[co-authors: Andrea Baetscher and Sibil Melliger, Eversheds Sutherland (International) LLP Team]
On June 27, 2024, Switzerland and the United States executed the Agreement between Switzerland and the United States of America to Improve International Tax Compliance and to Implement FATCA (New IGA), which will take effect on January 1, 2027. The New IGA is the culmination of years of negotiations between the two countries to update the existing Swiss FATCA Intergovernmental Agreement and transition to a Model 1 IGA. The current IGA is a Model 2 IGA, which requires that Swiss financial institutions disclose account details of US account holders or US controlling persons directly to the US Internal Revenue Service (IRS) after obtaining appropriate Swiss law consents from such persons. However, beginning in 2027, the New IGA that will take effect is a Model 1 IGA that requires Swiss financial institutions to provide account data directly to the Swiss tax authorities, which will then transfer such information to the IRS. In this regard, the Swiss FFI no longer is obligated to obtain a suitable Swiss law consent from the US account holder or controlling person. The New IGA will also contain reciprocity provisions that would enable the IRS to transfer certain data relating to US accounts held by Swiss tax residents to the Swiss tax authorities.
Eversheds Sutherland Observation: The reciprocity aspects of the New IGA are, seemingly, of significant interest to the Swiss authorities. As a general matter, the IRS presently obtains data regarding certain payments made or credited to accounts held by non-US persons, including Swiss tax residents. Under the relevant information exchange provisions of existing US tax treaties, the United States may spontaneously transfer certain information to the tax authorities of treaty partners. Accordingly, without regard to the New IGA, certain financial data of Swiss tax residents, such as dividend and interest income derived through accounts maintained at US financial institutions would be transferred by the relevant US financial institution to the IRS and may be exchanged with the Swiss tax authorities pursuant to the existing tax treaty between the two countries. Assuming the IRS is able to identify the account holder as a Swiss tax resident, there should be minimal difficulties in exchanging this type of financial data.
The New IGA also applies to other types of financial data that may not presently be exchanged pursuant to the tax treaty between Switzerland and the United States. In this regard, reciprocity, as referenced in the New IGA, does not necessarily mean the complete exchange of all data relating to tax residents of Switzerland that is maintained by US financial institutions. In principle, other types of income or gain should similarly be tracked by US financial institutions and such data should be provided to the IRS and shared with Swiss tax residents, pursuant to existing US information reporting rules. This data may also be exchanged pursuant to the New IGA.
Although the Swiss have sought to transition their IGA to a Model 1 IGA for several years, there were a variety of administrative and procedural hurdles that seemingly delayed the process. The primary issue complicating the transition from the current Model 2 IGA to the New IGA relates to the fundamentally different basis by which Swiss Financial Institutions comply with FATCA under a Model 2 vs a Model 1 IGA. In order to address many of these concerns, Switzerland and the United States also executed a Memorandum of Understanding (MOU) that seeks to address many of the issues associated with the transition from the current IGA to the New IGA.
Eversheds Sutherland Observation: Not all items relating to the transition from Model 2 to Model 1 IGA have been addressed within the text of the New IGA or the MOU. We understand that concerns have been raised whether existing accounts maintained at Swiss FFIs need to be redocumented following the transition to the New IGA. Generally, the New IGA continues to treat accounts maintained as of June 30, 2014 as “Preexisting Accounts” and accounts opened after such date as “New Accounts.” The New IGA requires that the relevant due diligence procedures generally occur within one or two years of the “Determination Date,” which generally is June 30, 2014. While the New IGA and the associated Memorandum of Understanding is silent regarding redocumentation, we do not regard its absence to suggest redocumentation is required. In our view, if the United States intended that Swiss FFIs redocument all accounts, we believe this requirement would have been explicitly stated. We understand that the Swiss tax authorities may choose to clarify this point in future guidance.
Certifications and Termination of FFI Agreements
As a preliminary matter, the MOU addresses the timing of the termination of a Swiss FFI’s FFI Agreement and the obligations a Swiss FFI may have to the extent the certification and other pending obligations under such agreement have yet to be satisfied. Thus, an FFI Agreement will terminate with respect to the Swiss FFI as of the close December 31, 2026. That being said, the FFI Agreement will remain in effect with respect to any branch of the Swiss FFI located outside of Switzerland that is subject to such FFI Agreement. Furthermore, since the FFI Agreement will be terminated at the close of December 31, 2026, any Swiss FFI that has not provided a FATCA certification for an applicable certification period prior to January 1, 2027 is not obligated to provide a certification (or a final FATCA certification) pursuant to a terminated FFI Agreement after December 31, 2026. To the extent no periodic certification (or final certification) is provided to the IRS due to the termination of the FFI Agreement, the MOU contemplates that the Swiss Financial Institution must prepare a pro-forma certification for the relevant certification period ending as of December 31, 2026, retain it for six years, and provide it to the IRS upon request. To the extent the Swiss FFI chooses to submit such certification to the IRS, it is not obligated to maintain a copy of the certification in its records.
