1. Background

On 18 March 2010, the U.S. Hiring Incentives to Restore Employment Act of 2010 (known as the Hire Act) amended the U.S. Internal Revenue Code of 1986, respectively its sections 1471 through 1474 which are commonly referred to as the Foreign Account Tax Compliance Act (“FATCA”). FATCA is implemented through the Final Regulations1 issued by the U.S. Treasury Department and the Internal Revenue Service (the “IRS”) on 17 January 2013 (the “Final Regulations”).

FATCA targets non-compliant U.S. taxpayers with offshore accounts by requesting foreign (i.e., non U.S.) financial institutions (“FFIs”) to report certain information to the IRS regarding their United States accounts (“U.S. Accounts”)2.

Participating FFIs3 will have the obligation to (i) register, and as the case may be enter into an agreement, with the IRS in order to (a) identify U.S. Accounts, (b) report certain information to the IRS regarding U.S. Accounts and (ii) withhold a 30 percent tax on all payments originating from the United States to Non-Participating FFIs4 and/or account holders who are unwilling to provide the required information5. A Non-Participating FFI will therefore be subject to the 30 percent withholding tax under FATCA upon receipt of such funds.

Unless an FFI is prepared to lose its access to the U.S. economy or lose commercial relations with Participating FFIs, the only option is to adhere to FATCA’s implementation.

2. Approaches towards Implementation

Participating FFIs face the daunting task of complying with the terms and requirements set forth under FATCA and the Final Regulations (over 540 pages).

In order to reduce FATCA’s administrative and financial burden on domestic financial institutions, any non-U.S. State may negotiate FATCA’s implementation terms through an intergovernmental agreement.

Since FATCA’s adoption, several countries including some of Switzerland’s neighbours (France, Germany and Italy) have concluded, or entered into negotiations with the U.S. Department of the Treasury to conclude, a so-called first model intergovernmental agreement characterized by the establishment of an automatic exchange of information between the IRS and the respective national tax authority6.

Switzerland, however, has signed with the United States a so-called second model intergovernmental agreement, the Implementation Agreement7, which excludes such automatic exchange of information. It provides that Swiss Financial Institutions (“SFIs”) shall register with and report directly to the IRS the information regarding U.S. Accounts as required by FATCA. Through the adoption of the FATCA Message dated 10 April 2013, the Swiss Federal Council submitted to the Swiss Parliament for approval two projects aiming at (i) ratifying the Implementation Agreement and (ii) adopting the draft Federal Act on the execution of said agreement8. If approved by the Swiss Parliament, the objects of the FATCA Message may be challenged by a facultative referendum.

In comparison with the requirements set forth under FATCA and the Final Regulations, the Implementation Agreement establishes a simplified procedure for SFIs to identify U.S. clients, thus keeping the administrative burden “within reasonable limits”9.

3. Swiss Implementation

Unless expressly exempted (or considered “certified deemed-compliant”), all SFIs are required to implement FATCA according to the applicable U.S. legislation (i.e., FATCA and the Final Regulations if applicable) provided that the Implementation Agreement does not state otherwise10.

The Swissness criterion under the Implementation Agreement applies to any financial institution (branch, subsidiary or head office) located in Switzerland, whether such financial institution is organized under the laws of Switzerland or not11.

For a detailed presentation of SFIs under the Implementation Agreement, see page 4.

3.1. SFIs – Swiss Financial Institutions

Are defined as financial institutions: custodial institutions, depository institutions, investment entities or specified insurance companies12. The term “investment entity” includes any entity that conducts as a business (or is managed by an entity that conducts as a business) one or more of the following activities or operations for or on behalf of a customer: (i) trading in (a) short term securities (such as cheques, bills, certificates of deposit, derivatives or other money market instruments), (b) foreign exchange (forex), (c) financial instruments pertaining to exchange, interest rates and indexes, (d) transferable securities or (e) commodities futures, and/or (ii) managing individual and collective portfolios and/or (iii) otherwise investing, administering, or managing funds or money on behalf of other persons.

Further, one notes that the term “investment entity” under the Implementation Agreement has the meaning of the same notion used in the Financial Action Task Force Recommendations13.

3.2. Entities considered as SFIs

The extensive notion of SFIs under the Implementation Agreement includes banks, insurance companies (with cash value or annuity contracts), collective investment schemes, investment advisors, asset managers, holding companies, entities granting commercial loans, entities buying and selling claims, providing trust or fiduciary services. Trusts should also be considered as SFIs if they engage in the activities of an SFI.

3.3. Simplified Implementation Procedure

All SFIs do not face the same administrative and/ or registering or reporting requirements under the Implementation Agreement. The following SFIs, among others, benefit from a simplified procedure:

  1. SFIs considered as exempt beneficial owners are not required to register with the IRS and are not subject to any reporting obligation under FATCA – their sole remaining obligation being to declare that their accounts are excluded from FATCA’s scope14. The category of exempt beneficial owners encompasses mainly (a) Swiss governmental entities, (b) the Swiss Central Bank, (c) international organizations and (d) social security funds, private pension funds and property and casualty insurers.
  2. Certified deemed compliant Financial Institutions, i.e., non-profit organizations and Swiss Condominium Owners’ Association, are not required to register with the IRS.
  3. The following three categories of SFIs – considered as deemed compliant Financial Institutions – are required to register with the IRS:
  • SFIs with a “local client base” – i.e., with at least 98% of their clients’ assets being held by residents or entities of Switzerland or the European Union – are not required to comply with identification and reporting obligations under FATCA in connexion with the individual accounts they manage provided the account holders reside in Switzerland. Local client base SFIs must therefore only comply with FATCA obligations when dealing with corporate accounts and individual accounts of which the account holders do not reside in Switzerland;
  • “Sponsored Entities” agree to have all due diligence, reporting, withholding, and other requirements performed by another Participating FFI (the “Sponsoring Entity”15); and
  • Swiss investment advisors, asset managers and certain collective investment vehicles must register with the IRS but are exempt from obligations arising out of an FFI agreement provided FATCA compliance is guaranteed through another FFI.

3.4. Non-Financial Foreign Entities

Entities that do not engage in the activities described under 3.2 above, do not qualify as SFIs and are therefore considered as Non-Financial Foreign Entities (“NFFEs”).

SFIs and Participating FFIs have a duty to examine the status of an NFFE in the exercise of their due diligence requirements under the Implementation Agreement. If they assess that an NFFE holds a U.S. Account16, they will have to withhold a 30 percent tax on all payments originating from the United States and credited in favour of the NFFE.

4. Conclusion

As per the Implementation Agreement or the applicable U.S. legislation, SFIs should consider taking the appropriate measures to comply with FATCA and thus avoid the 30% tax withholding on all payments originating from the United States starting on 1st January 2014. Among such measures, registration on the FATCA Registration Portal between 1st July 2013 and 15 October 2013 is highly recommended, failing which SFIs will expose themselves to a fine up to CHF 250’000.– 17.

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