Traditionally, Switzerland has been more protective of financial privacy than many neighbouring countries. Among others, a relatively modest policy on information exchange, together with legally enforced banking confidentiality were direct consequences of this general attitude. In late 2008 and from the beginning of 2009, in the wake of global economic turmoil, the pressure on perceived tax havens and in particular on Switzerland´s information exchange regime increased drastically. On March 13 2009, in a dramatic switch of policy, the Swiss government had announced that Switzerland would finally fully adopt the OECD standards on information exchange and withdrew its reservation to article 26 of the OECD Model Tax Convention dealing with the exchange of information. Switzerland has always had a reservation to article 26 OECD Model Tax Convention, the last version dated July 15 2005 read as follows:

Switzerland reserves its position on this Article. It will propose to limit the scope of this Article to information necessary for carrying out the provisions of the Convention. This reservation shall not apply in cases involving acts of fraud subject to imprisonment to the laws of both Contracting States.

As a result, Switzerland was taken off the OECD's so-called blacklist of countries which were not committed to internationally agreed tax standards. The so-called blacklist of countries not committed to internationally agreed tax standards then consisted of Costa Rica, Malaysia (Labuan), the Philippines and Uruguay.

On April 2 2009, the participants in the G20 summit in London decided to place Switzerland on the OECD´s grey list of countries which complied with the OECD standards but had not yet fully implemented them. The so called grey list at that time included, among others, Austria, Belgium, Luxembourg, Singapore and Switzerland. Since then and up to September 2009, the minimum number of 12 double tax treaties were newly negotiated or amended, including provisions equal to article 26 of the OECD Model Tax Convention, so that the OECD removed Switzerland from this grey list on September 25 2009. As a consequence, Switzerland is now considered to be compliant with internationally agreed tax standards.

These countries identified as tax havens are still on th OECD's grey list: Anguilla, Belize, Cook Islands, Dominica, Grenada, Liberia, Marshall Islands, Montserrat, Nauru, Niue, Panama, St Kitts and Nevis, St Lucia, St Vincent and the Grenadines and Vanuatu. In addition, under the title "Other financial centre", the countries of Brunei, Costa Rica, Guatemala, the Philippines and Uruguay are on this grey list. No country is on the black list anymore.

Swiss exchange of information practice up to 2009

Until 2009, Switzerland would, at most, agree to exchange information only in the case of "tax fraud and the like". The mere non-declaration of income and/or wealth (Steuerhinterziehung/soustraction fiscale), in particular, was, in line with Swiss domestic legislation and was not considered to be sufficient to justify lifting banking confidentiality and transfer relevant information to foreign tax administrations. Accordingly, Switzerland placed a reservation to article 26 of the OECD Model Tax Convention. Most of the double tax treaties it signed in the past provided for either a clause on information exchange limited to assistance for information required for the proper application of the double tax treaty (for example, the double tax treaty with Greece) or no clause on information exchange at all (for example, the double tax treaties with Sweden or the Netherlands). Where no clause on information exchange existed, the Swiss tax authorities still exchanged information required for the proper application of the double tax treaty.

As early as 1951, when the first double tax treaty between Switzerland and the US was signed, an exchange of information clause was included in article XVI for the prevention of "fraud and the like". The revised double tax treaty of 1996 provided for a similar clause to which a mutual agreement in January 23 2003 was signed, including further details on what "tax fraud and the like" means. In particular, there are 14 examples listed in the appendix which outline the type of fraudulent behaviour giving rise to administrative assistance under the double tax treaty.

On August 19, 2009, Switzerland and the US signed an agreement about the request from the US Internal Revenue Service for information about UBS. Under this agreement, exchange of information is granted by Switzerland also in cases of severe tax evasion and not only in cases of fraudulent behaviour (that is, using falsified documents or a scheme of lies). In addition, a declaration was signed on August 19 2009 where both the US and Switzerland committed to signing a new protocol amending article 26 (together with certain other provisions) by September 30 2009 (which was eventually signed on September 23 2009).

Two groups of people were covered by this agreement: on the one hand clients of UBS with US residence holding directly as beneficial owner between 2001 and 2008 more than Sfr1 million ($945,000) in non-reported (undisclosed (non-W-9)) custody and banking deposit accounts and, on the other, US citizens irrespective of their residence who were the beneficial owners of UBS bank accounts of an offshore entity (offshore company accounts).

Other double tax treaties providing for information exchange in case of tax fraud

On March 12 2002, Switzerland and Germany signed a protocol extending the administrative assistance for exchanging information in cases of tax fraud (to the extent both countries qualify the respective behaviour of a taxpayer as fraudulent) which, before this agreement, was possible only by way of judicial but not administrative assistance. Concerning the procedures, the notes to the protocol refer to the double tax treaty between Switzerland and the US.

