Guidance on the US - Switzerland Protocol

In April 2019, 80 of the world’s largest and most powerful companies called on the Senate Foreign Relations Committee to expedite the approval of pending bilateral income tax treaties and protocols.  On 16 July 2019, the Senate approved the pending bipartisan protocol amending the US Tax Treaty Convention with Spain. The next day the Senate approved pending bilateral income tax treaties and protocols including the pending protocols with Switzerland, Japan, and Luxembourg.
 
After being under great uncertainty for over 10 years, the US – Switzerland protocol (“Swiss Protocol”) has the following key impacts:
 
Taxation of Dividends Received by Pension Funds
 
Amendments to Article 10 (Dividends) of the Swiss Protocol will provide for pension accounts, other retirement arrangements and individual retirement savings plans (i.e., Pillars 1, 2 and 3) resident in one of the states to benefit from the 0% withholding tax rate on dividends paid from companies in the other treaty state. This change will be effective for payments made on or after 1 January 2020. Before this amendment, only pension schemes (e.g., 1st and 2nd Pillars) were able to benefit from the reduced 0% withholding tax rate under the US-Switzerland Treaty signed 2 October 1996.
 
Exchange of Information
 
Amendments to Article 26 (Exchange of Information) of the Swiss Protocol provides that the competent authority of both countries can collect and exchange information that is relevant to all taxes imposed by countries and in accordance with the provisions of the US-Switzerland Treaty and domestic laws. An example of this change impacts the requests for tax information under the US-Swiss Inter-Governmental Agreement for the implementation of FATCA (“US-Swiss IGA”). This change will allow the Internal Revenue Service (“IRS”) to request information pertinent to non-consenting US accounts and accounts held at non-participating financial institutions since the implementation of FATCA from 2014 onwards.
This change will go into effect after the date of entry into force of this protocol.
 
Mandatory Arbitration
 
Amendments to Article 25 state that the competence authorities shall be able to resolve through arbitration cases in which they have not been able to reach a complete agreement. The arbitration provisions included in the Swiss Protocol are:
 
  1. Tax returns have been filed with at least one of the contracting states with respect to the tax years under dispute;
  2. The case is suitable for arbitration because a complete agreement has not been reached before arbitration proceedings would have begun; and
  3. The “concerned person(s)” (i.e., taxpayers) and their authorized representatives agree not to disclose the arbitration proceedings before the beginning of arbitration.
 
This provision will be effective for cases that come into consideration by the competent authorities after the date of which the protocol enters into force.  There are provisions under the Swiss arbitration article that allow the governments to opt out or not have certain types of issues decided under these procedures.
 
Do not hesitate to contact us for further information concerning any implications from the approval of the Swiss Protocol.