As a matter of background, U.S. RICs must complete a Form 82R when filing a tax reclaim, where they indicate the percentage of shares held directly by investors in the fund. If the percentage indicated is less than 50 percent, then the RIC must also provide percentage of shares held indirectly by investors and the percentage of shares held indirectly by U.S. residents. If the overall percentage of U.S. investors is less than 95 percent, then the refund must be prorated by the percentage of non-U.S. investors. If the percentage of overall U.S. investors is above 95 percent, then the RIC qualifies for the full refund amount under the tax treaty.
The Swiss Federal Tax Administration (SFTA) requires an explanation for the basis of treating indirect U.S. shareholders of the RIC as U.S. shareholders. These requests are made randomly, but appear to target claimants with significant refund amounts. The SFTA are not accepting written confirmations from the fund, but rather are requesting an explanation of how the RIC came to the result of the percentage of indirect U.S. residents, such as an indirect shareholder breakdown. Claimants are provided with a deadline for submission of the additional documentation and may request an extension of such deadline. If a response is not provided, the reclaim is rejected and investors may pursue filing a new tax reclaim within the statute of limitations. Where an unsatisfactory response is provided, the SFTA may reimburse the portion of the reclaim pertaining to only U.S. direct shareholders in the RIC.
Oftentimes, such requests for additional information prove to be difficult or sometimes impossible for the RIC to satisfy as there is no clarity or consistency as to what type of proof would be deemed acceptable by the SFTA and the fund may not be directly privy to such information. Some investors have resolved to addressing such requests for information through their tax counsel. Others manage the requests using brokers and other intermediaries.
The SIF’s Response
Recently, the ICI received a response to its letter to the SIF where they sought a written clarification of whether information received from a third party, such as a proxy solicitation firm, collected from the nominees would be deemed an acceptable form of proof.
The SIF responded confirming that that information collected from third party providers (e.g. a proxy solicitation firm) is acceptable to establish treaty eligibility for the RIC’s indirect investors. The SFTA decides the qualification of the third party provider on a case by case basis, so long as the method leads to a reliable result. The third party provider may be examined and qualified by contacting the Refund Division of the Federal Tax Administration.
Other forms of proof referenced in the letter are sales restrictions, as well as a full disclosure of the names and the addresses of the investors. The SFTA continues to examine whether pooled percentage certifications issued by intermediaries may be an acceptable form of proof.
BBH is a member of the Association of Global Custodians (AGC) and works closely with the ICI on issues mutually impacting our clients.
Seeking information from third party providers as a means of proving treaty eligibility was not on the forefront of the AGC’s lobbying efforts. Many investors may find that contracting with a third party provider is cost prohibitive and outweighs the benefit of the reclaim.
Following a meeting between members of the AGC and the U.S. Treasury earlier this year, it was confirmed that the issue is one of reciprocity of treaty benefits available to Swiss funds investing in the U.S. and to U.S. Funds investing in Switzerland. Although the argument of reciprocity may be deemed somewhat flawed, Swiss funds being contractual in nature, while U.S. RICs are organized as legal entities, it is nevertheless the issue currently being addressed by the two governments. Resolution may not be forthcoming in the short term, therefore, we welcome the SFTA’s letter confirming that information obtained from a third party provider may be used as means of proof of treaty eligibility.
BBH, continues its lobbying efforts via the AGC, for the governments to address the issue of U.S. RIC treaty eligibility in a more streamlined and cost effective manner.
Investors in receipt of requests for additional information, are strongly encouraged to consult with a tax advisor prior to responding to the SFTA.
For more information please contact your relationship manager or Global Tax Services.
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