FATCA and Switzerland: Model II

FATCA and Switzerland: Model II

Editor's Note: The following is an excerpt from Chapter 19 of the forthcoming LexisNexis® Guide to FATCA Compliance by William Byrnes and Robert Munro, scheduled for publication in May 2013.

In General

On June 21, 2012 the U.S. and the Swiss government released a joint statement regarding a "Framework for Cooperation to Facilitate the Implementation of FATCA" (Model II Agreement"). The template for the Model II agreement was published by the U.S. Treasury on November 14, 2012. It is planned that the due diligence and reporting requirements begin on January 1, 2014.  On February 14, 2013 the U.S. - Switzerland IGA was published.1

Unlike Model I, the "Swiss" Model II does not establish automatic information exchange between governments. The Swiss government has thus not agreed to automatic information exchange between governmental authorities. Instead, the Swiss government has agreed that it will ensure that the Swiss financial institutions will be able to enter into an FFI agreement with the U.S. Treasury Department to directly report to the IRS (to become a "participating FFI"). In other words, the underlying mechanics of Model II are the same as under FATCA itself. The financial institutions organized under Swiss law annually report the U.S. accountholders and their U.S. beneficial owners.

For Switzerland it has become necessary to negotiate Model II, as Swiss law prohibits financial institutions from acting on behalf of a foreign government. Article 271 (1) of the Swiss Criminal Code states that "[a]ny person who carries out activities on behalf of a foreign state without lawful authority . . ."2 commits a crime. This provision would have put financial institutions in Switzerland in an untenable position where they would have had to decide whether they want to be in conflict with the Swiss Criminal Code or with FATCA. With the Model II Agreement, Swiss financial institutions have the guarantee that they will not be prosecuted in Switzerland if they report bank information to the IRS.3

Since space constraints prohibit showing all details of Model II, only the basic features of information exchange shall be described here, as applying to bank accounts held by U.S. Persons at a Swiss "participating FFI". As regards existing U.S. accounts (and U.S. accounts yet to be opened), the relevant financial institution is to obtain prior consent from the accountholder regarding the reporting of bank information to the IRS. In particular, there is a duty to proceed actively. Where the accountholder declines consent, the financial institution may not deliver information to the IRS. Without prior consent it would violate Swiss banking secrecy rules, which are still in effect. What is reported, however, are "nameless aggregates" and the number of accounts that, in FATCA terms, belong to the "Recalcitrant Accountholders".

This information is to form the basis of an IRS group request, through which the IRS, on request, can demand complete information on the Recalcitrant Accountholders.4 The group request provides the IRS, after a time lag, with the information that the financial institution would have reported according to the FATCA rules had it received consent to report (see article 2 2(c) of Model II).

It is interesting how the Model II agreement governs this group request mechanism, as the agreement includes no independent regulation, but refers in this regard to provisions of the double tax convention (article 2 2(a) of Model II). Nevertheless, the Model II itself provides that the group request and the requested information are "foreseeably relevant" within the meaning of the applicable relevant double tax convention. See article 2 2(b) of Model II: "The information requested [...] shall be considered information that is foreseeably relevant [...] covered by the Convention [...]."5 The U.S. - Switzerland IGA Article 5 Exchange of Information provides that such requests shall be made pursuant to the Protocol of the Article 26 of the U.S. - Switzerland Double Tax Agreement when the Protocol enters into force.  Furthermore, such requests shall apply only to information beginning upon the IGA's entry into force.  The requested information will be considered "...information that may be relevant for carrying out the administration or enforcement of the domestic laws of the United States ..., without regard to whether the Reporting Swiss financial Institution or another party has contributed to noncompliance of the taxpayers in the group."6

In return for entering into the Model II Agreement, the U.S. eliminates the 30% withholding tax on all payments made to Swiss financial institutions that have entered into an FFI agreement with the IRS.7 Moreover, the U.S. government has agreed to exclude retirement plans from the withholding and due diligence requirements by treating them as deemed-compliant or exempt entities.8 And, as under Model I, pursuant to Article 7 of the U.S. - Switzerland IGA, Swiss financial institutions are neither required to close bank accounts of Recalcitrant Accountholders nor must they deduct a withholding tax on payments to Recalcitrant Accountholders. Finally, the U.S. government grants simplifications for small and local Swiss financial institutions.9


At first glance it appears that FATCA, as implemented in the Swiss Model II, represents no automatic information exchange. This may be the case, if one understands automatic exchange as information that is automatically delivered to the foreign tax authority, i.e. without any further action by the tax authorities. An automatic exchange such as this does indeed not exist in Model II. Rather, Model II is a two-stage, indirect mode of automatic information exchange that effectively works like a direct mode of automatic information exchange. Where there is obstruction from the accountholder, the IRS still needs to file an information request with the foreign tax authority, i.e., it will simply take a little longer for the IRS to have the information at its disposal since it needs a group request on the grounds of the "aggregate information".

