Effect of the New Regime
Swiss Banks' Status
Documentation of Entities

The aim of this update is to provide Swiss banking clients with guidelines to assist them when confronted with the requests that will be submitted to them by the Swiss financial institutions with which they hold their accounts and which invest on their behalf in US securities.

According to new US tax rules that will come into effect on January 1 2001, Swiss financial institutions and intermediaries will have to determine which of their customers holding US securities are 'US persons' and which are so-called 'non-resident aliens' ('non-US persons').


In Switzerland, a 30% US withholding tax is levied by US withholding agents in the United States on all dividends and interest arising from US securities and paid outside of the United States to Swiss banks on behalf of their customers. Pursuant to the double tax treaty of October 2 1996 in force between Switzerland and the United States, the rate of this US withholding tax may be reduced. (Further, US law exempts interest paid on obligations issued by a US person after July 18 1984, the so-called 'portfolio interest exemption'). The notion of US securities to which this withholding tax regime applies is both vast and comprehensive. The term 'US securities' includes:

  • shares;

  • bonds and derivatives issued by US persons;

  • eurobonds issued by US borrowers;

  • shares of US issuers listed on non-US stock exchanges; and

  • time deposits and fiduciary investments held with US counterparties.

It does not include:

  • non-US investment funds;

  • non-US derivatives;

  • US dollars (cash);

  • US denominated bonds issued by non-US person borrowers;

  • American depositary receipts listed on US stock exchanges but issued by non-US persons; and

  • time deposits and fiduciary investments quoted in US dollars but held with non-US counterparties.

Under existing US withholding tax regulations that expire on December 31 2000, US withholding agents making payment to a Swiss financial institution on behalf of its bank customers as beneficial owners, or on behalf of other intermediaries who are bank clients, may apply a reduced withholding rate to this payment without first having to obtain information from the Swiss financial institution on its customers or correspondents. This mechanism, known as the 'address system', will be abandoned under the new US withholding tax regime applicable on a worldwide basis to foreign financial institutions as of January 1 2001.

From the Internal Revenue Service (IRS) point of view, the current regime has proven ineffective against US tax evasion in its inability to track down US tax evaders who may be clients of foreign financial institutions, including Swiss banks, dealing on their behalf in US securities without reporting the resulting income. This has led to abuse of the US double taxation treaties by non-eligible persons.

Effect of the New Regime

As before, a US withholding tax of 30% will be withheld by US withholding agents on payments of interest, dividends and royalties arising from US source income and payable to a Swiss financial institution on behalf of its customers. Under the new regime, however, the US withholding agent may only apply a reduced rate of withholding to the payment (ie, the 'treaty rate' or the 'portfolio interest exemption') if written documentation is provided by the 'beneficial owner' of the US source income, that is, by the customer of the Swiss financial institution. Lack of proper documentation may lead to adverse tax consequences for the Swiss bank customer on his US asset holdings. These can range from application of the highest non-treaty withholding tax rates on interest, royalties and dividends (30%), to the imposition of a special US tax, called the 'backup withholding tax', of 31% on proceeds of sale of US securities.

The new regime will apply to all financial institution customers (US persons and non-US persons alike, whether individuals or corporate entities) that hold US securities on or after January 1 2001.

Rules for 'US person' clients of Swiss financial institutions
A 'US person' is any person who is a US taxpayer, that is:

  • US citizens;

  • foreign citizens born on US soil;

  • foreign citizens born abroad of a US parent (under certain circumstances);

  • holders of the US permanent residency visa, or 'Green Card';

  • foreign citizens who spend a significant amount of time in the US either in the current year or in the current and the two previous years (and thus meet the so-called 'substantial physical presence' test); and

  • under certain circumstances, foreign citizens married to US taxpayers who have made an election for joint US taxation.

Under the new US withholding tax rules, as from January 1 2001 a 'US person' customer of a Swiss financial institution may only retain his US securities deposited with the bank if he files a specific US tax form (IRS Form W-9) disclosing his name and US tax identification number. By signing this form the customer releases his bank from banking secrecy obligations in relation to the US custodian of the bank and the IRS. US-person Swiss bank clients who are not willing to disclose their US assets and sign an IRS Form W-9 must in principle sell their US assets by the end of the year in order to avoid the new reporting and withholding tax requirements in respect of US securities holdings. Otherwise, they will be subject to the special US backup withholding tax of 31% on proceeds of sale of their US securities (or redemption of their US bonds) upon sale or disposition after January 1 2001.