Further protocols were signed in 2005 with Norway, in 2006 with Austria, Finland, Spain and UK and in 2007 with South Africa, providing for information exchange in case of tax fraud or tax fraud and the like (protocol with Spain and the UK).

Contrary to the Swiss-US double tax treaty, exchange of information under these double tax treaties is granted only in the case of fraudulent behaviour that may be penalised with imprisonment in both contracting states. The mere filing of a wrong tax return without forging additional documents is insufficient to commit tax fraud according to Swiss domestic law (the tax return itself is not considered as a document in the legal sense) and hence no information exchange will be granted.

The double tax treaties with Norway, Austria, Finland, Spain and the UK provide for exchange of information not only in the case of tax fraud but also in case of holding companies: as a response to the OECD's report on harmful tax practices in 1998, Switzerland committed itself to exchange information for the proper implementation of domestic tax laws with respect to Swiss holding companies on a reciprocal basis. The scope of information to be exchanged is restricted to the information the Swiss tax authorities receive during the normal assessment procedure (for example, financial statements of the Swiss holding company). Banking secrecy is not affected in such cases.

By signing the Swiss-European Union Savings Tax Agreement on October 26 2004, Switzerland agreed to exchange information about taxes subject to the agreement in cases of tax fraud and the like. The scope of this agreement is restricted to interest income generated by individuals resident in EU member states where a Swiss paying agent is involved. Together with the agreement, Switzerland signed a memorandum of understanding with the EU agreeing to start negotiations with the EU member states to amend the double tax treaties, introducing administrative assistance in situation of tax fraud and the like for the purpose of implementing domestic laws.

Since the fundamental change of policy by the Swiss government on information exchange on March 13 2009, a number of protocols and new double tax treaties were signed including a revised information exchange article along the lines of article 26 of the OECD Model Tax Convention. From January 1 2010, respective agreements were signed with these countries:

Denmark –August 21 2009

Luxemburg –August 25 2009

France –August 27 2009

Norway –September 2 2009

Austria –September 4 2009

UK –September 7 2009

Mexico –September 21 2009

Finland –September 22 2009

Faroe Islands –September 22 2009

US –September 23 2009

Qatar –September 24 2009

Since the double tax treaty with Spain has a most favoured nation clause, no amendment needed to be signed; the signing of the protocol with Denmark on August 21 2009 triggered this clause automatically in the Swiss-Spanish double tax treaty.

Essentially, the revised double tax treaties have these features broadly in line with article 26 of the OECD Model Tax Convention but in certain areas deviating to some extent about exchange of information:

• Exchange of information relates to taxes covered by the respective double tax treaty (either income tax alone or income and wealth tax). Only the revised double tax treaties with France and the UK relate to taxes of every kind and description (as it is stated in article 26 of the OECD Model Tax Convention), including gift and inheritance tax as well as indirect taxes.

• Exchange of information is only granted for information that is foreseeablely relevant for carrying out the provisions of the respective double tax treaty.

• Exchange of information is also provided in the case of non-resident persons, for example, in case information is requested by one contracting state where a third-country person is limited liable to tax due to ownership of real estate.

• Exchange of information is explicitly denied in the case of so-called fishing expeditions.

• Exchange of information is granted only on request and – at least as far as Switzerland is concerned – neither automatically nor spontaneous.

• Exchange of information is granted only where a number of requested details are disclosed by the requesting state. The request needs to include 1) the name and address of the person under investigation, 2) the period for which the information is requested, 3) a statement of the information sought including its nature, 4) the purpose for which the information is requested and 5) the name and address of the person which is considered to be in possession of the requested information.

• Information received by way of exchange of information may not be disclosed to a third country. Furthermore, under the revised double tax treaties with Denmark, Luxembourg, Norway, Austria, Mexico, Finland and Qatar, such information may not be disclosed to oversight bodies. In addition, if there is no assurance that the information received will be treated as confidential, Switzerland will as a consequence of general principles of international law and its ordre public not agree to such information exchange.

In addition to article 26 paragraph 5 of the OECD Model Tax Convention, the revised Swiss double tax treaties provide for the following – or similar – wording:

in order to obtain such information, the tax authorities of the requested Contracting State, if necessary to comply with its obligations under this paragraph, shall have the power to enforce the disclosure of information covered by this paragraph, notwithstanding paragraph 3 or any other contrary provisions in its domestic laws.

This additional provision is necessary from a Swiss domestic law point of view to provide an explicit legal basis for exchanging information protected by banking secrecy law. Furthermore, Switzerland has decided to introduce an administrative assistance act to further secure legal certainty. Initially, it was planned to issue an administrative assistance ordinance only (foreseeablely entering temporarily into force as per October 1 2010).