The MOU also clarifies that the termination of the FFI Agreement only applies prospectively. Thus, a Swiss Financial Institution’s withholding, reporting, or due diligence obligations that arise during a year in which the FFI Agreement is in effect, will continue to apply.
Eversheds Sutherland Observation: The transition from Model 2 to Model 1 IGA will not eliminate the need for Swiss FFIs to prepare their periodic FATCA Certification or a final FATCA certification covering the period between their last FATCA Certification and December 31, 2026. Swiss FFIs will have the choice to retain such pro-forma certification in their own records or file such certification with the IRS. It is unclear whether Swiss Law permits the filing of a certification with the IRS when it is not legally obligated to make such filing.
Likewise, it is unclear whether the transition to a Model 1 IGA has the effect to limiting the IRS’ ability a Swiss FFI’s compliance with the terms of its FFI Agreement after the termination of such agreement.
Retention of GIINs
The IRS issues financial institutions Global Intermediary Identification Numbers (GIINs), a 19 digit number that contains several data points relevant to identifying the holder of the GIIN. Swiss Financial Institutions were concerned that transition from Model 2 to Model 1 could require obtaining a new GIINs, possibly for each member of the FATCA expanded affiliated group.
The MOU confirms that a Swiss Financial Institution whose chapter 4 status has not been revoked may continue to use the same Global Intermediary Identification Number (GIIN) that it obtained when it registered with the IRS, provided it complies with certain administrative procedures. Notably, in order to retain its GIIN, a Swiss Financial Institution will be required to resubmit its FATCA registration, by January 20, 2027, on the IRS FATCA Registration Portal.
Swiss sponsoring entities are obligated to undertake the same re-registration protocol for each of their sponsored entities.
A Swiss FFI that is a branch of a non-Swiss FFI would not need to re-register with the IRS to continue using its GIIN.
Eversheds Sutherland Observation: The MOU requires affirmative action by the Swiss FFI to retain its GIIN. Failure to affirmative re-register using the IRS FATCA Registration Portal within the 20 day period following the implementation of the New IGA subjects the Swiss FFI to risk that their GIIN may not appear on the IRS FFI List on or after February 2027. If the Swiss FFI is not listed on the FFI List, it may be treated as a non-participating FFI despite the fact that it otherwise should be treated as a Reporting Model 1 FFI. It is absolutely imperative that Swiss FFIs register to retain the use of their GIINs.
Swiss FFIs that are sponsoring entities are obligated to re-register each of their sponsored entities. Depending on the number of sponsored entities, this may be a time consuming process that must be concluded in a relatively short period of time.
Lead FI Status
The MOU confirms that a Swiss FFI may continue to serve as the lead FI of a FATCA expanded affiliated group, provided it complied with the procedures to retain its GIIN as described above. Of course, Swiss members of an expanded affiliated group would not need to satisfy those FATCA compliance obligations following the termination of their respective FFI Agreements.
Notifying Counterparties of the Applicable Change in Chapter 4 Status
The MOU implicitly considers the changes from Model 2 to Model 1 IGA to result in a change in circumstances with respect to each Swiss FFI that is presently a Reporting Model 2 FFI, and possibly each Non-Reporting IGA FFI that relies on the terms of the current IGA as a basis for its status as a Non-Reporting IGA FFI. Accordingly, the MOU requires each Swiss FFI to notify its upstream withholding agents that its chapter 4 status has changed. A Swiss FFI may choose to directly notify withholding agents by providing a new IRS Form W-8 to such person or it could choose to inform the withholding agent of such change verbally or in writing. Alternatively, the Swiss FFI may inform withholding agents of the change in the Swiss FFI chapter 4 status using “publicly available means.” Although the MOU does not define the term “publicly available means,” it may be determined by reference to the laws of the party applying the agreement. Swiss law may allow this requirement to be satisfied by means of posting such information on the Swiss FFI’s website, a newspaper, or within an official corporate register.
Eversheds Sutherland Observation: We understand that this notification requirement was a point of contention during negotiations between the United States and Switzerland because of the IRS view that any change resulting in a change in circumstances, necessitating new FATCA documentation. The MOU provides a thoughtful compromise that allows affected FFIs to publicly inform counterparties of the change in their FATCA status without the need to take on the administrative burden of providing each withholding agent with a Form W-8 that reflects the Swiss FFI’s new chapter 4 status.
Information Reporting Relating to Tax Years Prior to 2027
The MOU recognizes that there may be some challenges in ensuring that Swiss FFIs timely satisfy their FATCA reporting once the New IGA takes effect. In this regard, the Swiss tax authorities will take action to ensure that Swiss FFIs file applicable reports, including amended reports, for tax periods prior to January 1, 2027 by December 31, 2027. It is contemplated that the Swiss tax authorities will impose penalties or other means of enforcement to ensure compliance with these requirements. Likewise, it is also contemplated that the IRS will notify Swiss FFIs by May 31, 2027 of any outstanding compliance obligations relating to tax years prior to January 1, 2027. In this regard, any items not addressed by May 31, 2027 will be addressed through the information exchange provisions of the double tax treaty between Switzerland and the United States.
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