The Global Forum on Transparency and Exchange of Information for Tax Purposes conducts country reviews that assess how international standards for the exchange of information (EOI) on request is applied. This 'peer review' is broken down into two phases:
1) Phase 1 covers the legal and regulatory framework for tax administrative assistance on request in the country concerned; and
2) Phase 2 assesses how this is implemented in practice. Each country is given an overall rating upon completion of phase 2.
Switzerland's approach to the EOI for tax purposes has changed significantly over the past few years. Previously, Switzerland adopted a very restrictive approach. However, in 2009 it withdrew its reservation to Article 26 of the OECD's model tax convention, and started to amend its tax treaties to ensure the EOI is in line with international standards.
The Global Forum published its phase 2 peer review report on Switzerland on July 26 2016. It was rated as "largely compliant", with the Global Forum recommending it implement appropriate reporting mechanisms to effectively ensure the identification of the owners of bearer shares. With regards to information requests based on stolen data, it recommended modifying its law and/or practice to ensure that it can enforce its obligations under EOI mechanisms. Of the 10 assessment criteria, only two were recorded as "partly compliant".
As a consequence of these recommendations, Switzerland has published its draft legislative amendments in response to its recommendations. These are discussed below.
Phase 2 recommendations
With regard to the transparency of legal entities, the draft law notes that bearer shares are only permitted if a company's stock is listed on a stock exchange, or if the bearer shares are structured as intermediated securities. Also, it will be punishable to not maintain a shareholder and beneficial owner (BO) register, and to not report these.
With regards to the EOI, the draft law contains provisions on the confidentiality of requests, as well as on the procedural capacity of parties subject to administrative assistance procedures. The provision on administrative assistance requests (based on stolen data) is yet to be clarified. The six measures to be implemented as per the Global Forum's recommendations include:
1) Conversion of bearer shares into registered shares. As an alternative to the conversion, bearer shares can be structured as intermediated securities;
2) Transitional provisions for the cancellation of outstanding bearer shares;
3) A sanction system for breaches of compliance duties;
4) Maintenance of a register of legal owners by entities with registered offices abroad (but effective management in Switzerland);
5) Provision for the EOI on deceased persons; and
6) Provision on the confidentiality of the request.
The proposed law does not provide any additional measures for the inspection of account details regarding Swiss bank accounts, or the inspection of company registers. As a substitute for the latter, in the future, the Swiss Federal Tax Administration (SFTA) will check the existence of shareholder and BO registers when carrying out withholding tax (WHT) audits in order to encourage companies to fulfil their respective obligations.
Civil and criminal law amendments
The new provisions address a number of legal areas including identification of bearer shares, provisions for outstanding bearer shares, the supervision of stock corporations and limited partnerships, and information regarding the legal ownership of foreign companies.
Identification of bearer shareholders
On July 1 2015, new provisions regarding the transparency of legal entities were passed in Switzerland, implementing the recommendations of the Groupe d'action financière. In the case of non-listed companies, obligations to report on the acquisition of bearer shares within one month was introduced, with beneficial owners of the shares now required to report a share acquisition greater than 25%.
If a shareholder does not comply with reporting obligations, their share rights are suspended until reporting obligations have been fulfilled. Amendments from 2015 also state that companies are now obliged to keep a register of the direct holders of the bearer shares as well as of the BO's reported to the company.
Due to the amendments introduced in 2019, the issuance of bearer shares will only be permitted if a company is listed on a stock exchange, or if the bearer shares are issued as intermediated securities (in accordance with the Federal Law on Intermediated Securities, and deposited with a Swiss custodian).
Companies will also have to publish in commercial registers whether they are listed on a stock exchange, or whether their bearer shares are structured as intermediated securities. Participation certificates will also fall under this amendment to the law. Bearer participation certificates will only be admissible for non-listed companies if they are structured as intermediated securities.
Outstanding bearer shares
The applicable law states that a shareholder's property rights are suspended if they fail to comply with reporting obligations within one month of acquiring the shares. However, if the shareholder notifies the company at a later moment, they may reassert property rights from that moment.
This late reporting has been criticised as bearer shareholders can remain anonymous until they wish to assert their rights against a company. The Global Forum's phase 2 report noted that the Swiss law of 2015 did not sufficiently ensure the identification of bearer shareholders within the timeframe noted in law.
