Switzerland is one of a few markets of investment that look through US Regulated Investment Companies (RICs) to its investors to determine tax treaty eligibility. It has been a long standing issue that Switzerland does not have a clear and concise procedure for US RICs to demonstrate tax treaty eligibility. (See our In Focus from January 2018)

When filing a tax reclaim, US RICs complete a Form 82R. On this form the fund indicates the percentage of shares held directly in the fund. If the percentage of US direct investors indicated is at least 50 percent, then treaty benefits can be extrapolated to the remaining US investors in the fund. If the percentage of US direct investors indicated is less than 50 percent, then the fund must provide the percentage of its indirect investors. The 82R then goes on to ask on what basis does the fund know that the US indirect investors are US residents, and this is where the reclaim process becomes tricky. A written explanation generally does not suffice. If no additional proof is provided, the reclaim amount will be prorated based on the percentage of US direct investors indicated on the form.

The Association of Global Custodians (AGC), of which BBH is a member, has brought this issue to the attention of US Competent Authority on several occasions. The Investment Company Institute (ICI) has written numerous letters to the Swiss Federal Tax Authority (SFTA) seeking clarification of treaty eligibility, as well as clear guidelines of acceptable proof of US residence. The last letter written in March of 2018 was a global proposal for additional methods by which US funds can establish that they are owned by US persons. The SFTA responded producing a list of acceptable information sources for proving US residency. Importantly, the letter also confirms that US RICs can claim treaty relief if at least 50 percent of the shares in the fund are held directly by US investors. Confirmation of the extrapolation method is important as it upholds the validity of an agreement that the US and Switzerland entered in to in 2001 where the Swiss Tax Authorities agreed to provide full treaty relief if at least 95 percent of the RIC’s shares are held by U.S. investors. The letter further confirms that names and addresses of shareholders generally will not be required. Another important affirmation as this information is oftentimes not available for indirectly held shares due to data privacy requirements.

Confirmed information sources include:

  • Transfer agent’s books for directly held shares – Units registered within the transfer agent’s books are directly held. It follows that if more than 50 percent of the total outstanding units can be proven as held directly, the claimant may extrapolate eligibility to the remaining units.
  • Broker information (e.g. Omni/Serv) – Broker information can be used to prove US residence of indirect shareholders. With respect to this methodology, the RIC would need to obtain information from each nominee and check the accuracy of the data provided. Information obtained from each nominee would need to be listed out as a separate line item. Such data would need to be stored and produced to the SFTA upon request.
  • Proxy firm information – Information obtained from third-party providers such as proxy firms, continues to be an acceptable source of information. The proxy firm would need to disclose the names of each nominee, intermediary, trust, partnership or estate through which US investors hold their shares. This data would need to be stored and produced to the SFTA upon request.
  • Sales restrictions for the fund or share classes – Proof that the fund units are exclusively sold to investors in the US and that nonresident investors are not permitted to subscribe to the fund would be acceptable proof of residency for indirect US investors in the fund. Only restricting distribution to within the US is not sufficient to establish that all shareholders in the class are US residents. In this case, the fund would need to provide proof in the form of a current fund prospectus or any other document confirming sales restrictions.
  • On a case-by-case basis, the SFTA may also consider whether shares held by nominees should qualify as directly held for purposes of applying the 50 percent threshold test.

Information provided must include:

  • the name of the proxy solicitation firm (if applicable)
  •  name of the intermediary, nominee, trust, partnership or estate through which shares are held
  • claim period
  • share class
  •  fund units held by the US investors
  •  total outstanding fund units
  •  Swiss income per unit
  • total gross Swiss income held by investors
    percentage held by US investors 

Where the fund uses more than one information source, the data would need to be summarized in a data summary table which would include the:

  • claim period
  •  share class
  • total outstanding fund units directly and indirectly held by US investors 
  • total outstanding fund units and total percentage of directly and indirectly held fund unit by US investors

Next Steps

Although the response from the SFTA provides substantial clarification of acceptable forms of proof of US residency, it also creates many questions on implementation, which were addressed to the SFTA in the form of a follow-up letter written by the ICI with significant input form the AGC member banks.

A continued concern is that information required by the SFTA is significantly more detailed than that required by most other markets when filing tax reclaims. Market participants emphasized the need to create a standardized format for collecting and presenting information acquired from approved sources, and direction for how long the collected information must be stored.

Proxy firm information requirements are significantly more detailed than those that are currently being produced and successfully submitted with reclaims. The SFTA was asked to confirm whether the currently issued reports will continue to be acceptable. Investors relying on broker produced information would need to check the accuracy of the information provided. The SFTA was asked to clarify how the fund is to check the accuracy of the information provided by the broker.

BBH continues to work closely with the AGC and the ICI to better understand how investors can start implementing the newly approved sources of information.

FOR MORE INFORMATION, PLEASE CONTACT YOUR RELATIONSHIP MANAGER.

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