiss bank secrecy, alone or in combination, were previously relied upon by Swiss authorities in declining to exchange information. The protocol attempts to ensure that subsequent changes in domestic law cannot be relied upon to prevent access to the information by including in the protocol a self-executing statement that the competent authorities are empowered to obtain access to the information notwithstanding any domestic legislation to the contrary.

Extent to which taxpayer names will continue to be required

The need to identify the taxpayers to whom the request for information relates is subject to varying interpretations about the extent to which information provided by the requesting treaty country is sufficiently specific. The protocol mandates exchange of information only if made pursuant to specific requests for exchange of information and only if the request contains information sufficient to identify the taxpayer. It is not clear what information other than a name will be sufficient within the meaning of the proposed protocol to obtain the names of persons within an ascertainable class of persons. In the context of Code section 7609(f) and John Doe summonses in the United States, the persons whose tax data is sought must belong to an ascertainable class of persons who may have taken steps to avoid taxes. That standard was satisfied in the UBS controversy.

The ultimately successful treaty request submitted under the terms of the August 2009 settlement with UBS, which led to production of the information and withdrawal of the John Doe summons, was not the first time that a treaty request was considered in that case. Enforcement of the summons was sought in 2009 only after the United States, through the U.S. Competent Authority, had requested the information, despite long experience with Switzerland suggesting that the request would be futile both because the United States could not supply the names of the taxpayers involved and because it did not yet have information sufficiently probative of tax fraud or fraudulent conduct.  The purpose of the request was to obtain those names. Only after enforcement proceedings were approaching a point at which Swiss courts would be asked to grant comity to a U.S. court order were the treaty countries able to agree that exchange of information was permissible under the treaty. Use of the treaty request under the agreement negotiated by the United States and Switzerland as well as the United States and UBS enabled the Swiss to preserve Swiss sovereignty while nevertheless providing the information needed by the United States.

Standard of relevance for requests for exchange of information

The protocol permits the competent authorities to exchange such information as may be relevant to the assessment, collection, and enforcement of the domestic laws of the two treaty countries, rather than limiting the information to that which is necessary. This conforms to the standard of Code section 7602 as confirmed by the U.S. Supreme Court in a line of cases beginning with United States v. Powell, under which information need only be relevant to a legitimate purpose to be required to be produced. Despite that clear statement in Article 3 of the proposed protocol, paragraph 10 in Article 4 of the protocol clouds the standard of relevance that is to be applied by referring to “fishing expeditions” by the requesting treaty country and concerns that information requested may be unlikely to be relevant to the tax affairs of a given taxpayer.

Other issues about scope of exchanges

The protocol limits use of information to matters pertaining to the taxes covered by the treaty, unless both treaty countries agree upon a proposed use of the information that would be consistent with domestic law of both countries. The protocol and paragraph 10 do not elaborate on the scope of proposed uses that may be acceptable. In the Technical Explanation, Treasury states that the parties have agreed that the only such use of exchanged information will be limited to those uses that are within the scope of the Mutual Legal Assistance Treaty (“MLAT”). The reference to matters consistent with the scope of the MLAT is not given as an example of a use beyond those specified in the treaty; rather it is stated as a firm limitation on such uses. Although use of information consistent with an MLAT would clearly be consistent with law of both treaty countries and likely to be a use on which the treaty countries would agree, it is not clear why such uses must be the only uses not specified in the treaty.

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