As a consequence, the revised law proposal remedies this by stating the conversion of bearer shares into registered shares will not take place automatically on the effective date of entry into force of the new law. Instead, it will apply 18 months after the new law enters into force, unless a company is listed on the stock exchange or its bearer shares are structured as intermediated securities. If the company reflects the last two situations, it must be entered in the commercial register and no conversion is required.
If the company is not listed, or if the bearer shares are not structured as intermediated securities, then the board of directors of a company with bearer shares must invite the shareholders who have not yet fulfilled their reporting obligations to comply. Such a notification must mention that shareholders who fail to comply with their reporting obligation will permanently lose their rights and their contributions will fall to the company.
In such a notification, the 18-month period will be extended. Shareholders with shares that have been automatically converted from bearer shares into registered shares after 18 months may apply to the courts for registration in the company's register within five years following the law coming into force.
If a shareholder does not register, their shares will be cancelled by court order after the expiry of the five-year period, at the company's request. In such a case, the shareholder will definitively lose all their rights and the contributions will be transferred to the company.
Stock corporations and limited partnerships
The Global Forum's report further recommends monitoring the fulfilment of compliance obligations by stock companies and limited partnerships regarding the maintenance of shareholder and BO registers. In addition to the sanction system proposed, the SFTA will control (in the course of WHT audits) whether shareholder and BO registers are available.
Notification duty breaches can occur at the level of the company or at the level of the shareholder. The new sanction system will cover both. On the one hand, the draft law includes penalties for reporting obligation breaches. On the other hand, the new law notes that poor quality registers constitutes a deficiency in the organisation of the company, which can allow a shareholder or creditor to request court changes to the system in place.
Information of foreign company ownership in Switzerland
According to the Global Forum, if a company is present in multiple jurisdictions, and is a resident in Switzerland for tax purposes (e.g. by having effective management or administration in Switzerland), the company will have responsibility to ensure that legal ownership information is available.
However, reporting compliance obligations under Swiss company law apply only to companies registered in Switzerland. If information becomes available from companies with their head office abroad and a Swiss permanent establishment (PE), a legal basis will be required to collect such information.
In order to implement this recommendation, the Federal Law on International Administrative Assistance in Tax Matters (IAATML) stipulates that legal entities with foreign head offices must keep a register of their legal owners at the place of their effective administration in Switzerland. The register must contain their first and last names (or company name), and the address of the shareholder.
Hereby, the concept of effective management (or effective administration) corresponds to the definition of effective management or effective administration used for federal income tax purposes.
Exchange of information amendments
The Global Forum has also examined the implementation of the EOI process. Switzerland has received three recommendations that need to be implemented.
Exchange of information on deceased persons
Switzerland must ensure that information on deceased persons can be exchanged. In the absence of procedural capacity, administrative assistance cannot be provided for deceased persons under Swiss law. The same applies to an estate.
In order to be able to provide administrative assistance in such cases, the SFTA addresses the EOI request to the person's legal heirs. However, this is only possible if such persons have procedural capacity under Swiss law.
A further difficulty lies in the fact that the SFTA is not always successful in finding the legal heirs (e.g. in cases of group requests). Finally, it is difficult to provide administrative assistance with respect to legal succession if the request for administrative assistance is based on the deceased person's conduct (which is relevant under tax criminal law), since administrative assistance is only applicable against the person who is personally responsible for the conduct.
In accordance with Article 26, paragraph 1, of the OECD's model tax convention, competent authorities (CA) of contracting states exchange information as it is foreseeably relevant for carrying out the provisions of the tax treaty, or to the administration or enforcement of the domestic laws.
It is understood that the standard of "foreseeable relevance" is intended to provide for EOI in tax matters to the widest possible extent, and at the same time, to clarify that the contracting states are not at liberty to engage in "fishing expeditions" (or to request information that is unlikely to be relevant to the tax affairs of a given taxpayer).
Accordingly, Switzerland's tax treaties state that in the case of an EOI request, the procedural rules regarding taxpayers' rights (provided for in the requested contracting state) remain applicable, but will not lead to the prevention or excessive delay of the effective EOI. In other words, the lack of procedural capacity under Swiss law may not lead to the impossibility of providing administrative assistance under an international treaty in the case of deceased persons.
In order to solve this issue, the revised law notes that persons (including deceased persons), special assets and other legal entities subject to information requests will be given procedural party status. This is to ensure that administrative assistance can also be provided in respect of these persons. The only decisive factor will be whether the information is likely to be substantial in order to assess the tax situation of the person(s), special asset or legal entity, to which administrative assistance has been requested.
