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The Final Regulations published by the US Treasury and the IRS on January 17, 2013, apply to Swiss financial institutions to the extent the FATCA Agreement and its annexes do not expressly derogate the provisions of the Final Regulations.Domestic banking secrecy laws prevent the disclosure of account information by Swiss financial institutions to the tax authorities. The FATCA Agreement therefore provides a specific carve-out from Swiss law that would otherwise prohibit that the Swiss financial institutions report directly to the IRS.

2. Reporting and Withholding Obligations of Swiss Financial Institutions2.1. Basis of Obligations Foreign Financial Institution Agree-

mentsUnder the FATCA Agreement, Swiss financial institutions will be required to register with the IRS by January 1, 2014, and to enter into a 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 en-abling clause that specifically authorizes Swiss financial insti-tutions 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.2.2. Consent of Account Holders and Reporting RequirementsThe consent given by a US account holder will apply irrevoca-bly 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. Absent consent of the account holder, a Swiss financial institution cannot re-port 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 FTA, transmission by the Swiss financial institutions of the account information to the FTA, and exchange of such in-formation by the FTA with the IRS. The FATCA Agreement requires that Swiss financial institu-tions 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 con-dition to open the account.2.3. Withholding ObligationsA reporting Swiss financial institution will not be required to withhold tax with respect to an account of a non-consenting account holder only if (1) the reporting Swiss financial institu-tion complies with its reporting obligations described above, and (2) 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 ex-change the account information, the account will be treated

14. The FATCA Agreement Between Switzerland and the USA Marnin Michaels, Baker & McKenzie, Zurich

Walter H. Boss, Poledna Boss Kurer AG, Zurich

1. IntroductionOn February 14, 2013, the Swiss Government and the United States signed an agreement for the implementation of the Foreign Account Tax Compliance Act of March 18, 2010 (FATCA) in Switzerland (FATCA Agreement)1). The FATCA Agreement, already initialed on December 3, 2012, is intended to simplify the implementation of FATCA for the Swiss financial institutions and, at the same time, to give them permission to comply with the requirements of FATCA without breaching the banking secrecy inherent in the Swiss legal system. On April 10, 2013, the Federal Council issued the official commentary to the FATCA Agreement2) to Swiss Parliament for approval.

2. The FATCA Agreement

1. The Model 2 Intergovernmental AgreementWith the enactment of FATCA, the United States intend to sub-ject all income of US persons earned on foreign bank accounts to US taxation. FATCA requires that foreign financial institu-tions register with the Internal Revenue Service (IRS) and enter into an agreement with the IRS that contains the obli-gation to identify accounts of US persons and periodical re-porting requirements with respect to the identified accounts (FFI Agreement). In order to simplify the implementation of FATCA, the IRS has released two models of an intergovernmental agree-ment. Model 1 provides for an automatic exchange of infor-mation between the tax authorities of the contracting states. Model 2, released by the IRS in November 2012, requires that foreign financial institutions directly report the account informa-tion to the IRS based on a declaration of consent of the account holder. Additionally, the foreign financial institutions are re-quired to report the number of accounts they hold for which the account holders have not given their consent, as well as the total value such accounts, without having to report the names of the account holders. This aggregate reporting procedure is complemented by an exchange of information upon request based on the Swiss-US double taxation treaty. Hence, based on a group request of the IRS submitted to the Swiss Federal Tax Administration (FTA) the IRS may obtain information about the US accounts that have been reported by means of the aggregate reporting procedure3). On-site inspections by the IRS at the financial institutions are not permitted under either Model.Switzerland has concluded a Model 2 intergovernmental agree-ment. The conclusion of a Model 1 intergovernmental agree-ment would have meant the introduction of the automatic ex-change of information by Switzerland which Switzerland has refused to do so far4). The FATCA Agreement determines which Swiss financial in-stitutions are excluded from the scope of FATCA, which Swiss financial institutions are deemed FATCA-compliant and which Swiss financial institutions are obliged to register with the IRS and to enter into a FFI Agreement with the IRS.

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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.2.4. Exempt and deemed FATCA Compliant Swiss Financial

InstitutionsAnnex 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 re-porting obligation under FATCA in respect of the following accounts and products: vested benefits insurances under Swiss law, restricted pension plan insurances (pillar 3a) 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 es-

tablished in Switzerland under certain Swiss laws, vested benefits institutions, substitute occupational pension fund, guarantee 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 reisidents (individuals or entities); and

certain Swiss investment adviser entities, the sole activity of which is to render investment advice to and act on be-half of a customer based on a power of attorney or invest-ment 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. Further-more, 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.

3. Swiss Implementation of the FATCA AgreementThe FATCA Agreement contains certain detailed provisions directly applicable in Switzerland. The implementation of the obligations of the Swiss financial institutions described above, however, will be specified in a Swiss law called the Federal Law on the Application of the Agreement between Switzerland and the US on Their Cooperation Aiming to Fa-cilitate the Implementation of FATCA5). The draft law provides that the Federal Act of September 28, 2012, on International Administrative Assistance in Tax Matters6) applies in the alternative. The draft law further specifies that in case the FTA exceeds the eight months deadline set forth in the FATCA Agreement for dealing with a group request of the IRS, the respective financial institutions shall withhold the tax on the income credited on the account in question, which shall then be forwarded to the IRS annually.

3. Final CommentsAs mentioned above, on April 10, 2013, the Federal Council issued the official commentary to the FATCA Agreement to Swiss Parliament for approval. Upon approval respectively official publication, the FATCA Agreement will be subject to the optional referendum, which means that within 90 days of the official publication of the FATCA Agreement any 50,000 persons eligible to vote or any eight Swiss cantons may re-quest a referendum. If any of these two thresholds is met, the FATCA Agreement will be submitted to a vote of the Swiss people.As of January 1, 2014, the United States will gradually in-troduce FATCA. Swiss financial institutions will be forced to comply with FATCA from said date, irrespective of whether the FATCA Agreement between Switzerland and the United States has come into force. Non-compliant Swiss financial institutions will be excluded from the US capital market.

1) Agreement Between Switzerland and the United States of America for Cooperation to Facilitate the Implementation of FATCA of February 14, 2013.

2) Botschaft zur Genehmigung des Abkommens zwischen der Schweiz und den Vereinigten Staaten von Amerika ber die Zusammenarbeit fr eine erleichterte Umsetzung von FATCA und zum Entwurf fr ein Bundesgesetz ber die Umsetzung des Abkommens (Botschaft).

3) Botschaft, bersicht.

4) Botschaft, bersicht.

5) Bundesgesetz ber die Umsetzung des FATCA-Abkommens zwischen der Schweiz und den Vereinigten Staaten (FATCA Gesetz).

6) Bundesgesetz ber die internationale Amtshilfe in Steuersachen vom 28. September 2012.

About the authors:

Marnin Michaels is Partner at Baker & McKenzie in Zurich. He is a member of the Tax Chapter Board of the Swiss-American Chamber of Commerce.

Walter H. Boss is Attorney at Law at Poledna Boss Kurer in Zurich. He is Chairman of the Tax Chapter Board of the Swiss-American Chamber of Commerce.