Based on article 26 paragraph 3 of the OECD Model Tax Convention, the guaranteed procedural domestic rights of the taxpayer are to be observed in the respective double tax treaties. In the revised double tax treaties Switzerland explicitly states that these rights, such as the right to be notified or the right of appeal, remain applicable also in the exchange of information procedure. Accordingly, a foreign resident taxpayer has the right to appeal an order issued by the Federal Tax Administration within 30 days to the Swiss Federal Administrative Court. There is no further ordinary legal remedy against this decision with the Swiss Federal Supreme Court.

Based on article 26 paragraph 5 of the OECD Model Tax Convention, the requested state is not allowed to decline supplying of information solely because the information is held by a bank, other financial institution, nominee or person acting in an agency or fiduciary capacity or because it relates to ownership interests in a person. Swiss banking secrecy which is protected under article 74 of the Swiss Banking Act is therefore not a professional secret according to article 26 paragraph 5 of the OECD Model Tax Convention that allows refusal of exchanging information.

Article 26 paragraph 5 of the OECD Model Tax Convention, on the other side, does not preclude the requested state from invoking paragraph 3 to the extent the respective reasons are not related to the status of a bank, agency or fiduciary capacity. For example, in case an attorney is acting in an agency capacity, paragraph 3 still allows the refusal of exchanging information due to confidential attorney-client communication.

The Swiss government published its dispatches on the first revised double tax treaties in January 2010. The Swiss Parliament started to discuss the first double tax treaties in their spring session and voted on the revised double tax treaties on March 17 2010. Since all revised double tax treaties are subject to an optional referendum, it is anticipated that the Swiss people will be voting on such revised protocols, delaying their entry into force to 2011 or 2012.

Where one or several revised double tax treaties will not be subject to a referendum, they enter into force in 2010. Swiss legal practice in international treaty matters does not provide for retroactive effect or application. Accordingly, the revised double tax treaties state that exchange of information is only granted for tax periods or years starting on or after January 1 after the entry into force of the double tax treaty under which the exchange of information is requested. As a result, exchange of information will be granted for tax periods as from January 1 2011 at the earliest. Under the revised double tax treaty with France, information for tax periods beginning January 1 2010 can be requested.

A special rule applies to the double tax treaty with the US where information about tax periods beginning as from September 23 2009 (that is, the signing of the protocol) may be requested as soon as the revised treaty enters into force. This date, however, is only relevant for information described in article 26 paragraph 5 of the revised double tax treaty (that is, information held by a bank or information on ownership interests). All other information requests filed after the entry into force of the revised double tax treaty may relate to tax periods starting from January 1 2010 only.

Effects of landmark decision

Under Switzerland's existing double tax treaties, exchange of information is granted only for the proper application of the double tax treaty. Next to this, only a few double tax treaties provide for exchange of information in the case of holding companies and in the case of tax fraud. According to Swiss interpretation, tax fraud eligible for exchange of information requires the use of falsified or forged documents (with the exception of the double tax treaty with the US, where a somewhat broader scope of tax fraud is defined in the protocol).

The international pressure on Switzerland's restrictive exchange of information practice in the course of the financial crisis and accentuated by the G-20 led to a landmark decision by the Swiss government on March 13 2009 to exchange information in accordance with article 26 of the OECD Model Tax Convention. With the amended exchange of information practice, Swiss banking secrecy as it was perceived in the past was de facto abolished in an international context.

Under the new double tax treaties, Switzerland will follow the basic principles set in article 26 of the OECD Model Tax Convention, that is, extending the exchange of information for the proper implementation of domestic laws in the other contracting state. Restrictions will still be applicable to the extent they are compatible with the provisions set in article 26 of the OECD Model Tax Convention (that is, no fishing expedition and no automatic exchange of information).

It is anticipated that the revised exchange of information clauses will become applicable for requests for information for tax periods from January 1 2011 at the earliest (that is, where the respective double tax treaty enters into force in 2010) with the exception of the double tax treaty with the US where information may be requested for tax periods from September 23 2009 and potentially France from January 1 2010. This should also be the case for Spain with respect to its most-favoured-nation clause.

Marcel Widrig
		PricewaterhouseCoopers Birchstrasse 160 CH-8050 Zurich Tel: +41 58 792 44 50 Fax: +41 58 792 44 10 E-mail: marcel.widrig@ch.pwc.com Marcel Widrig is a partner of PricewaterhouseCoopers, which he joined in 1993. Since 2001 he has been the leader of private client services in Zurich and subsequently Switzerland. He holds a PhD in law and is a certified Swiss tax expert. He is a consultant to entrepreneurs and to top executives and private individuals about complex wealth structures.