For example, if a US estate is the subject of a request, the planned provision will allow the SFTA to inform the estate of the administrative assistance procedure. The US law determines who can exercise the procedural rights of the estate in administrative assistance procedure (e.g. the administrator of the estate). The procedural action (e.g. the issuance of a decision), takes place vis-à-vis the estate. The latter may act through the person authorised under US law (e.g. the administrator of the estate) and then file an appeal.
In the international context, the term "legal unity" is understood as a general, open term, and not in the sense of a precise definition under commercial register law.
Confidentiality regarding requests
Switzerland must ensure that it complies with the international standards on confidentiality. The OECD model tax convention notes that administrative assistance procedures (including the request for administrative assistance itself) should be treated confidentially, and that only information that is necessary may be disclosed.
The Global Forum takes the position that the request itself must always be treated confidentially by the SFTA and must not be made available.
However, according to Swiss case law, an information request must be made available to the person who is expected to be entitled to appeal before the final decision is issued, unless there is an exception for not doing so.
This is a consequence of the right to inspect files as a part of the constitutionally guaranteed right to a hearing. Inspection of the files may only be refused if essential public interests of the confederation, cantons, and the other party or interest of an ongoing official investigation require secrecy.
If a person concerned wishes to exercise their right to inspect the files, the SFTA gives the requesting state an opportunity to take a position on the disclosure in advance, and to assert essential grounds for secrecy with regard to certain pieces of the file.
The Global Forum has stated that the practice of the SFTA does not correspond to the international standard, as a request should generally be treated as confidential, and apart from public court procedures or court decisions, no exceptions should be permitted.
Under the new law, grants will only be provided to inspect a file if the foreign authority agrees. It will be in the responsibility of the SFTA to determine whether the foreign authority has agreed or not. If the foreign authority does not agree, the SFTA will inform the person concerned about the essential parts of the request and the correspondence.
The person concerned will not be allowed to inspect the request itself (or any other correspondence). The summarised information to be provided would allow the person concerned to express their view on the matter and to contest the decision properly.
Stolen data recommendations
The Global Forum commented in its recommendations that Switzerland's application of the principle of good faith has had a significant impact on its information exchange practice. According to the applicable law, a foreign request will not be treated by Switzerland if it violates the principle of good faith. In particular, if it is based on information obtained through offences punishable under Swiss law.
According to the practice of the SFTA, it does not matter whether the requesting state obtained such information actively or passively. The Global Forum considered this practice to be too restrictive and said it did not conform with the international standard.
The Swiss Federal Supreme Court stated in a recent decision that the unilateral formulation of the application of the principle of good faith could only be invoked against a requesting state if:
a) A corresponding reference had been included in a bilateral treaty or in protocols thereto (i.e. the requesting state had accepted this reservation); or
b) It was established that the requesting state had violated the principle of good faith.
A state that buys Swiss bank data in order to use such data thereafter for a request of administrative assistance shows a conduct which is not compatible with the principle of good faith. However, it is possible to treat a request based on stolen data as long as the requesting state had not purchased such data in order to use it afterwards for a request for administrative assistance.
The question of whether a state has violated the principle of good faith must therefore be assessed based on the circumstances of each individual case. For example, according to the case law of the Supreme Court, an offence of good faith must be assumed if the requesting state disregards an assurance made.
If a breach exists, the applicable tax treaty as an international agreement between Switzerland and the requesting state will primarily be decisive, and not the domestic IAATML. Although Switzerland has noted since 2010 in treaty negotiations that it does not exchange information on requests based on illegally acquired data, this principle has not been included in the tax treaties or protocols concluded since then.
Switzerland and information exchanges
An insufficient grade in a Global Forum report can reduce a country's credibility in international bodies such as the OECD. In turn, this affects the ability to represent a country's interests effectively and credibly, while also impairing the attractiveness of a country as a location for foreign investors.
Switzerland is therefore motivated to implement the Global Forum's recommendations to retain the overall mark obtained in phase 2 in the next country review.
Swiss legislative amendments must enter into force by October 2019 in order to be taken into account in the next country review by the Global Forum. The draft law was therefore published in January 2019, and is subject to the facultative referendum.
Based on the assumption that no referendum will be filed, Switzerland is on track to implement the recommendations by October 2019.
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