In other words, under the new regime, it will no longer be possible for US-person clients of Swiss financial institutions (or other foreign financial institutions) to hold direct investments in US securities, retain their anonymity and benefit from reduced withholding tax rates on income arising from US securities, while benefiting from sales or dispositions of their US securities without withholding.

Rules for 'non-US person' clients of Swiss financial institutions
Non-US person Swiss bank customers holding US securities must also be properly documented. This may be achieved by signing a written form retained by the bank on which they certify their 'non-US status' to their Swiss banker and specify whether they wish to claim a reduction in US withholding taxes based on an applicable double tax treaty.

The new regime has some adverse tax consequences for Swiss bank customers who have not signed the appropriate documentation ('undocumented persons'). These consequences are exposure to the highest withholding tax rates and, eventually, exposure to the special US backup withholding tax of 31% on the sale proceeds of US securities.

The documentation will be provided by the Swiss financial institution to its account holder and should be signed by the person who is the 'beneficial owner' of US source income according to US tax rules.

It is important to note that the US notion of 'beneficial owner' differs from that of 'economic beneficiary' under Swiss 'Know Your Customer' (KYC) Rules laid down in the Swiss Bankers Association Code of Conduct (Due Diligence Convention, present version 1998).

Normally, beneficial owners would be required to sign an IRS Form W-8BEN. In Switzerland, however, IRS Form W-8BEN has been replaced by a specific form issued by the Swiss banks and based on the model prepared by the Swiss Bankers Association for non-US person bank clients. The advantage of the Swiss form over IRS Form W-8BEN is that its validity is not limited in time and it does not have to be refiled every third year.

Swiss bank clients who are acting as fiduciaries or intermediaries, and persons who are account holders in their own names but are not considered to be the beneficial owners of the Swiss bank account under the US rules (so-called 'look through' or 'transparent' entities, eg, partnerships and certain trusts) must document their status on IRS Form W-8IMY. They must attach a signed Swiss form or IRS Form W-8BEN for each beneficiary for whom they act as a Swiss bank customer.

What will happen to the documentation signed by non-US person Swiss bank clients? Will it be forwarded to the US custodian and the IRS (no banking secrecy), or will it be kept in the files of the Swiss bank covered by Swiss banking secrecy? The answer to this important question will depend on how the Swiss bank holding the customer's assets will have positioned itself with regards to the IRS.

Swiss Banks' Status

Swiss banks may either (i) submit to the general regime, in which case they will have the status of a 'non-qualified intermediary', or (ii) become a 'qualified intermediary' by signing a special agreement with the IRS (the Qualified Intermediary Agreement).

A Swiss bank which will have the status of a non-qualified intermediary will have to collect the documentation from all of its customers that hold US securities (US and non-US persons alike) and submit it to its US custodian and the IRS (no banking secrecy). Failure to comply with these rules while holding US securities on behalf of its customers will expose the non-qualified intermediary Swiss bank to substantial risks and, in the last resort, to the freezing of its assets in the United States.

A Swiss bank entering into the Qualified Intermediary Agreement with the IRS will be able to maintain Swiss banking secrecy for its non-US person customers. The documentation signed by these clients will remain in its files, and the bank's US custodian will withhold the proper rates based on the Swiss qualified intermediary's reporting of anonymous, or 'pooled', accounts. The rates will be reduced at source by the US custodian, and the Swiss qualified intermediary's clients will no longer have to claim tax refunds in the United States. The Qualified Intermediary Agreement will impose specific reporting obligations on the Swiss qualified intermediary in respect of the pooled account categories and special audit procedures by its external auditors (approved by the IRS).

In view of this, non-US person Swiss bank clients that hold US securities should approach their Swiss bank and inquire whether or not it intends to obtain qualified intermediary status. Clients of Swiss banks that have not addressed the problem or that do not intend to become a qualified intermediary should consider whether they want to maintain their account at this bank or whether they want to transfer their US assets to another Swiss financial institution which will obtain qualified intermediary status.

