The United States and Switzerland jointly announced the conversion of the intergovernmental agreement (“IGA”) from a “Model 2” to “Model 1” agreement. The new IGA will come into effect January 1, 2027, allowing time for Switzerland to amend its domestic law and for Swiss financial institutions to comply with their changed FATCA1 obligations.
The United States has entered into IGAs with 113 foreign jurisdictions. Each IGA implements FATCA in the local jurisdiction and is either a Model 1 or Model 2 IGA. While most jurisdictions entered into Model 1 IGAs, Switzerland and a handful of other jurisdictions (such as Bermuda) signed Model 2 IGAs.
Under a Model 2 IGA, foreign financial institutions will generally disclose consenting reportable account details directly to the Internal Revenue Service (“IRS”). With respect to non-consenting US account holders, the IRS may request this data through normal administrative assistance channels (e.g., under an applicable treaty’s exchange of information article). In addition, the United States does not transmit data regarding US financial accounts held by residents of the Model 2 jurisdiction to such jurisdiction.
By contrast, foreign financial institutions in a Model 1 IGA must report on US reportable accounts to the local tax authority. Then, foreign jurisdictions transmit FATCA data to the United States. Although two-way FATCA data sharing is not in effect with all Model 1 jurisdictions, the new Model 1 IGA with Switzerland obligates the US to share tax account information of reportable Swiss accounts with Switzerland.
Beginning in 2027, Swiss financial institutions, including investment funds that incorporate Swiss entities in their structures, will have reporting obligations regarding their reportable US accounts to the Swiss tax authority. Likewise, US financial institutions may have obligations to identify and report on financial accounts held by reportable Swiss residents.
Seward & Kissel LLP actively monitors tax changes and their impact on the investment management industry.
