Protocol to the Swiss-U.S. Double Tax Treaty


After being blocked for a decade, the 2009 Protocol to amend the Swiss-U.S. Double Tax Treaty (“Treaty”) is likely to be subject to a vote in the U.S. Senate during August. This would have the following key consequences for Swiss Financial Institutions (“SFI”):

1. Group requests in connection with FATCA reporting
Under FATCA, SFI have been required to report to the U.S. tax authorities (“IRS”) aggregate information each year in respect of the accounts that they maintain for clients who do not cooperate with the requirements to provide valid FATCA documentation. These accounts include:
(i) Accounts held by non-consenting individuals and entities, including Passive NFFE with non-consenting controlling persons (“Non-Consenting US Accounts”), and
(ii) Accounts held by non-consenting Non-Participating Foreign Financial Institutions (“NPFFI”) during the calendar years 2015 and 2016.

Article 5 of the Swiss-U.S. Inter-Governmental Agreement for the implementation of FATCA (“IGA”) grants the IRS the power to issue “group requests” for information in respect of such accounts. However, this power is tied to the Exchange of Information provision in the Protocol to the Treaty.

This means that after the exchange of the instruments of ratification between the U.S. and Switzerland, the IRS will be able to commence issuing group requests to SFI (via the Swiss Tax Authorities (“STA”)) with immediate effect. The IGA would permit such group requests to cover all years subject to FATCA reporting (i.e. from 2014 onwards), unless agreed otherwise between the U.S. and Switzerland upon the ratification of the Protocol.

Once a group request has been received, SFI will be required to provide the following FATCA information, and additional information required by the STA to verify if the account is reportable, to the STA within a deadline of 10 days:
• Service for Exchange of Information in Tax Matters ”SEI”-XML;
• Supporting documents in PDF format.

KPMG Comments
The deadline of 10 days in which SFI would be required to respond to any group requests is very short, and it is therefore strongly recommended that SFI already hold all of the necessary information for all of their Non-Consenting US Accounts and NPFFI, for all relevant tax years dating back to 2014, in a “ready-to-go” format. This will avoid heavy workloads, and the associated pressure and headaches, in the event that a group request is received in due course. SFIs which do not yet have all of this information readily available in an easy to locate and use file (which reconciles back to the aggregate FATCA reporting), should consider acting on this immediately.

2. Entitlement to reduced 0% WHT rate for Swiss Pillar 3a pension schemes
Pillar 3a pension schemes are unable to benefit from the reduced 0% dividend withholding tax rate under the Treaty (unlike other Swiss pension funds, e.g. Pillar 1 & 2 funds).
The Protocol amends Article 10 (Dividends) of the Treaty and, once it has been ratified, Pillar 3a pension schemes will also be eligible to claim the reduced 0% dividend WHT rate of the Treaty in respect of payments on or after 1st January of the year following the entry into force of the Protocol (which may be as early as 1st January 2020).

KPMG Comments
SFI which are Qualified Intermediaries (“QI”) should ensure that the U.S. dividend WHT rate for Pillar 3a account holders is updated in their systems once the Protocol to the Treaty has been ratified. SFI should consider contacting such clients to inform them of the possible opportunity and obtain the necessary documentation to support the claim of the 0% WHT rate.

Residual 5% WHT for substantial shareholdings
The Protocol unfortunately does not address the removal of the residual 5% dividend WHT, which remains in the case of substantial shareholdings of at least 10%. This issue is part of separate negotiations driven by the desire to ensure Switzerland continues to remain an attractive subsidiary location for U.S. headquartered companies, especially since the changes brought about by the latest U.S. tax reform now mean that the residual 5% Swiss WHT on dividend distributions is a final cost to a U.S. parent (no credit is available for U.S. domestic tax purposes).

Further information
Do not hesitate to contact us if you have any questions concerning the potential implications for your business of the ratification of the Protocol, or if KPMG can assist with a review of the completeness of the gathered information for the Non-Consenting US Accounts and NPFFIs.

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