For US persons maintaining US securities as of January 1 2001, the status of their Swiss bank is not relevant. IRS Form W-9 will have to be transmitted to the US custodian and the IRS, irrespective of the Swiss bank's qualified intermediary status. These customers should instruct their Swiss bankers to sell their US assets by December 31 2000 if they do not wish to file an IRS Form W-9 under the new withholding tax regime.

The situation becomes more complicated where a US-person banking client expressly refuses to consent to disclosure of his US status by the Swiss bank while also expressly refusing to permit the sale of his US securities by December 31 2000. In such an event, the Swiss bank - required to document these refusals and maintain Swiss banking secrecy as to the identity of its US customer - will probably terminate the banking relationship. A similar situation may arise where the Swiss financial institution learns after January 1 2001 that its client, up to that time considered to be a non-US person, is a US person. In addition to the decision whether to maintain the banking relationship, the Swiss bank is required to report to its US custodian immediately, such that withholding measures take effect immediately upon discovery with respect to the client's US securities and any income, sales and/or dispositions arising therefrom.

Documentation of Entities

As already mentioned, the new witholding rules require that the Swiss form regarding the economic beneficiary (or IRS Form W-8BEN) must be signed by the Swiss bank's 'beneficial owner' of the US source income, as defined by US KYC tax rules (which differ from Swiss KYC rules).

Under US KYC tax rules, a foreign corporation (even if it is a pure holding structure) is generally considered to be the beneficial owner of the assets it holds, and could thus sign the Swiss form or Form W-8BEN.

However, the treatment of other structures commonly used by customers of Swiss banks for the direct holding of their assets, such as certain foreign trusts, family foundations and establishments, is a more difficult question. Under US KYC tax rules, some of these structures will be considered as 'beneficial owners' of the assets they hold (Swiss form or IRS Form W-8BEN). Others will be treated as mere 'look through' or 'transparent' entities (W-8IMY and Swiss form or W-8BEN to be signed by all beneficial owners and accompanied by a statement from the trustee or equivalent determining how much of the trust's income will be allocated to which beneficiary).

The answer to the question of whether a Swiss bank customer's structure may claim to be the beneficial owner of the assets it holds or whether it will be disregarded and compelled to identify its beneficiaries will depend on a specific US test called the 'non-grantor complex trust test'. This is a test applied, for example, to an irrevocable discretionary trust. US asset holding structures created by a US-person Swiss bank customer will, during the US settlor's / founder's life, invariably be considered transparent by the IRS and in addition will most probably be defined under Swiss KYC rules as a US-person Swiss bank customer.

This classification is important, because many Swiss banks intend to exclude the 'look through' or 'transparent' entities which are account holders from the scope of their Qualified Intermediary Agreements (a qualified intermediary may decide to exclude certain accounts from the coverage of its Qualified Intermediary Agreement) and act as a non-qualified intermediary with respect to these accounts. This may expose the beneficial owners of these structures holding US securities to full disclosure in the US. The reason for this probability is that it will be very difficult for Swiss banks to cope with the burdensome reporting requirement imposed by the new US withholding tax regime for such accounts if they are included in the Qualified Intermediary Agreement.

Consequently, clients of direct holding structures over US securities with Swiss bank accounts that do not pass this special US test may want to take certain measures by the end of the current year to avoid any adverse impact of the new US regime on them (eg, modification of their statutes and by-laws in order to enable the structure to pass this test, incorporation of an underlying company, sale of direct US investments and/or purchase of certain non US investment funds).

Swiss bank clients that have created special holding structures for the direct holding of their US assets held with Swiss banks should contact their advisors to determine whether their structures will be classified as non-transparent or transparent (ie, look through) under this special US test, as well as who is considered under Swiss KYC rules as the economic beneficiary of same. If the structure cannot qualify, and therefore risks exclusion from the Swiss bank's Qualified Intermediary Agreement (where the Swiss bank intends to act as a qualified intermediary), the client and his advisors should determine which measures must be taken by December 31 2000 to protect the Swiss bank client's and/or the beneficiaries' Swiss banking confidentiality after January 1 2001.

For further information on this topic please contact Cyril Troyanov or David Forbes-Jaeger at Secretan Troyanov by telephone (+41 22 789 70 00) or by fax (++41 (22) 789 70 70) or by e-mail ([email protected]). The Secretan Troyanov web site can be accessed at

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