On March 19, 2009, Swiss Minister of Finance Hanz-Rudolf Merz announced that the United States (in addition to France and Japan) has requested negotiations for a new income tax treaty. Mr. Merz stated that he believes the negotiations will begin “quickly, not a matter of months.” Significantly, Switzerland had announced on March 13, 2009, that it would be willing to negotiate new treaties that would incorporate international transparency and OECD exchange of tax information standards. The result of adopting those standards would be the elimination of the distinction between “tax fraud” and “tax evasion” as in Switzerland’s current treaties.
It is likely that the focus of the treaty negotiations will be on the Exchange of Information provision in the current U.S.-Switzerland treaty (the “Swiss Treaty”), although other provisions such as changes to the Limitation on Benefits article and a zero rate on dividends for 80% or more shareholders may also be under consideration.
Exchange of Information
Article 26(1) of the Swiss Treaty limits the exchange of information to such information that is necessary to carry out the provisions of the Treaty or to prevent “tax fraud or the like.” Paragraph 3 of Article 26 prevents the imposition of an obligation to carry out administrative practices that vary with the regulations and practice of either country or that would be contrary to a country’s sovereignty, security or public policy. In addition, information not procurable under a country’s laws is not required to be made available to the other country.
Article 26(3) of the 2006 U.S. Model Income Tax Treaty (the “Model Treaty”) also limits the obligation to provide information when to do so would be at variance with the laws and administrative practice of the other country. However, Article 26(5) of the Model Treaty provides that paragraph 3 cannot be construed to permit another country to decline to supply information because the information is held by a financial institution or a person acting in a nominee or fiduciary capacity or because the information relates to the ownership interests of a person. Article 26 is generally consistent with the OECD Model Tax Convention Article 26 on Exchange of Information.
Limitation on Benefits
If the Model Treaty is followed, the primary change to the Limitation on Benefits article of the Swiss Treaty would be to limit treaty benefits to a public company whose principal class of shares is regularly traded on one or more recognized exchanges located in its country of residence or that maintains its primary place of management and control in its country of residence. The primary place of management and control is determined not by where the board of directors meets, but rather where the executive officers and senior management employees exercise day-to-day responsibility for the strategic, financial and operational policy decision-making with respect to the resident corporation (and its subsidiaries). Such responsibilities must be undertaken in the resident country more than in any other country, and the staff that support the management in making those decisions must also be based in that resident country. Article 22 of the Swiss Treaty currently requires only that a public company’s shares be traded on a recognized stock exchange without imposing these further limitations.
The current Limitation on Benefits Article in the Swiss Treaty provides for a unique ownership/base erosion provision commonly referred to as the “predominant interest” test. This article may be updated to conform to Article 22(2)(e) of the Model Treaty, which provides a more traditional ownership/base erosion provision. Any such revision may look only to ultimate ownership held by, and base eroding payments made to, U.S. or Swiss individuals, government entities, qualified resident companies meeting the publicly traded Limitation on Benefits provision described above, and certain pension/charitable organizations.
While Article 22 of the Swiss Treaty contains an active trade or business provision, that provision does not also contain the base erosion test and substantiality test for related persons. It may be anticipated that any new treaty would contain such tests.
Zero-Withholding on Dividends
The United States may also wish to include provisions in any new treaty with Switzerland similar to those contained in Articles 10(12) and 25(5), (6), and (12) of the U.S.-Belgium treaty (the “Belgium Treaty”). Article 10(12) of the Belgium Treaty provides that the zero rate on dividends under that treaty terminates on January 1, 2013, unless the IRS certifies by June 30, 2012, that Belgium’s obligations under Article 25 are satisfactorily met. Furthermore, the United States can terminate the zero rate at any time for a year (and subsequent years) if notice is provided by June 30 of the prior year. Such a termination may occur only if Belgium’s actions concerning the Mutual Agreement Procedures and Exchange of Information of the Belgium Treaty have “materially altered the balance of benefits.”
The special Exchange of Information provisions contained in Article 25(5) and (6) of the Belgium Treaty require that information from a financial institution or fiduciary (or other persons) must be provided even if the provision of such information would be contrary to domestic law or the domestic statute of limitations has expired. However, under Article 25(12) of that treaty, if the zero rate is terminated, Belgium’s obligations under Article 25(5) are no longer effective.
The effective date of the implementation of any new treaty with Switzerland may be accelerated due to the current concerns of Congress over tax havens and matters concerning UBS AG. The Senate Foreign Relations Committee in recent years has been holding a hearing annually regarding treaties, so it is entirely possible that the negotiation and hearing schedule could be accelerated to enable a new treaty to be in force by January 2010. Even if such an accelerated date would not be possible, it is not too soon to begin planning for anticipated provisions of a new treaty.