Switzerland's tax information exchange with the United States (IRS) and other countries | InternationalWealth.info (2024)

For a long time, the banking system in Switzerland has been highly regarded for its reliability, largely thanks to its strict internal regulations regarding confidentiality and safeguarding client information. This made it possible for non-residents to hold accounts and keep their wealth in Switzerland without the fear of being detected by tax authorities in their home countries.

Although not illegal under Swiss laws, the practice could potentially violate the regulations of the client’s country of residency or tax jurisdiction. This was particularly cumbersome for US tax residents with accounts in Swiss banks, as they were under scrutiny by the IRS.

For several years, Switzerland has been involved in a campaign against tax avoidance and offshore tax schemes. As a result, the country began to exchange tax information with other jurisdictions as provided for under the Common Reporting Standard (CRS) and adopted regulations for sharing information with the US under the Foreign Account Tax Compliance Act (FATCA).

The consequence was that the top clients with accounts in Swiss banks started questioning the safety of their financial assets.

To gain a better understanding of how secure Swiss bank accounts are and how financial and tax information sharing with the US Internal Revenue Service (IRS) operates, let’s examine these matters in more detail.

FATCA

Implemented in Switzerland in 2014, FATCA is the principal law for American residents in terms of financial and tax information exchange with Swiss banks. One of the most common questions we receive from clients with Swiss bank accounts is whether Switzerland transmits tax information on beneficiaries to the IRS and how serious the matter is.

As of April 2023, Switzerland and its banks have accepted the US terms under FATCA but continue to use Model 2 for tax information transmission instead of Model 1. This raises questions about the implications of Model 2 and the level of protection for customer data.

FATCA Models 1 and 2

Switzerland abides by FATCA regulations by implementing Model 2:

• Swiss banks are required to share account and tax information with the US IRS only if their clients are US tax residents who consented thereto.
• If a beneficiary of a Swiss account declines to have their tax and financial information disclosed to the IRS, data may only be provided on request from the US as part of administrative assistance.
• The IRS does not receive any tax information on accounts held by non-US residents.

Swiss banks are required to share certain data with the US Internal Revenue Service (IRS) as part of the Foreign Account Tax Compliance Act (FATCA). This includes the name, address, and taxpayer identification number of US citizens holding accounts with the bank, as well as the balance on those bank accounts.

Undoubtedly, the US IRS is not content with Model 2. It has been engaged in intensive discussions for several years now to introduce Model 1. The approach involves an automatic exchange of financial and tax information without the consent of Swiss bank clients. Nevertheless, as of today, the status quo remains unaltered.

FYI: Not disclosing a Swiss bank account in the IRS declaration may have serious consequences for US tax residents with bank accounts in the jurisdiction. They could face a hefty penalty above USD 100,000 and even criminal charges if they fail to report the accounts themselves.

Offshore Voluntary Disclosure Program (OVDP) in the USA

The IRS, a.k.a. the US tax authority has implemented the Offshore Voluntary Disclosure Program (OVDP) as one of its measures to detect tax evasion in the country. This program allows American residents to voluntarily disclose their foreign accounts, including those in Swiss banks, to the IRS and avoid penalties and criminal charges.

Under the OVDP, US citizens must report any previously undeclared accounts to the IRS, pay all taxes, interests, and penalties, and follow reporting requirements in the future. As a result, they may be able to reduce their liability and avoid criminal charges.

However, if the individual has already been identified by the IRS as a tax evader and criminal or administrative proceedings have commenced, they will not be eligible for the OVDP.

Switzerland: other financial and tax information sharing accords in 2023

At present, Switzerland has committed to several multilateral and bilateral agreements that mandate the exchange of tax and financial information according to established protocols.

AEOI in Switzerland

Switzerland has become a member of the automatic exchange of information with OECD and G20 member countries since January 1, 2017. This standard is designed to improve financial transparency, however, it does not affect the interests of Swiss residents and citizens personally.

Under the confidentiality law of the country, Swiss banks are not obliged to disclose data about local citizen beneficiaries to foreign jurisdictions. The rules of exchange established under AEOI are only applicable to non-Swiss residents.

Variations do exist in the extent of information exchange depending on the country. The US, despite being the one to initiate the project, does not take part in it. Other jurisdictions such as Qatar, the Marshall Islands, UAE, BVI, Bermuda, Bahamas, and several other states have classified themselves as permanently non-reciprocal. This means that while they provide information on Swiss bank accounts regularly, they do not receive any account information in return.

Tax accords on administrative aid and data exchange

Here’s what belongs to the said accord group:

• information exchange upon request.

The above information exchange is an additional measure to the request for administrative assistance. The latter is mostly regulated by bilateral double taxation agreements (DTAs) and tax information exchange agreements (TIEAs).

When requested, the Federal Tax Administration (FTA) is in charge of exchanging account data and other information with the Global Forum on Transparency and Exchange of Information for Tax Purposes, keeping track of its operations and overseeing them.

• spontaneous information exchange.

Starting from January 1, 2018, Switzerland facilitates the spontaneous exchange of information. The latter varies depending on the country. Say, the Internal Revenue Service (IRS) may submit such a request when there exists a potential for tax base erosion or profit shifting.

Reliability of Swiss banks in 2023

Switzerland has entered into multiple agreements with other countries, both bilateral and multilateral, that aim to facilitate the exchange of tax, account, and financial information on Swiss account holders. Nonetheless, Switzerland continues to prioritize its internal rules under the confidentiality law. Though the account information of foreign clients may be shared with the appropriate authorities upon request or as part of data exchange, Swiss citizens with bank accounts in the country are not affected by these measures.

In certain jurisdictions, residents may rest easy knowing that their Swiss bank accounts are safe from scrutiny since Switzerland does not accept account data for tax purposes from the tax authorities and banks in those countries. However, Switzerland may unilaterally disclose account information to tax authorities including inter alia the IRS.

While Swiss banks no longer promise the same level of confidentiality as they did 2 decades ago, they remain a reliable and secure option for foreign clients and companies.