Automatic exchange of information according to Model II, therefore, has three characteristics. First, it applies only in connection with the U.S. Second, it is only indirect or divided into two stages. In the case of Recalcitrant Accountholders, a (group) request becomes necessary. Third, it works in one direction only, towards the U.S.. Switzerland, in particular, did not insist on a reciprocal mechanism, as this would have stood in perfect contradiction to its official stance on automatic information exchange. Therefore, it would have been detrimental to its credibility to introduce information exchange for Swiss taxpayers having bank accounts in the United States.

The question now is what legal implications FATCA will entail in Switzerland, especially with regard to the group request reporting. The group request provision in Model II will, in our prediction, be tested in Swiss courts once the first account data of Recalcitrant Accountholders are the subject of an IRS group request. As regards the legal issues concerning this group request, the following points should suffice.

Most revised Swiss double taxation conventions (over 40) in which the OECD standards have been adopted have been concluded before the 2012 amendment of the OECD-Commentary (introduction of group requests).

In principle, the inadmissibility of group requests is at the basis of the revised, but blocked, DTC-USA 2009 as well. In order to be able to nevertheless process group requests from the U.S. government (as has been the case twice in connection with UBS on the basis of the DTC-USA 1996), Switzerland was obliged to change its domestic law with respect to information exchange requests from the U.S. government. This was done when the Swiss Parliament decided on an amendment to the DTC-USA 2009 in 2011. The definition in this domestic provision, however, is narrower than the group definition according to Model II. In other words: Outside of Model II and based on this domestic provision in this ordinance, group requests would not actually be possible. 

However, in the fall of 2012, the Swiss Parliament decided on a new Tax Administrative Assistance Act. This act, which regulates competences and procedures in connection with international information exchange, entered into force on February 1, 2013. The amendments to the OECD-Commentary from the summer of 2012, according to which group requests are admissible in certain cases, prompted the Swiss Parliament and the Swiss government, in the Fall of 2012, to decide that from now on Switzerland will accept group requests, not only from the U.S., but for all foreign governments with which Switzerland has signed a double tax convention. However, again, the definition of "group" is narrower here than that in the FATCA regulation. In other words, the provisions in the new Tax Administrative Assistance Act would, in the "FATCA cases" (i.e., in the case of "aggregate requests") be unlikely to permit the exchange of information.

These explanations show but one thing. There are many arguments to test the FATCA group request in Swiss courts. In all likelihood there will be some cases before Swiss courts. However, the chances that the Swiss courts might decide in favor of the taxpayers are slim. In fact, the Model II agreement defines clearly and unmistakably that a group request based on aggregate reports is admissible (i.e. is considered  foreseeably relevant). And, if the agreement is approved by the Swiss Parliament in a way that allows the Swiss people to hold a referendum, it will be legally binding for all Swiss Courts. Or, put differently, Parliament (and, if there is a referendum, popular) approval will establish a legal foundation for FATCA group requests which will be binding for the Swiss courts.


[1] Agreement between the United States of America and Switzerland for Cooperation to Facilitate the Implementation of FATCA (February 14, 2013) ("U.S. - Switzerland IGA")  available at http://www.treasury.gov/resource-center/tax-policy/treaties/Documents/FATCA-Agreement-Switzerland-2-14-2013.pdf.

[2] Article 271 (1) of the Swiss Criminal Code. Emphasis added.

[3] Art. 4 of the U.S. - Switzerland IGA.

[4] Art. 5, Para. 1 of the U.S. - Switzerland IGA.

[5] Emphasis added.  Model II also includes an exchangable phrase "may be relevant".

[6] Article 5, para. 2 of the U.S. - Switzerland IGA.

[7] Article 6 of the U.S. - Switzerland IGA.

[8] Article 9 of the U.S. - Switzerland IGA.

[9] Annex II, Art. II, Para. A - Deemed-Compliant Financial Institutions.


LEXIS users can view the taxanalysts® news story, "Switzerland, U.S. Sign FATCA Agreement," Tax Notes Today, February 15, 2013.

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