FATCA, Reporting and Withholding Obligations of Swiss Financial Institutions
Under the FATCA Agreement, Swiss financial institutions were required to register with the IRS by January 1, 2014, and to enter into a Foreign Financial Institution (“FFI”) Agreement, the terms of which will govern most of the reporting and withholding obligations of the Swiss financial institutions. The FATCA Agreement contains an enabling clause that specifically authorises Swiss financial institutions to enter into FFI Agreements without incurring a penalty according to article 271 of the Swiss Criminal Code governing unlawful activities on behalf of a foreign State.
Consent of Account Holders and Reporting Requirements
The consent given by a US account holder will apply irrevocably to the current calendar year and automatically be renewed for each successive calendar year, unless it is revoked by the account holder before January of such year. Lacking the consent of the account holder, a Swiss financial institution cannot report a US account directly to the IRS. The consequences of refusing to consent, however, include aggregate reporting by the respective Swiss financial institution, an IRS group request to the Foreign Tax Authority (“FTA”), transmission by the Swiss financial institutions of the account information to the FTA, and exchange of such information by the FTA with the IRS. The FATCA Agreement requires that Swiss financial institutions report the aggregate number of US accounts and their value by January 31 of the following year (i.e. within a month of year end), regardless of the other timing requirements for aggregate reporting set forth in the FATCA Agreement and the Final Regulations. With respect to non-consenting US account holders, Swiss financial institutions will need to track US account balances in a way that permits reporting shortly after the close of each year. For new accounts opened after December 31, 2013, that are identified as US accounts, obtaining a consent consistent with the terms of an FFI Agreement will be required as a condition to open the account.
A reporting Swiss financial institution will not be required to withhold tax with respect to an account of a non-consenting account holder only if the reporting Swiss financial institution complies with its reporting obligations described above, and the FTA exchanges the information requested by the IRS as part of a group request within eight months from the date of receipt of the group request. If the FTA does not exchange the account information, the account will be treated as held by a recalcitrant account holder and withholding will be required according to the Final Regulations. A reporting Swiss financial institution will, therefore, have at least until completion of the group request procedure until withholding is required.
Exempt and deemed FATCA Compliant Swiss Financial Institutions
Annex II of the FATCA Agreement identifies certain categories of entities as exempt or deemed FATCA compliant, because they are considered to present a low risk of being used by US persons to evade US taxes. Accordingly, there will be no reporting obligation under FATCA in respect of the following accounts and products: vested benefits insurances under Swiss law, restricted pension plan insurances and any retirement or other accounts or products held by one or more exempt beneficial owners, which include the following funds:
Pension institutions or other retirement arrangements established in Switzerland under certain Swiss laws;
Vested benefits institutions;
Substitute occupational pension fund;
Certain institutions for recognized forms of pension provision (pillar 3a);
Certain employer-funded welfare funds; and
Certain investment foundations.
In addition, certain Swiss financial institutions are classified as deemed FATCA compliant. Some of them still need to be registered with the IRS, namely:
Certain Swiss financial institutions with a local client base for which at least 98% of the accounts by value are held by Swiss or EU residents, both individuals or entities; and
Certain Swiss investment adviser entities, the sole activity of which is to render investment advice to and act on behalf of a customer based on a power of attorney or investment authority issued by the holder of a financial account or based on certain investment powers in a directorship capacity.
Certain non-profit organizations established and maintained in Switzerland and Swiss condominium owners’ associations are treated as certified-deemed FATCA compliant.
Furthermore, FATCA reporting will be deemed fulfilled in relation to certain collective investment vehicles subject to the collective investment legislation of Switzerland or another country with an intergovernmental agreement with the United States.