Note: The following is an excerpt from Chapter 19 of the LexisNexis® Guide to FATCA Compliance* – The title is now shipping to customers world-wide.

In General

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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

… 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 demandcomplete 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

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Analysis

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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.

… read the entire chapter analysis excerpt at Lexis’ FATCA Central

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[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.

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