From offshore to onshore

Thursday, 01 October 2009
Switzerland's bank secrecy and the exchange of information for tax purposes.

Traditionally, Switzerland has applied a restrictive practice in the field of exchange of information for tax purposes.

From a Swiss tax perspective, information should be exchanged primarily to secure a correct application of a double tax treaty, it being understood that the purpose of a double tax treaty is not only the avoidance of double taxation but also, in an international context, the fight against tax avoidance and tax fraud.

In the context of recent developments in the financial markets (UBS case in the United States) and an increasing pressure on the political floor (G20 Grey List), Switzerland has been compelled to revise its approach regarding its ‘cooperation’ in the sector of exchange of information for tax purposes.

On various occasions, however, the Swiss government pleaded that the principle of secrecy in the field of Swiss bank relationship was not negotiable.

At the moment of the redaction of the present contribution, the detailed content of the agreement negotiated by the Swiss and the US government to settle the UBS case is accessible only to a restrictive panel of persons.

With exception of the tax treaty with Denmark which has been recently signed by the Swiss government and with the new tax treaties with Luxembourg and France, the content of 12 newly renegotiated tax treaties remains unknown.

These are all factors of uncertainty that impact directly on the client’s trust in relation to banks in Switzerland and in Switzerland as one of the leading financial centres in the world.

Bank secrecy and judicial assistance

Confidential information received by a bank in Switzerland concerning its client’s financial and personal affairs will remain secret throughout the duration of the contractual relationship and beyond as long as the client or his heirs have a reasonable interest to have the secret maintained.

Swiss bank secrecy covers all information received in the course of the relationship between the bank and its client.

Directors, officers, employees of a bank and any agent or mandatee of a bank such as its auditors and lawyers are subject to the bank secrecy obligation.

The extent of bank secrecy is not defined in the Swiss Banking Act but in various legal provisions spread over various acts and codes of Switzerland.

The right of the customer of a bank to have his personal affairs kept confidential results directly from the Swiss federal constitution, which guarantees to every individual the protection of its privacy.

The breach of bank secrecy is a crime, but bank secrecy does not protect abuses of criminal nature and where there is evidence of a criminal offence, bank secrecy will be lifted upon a formal request for judicial assistance presented by a Swiss judge or a foreign criminal prosecution authority.

As a matter of principle, Switzerland would agree to lift bank secrecy in tax matters in cases of judicial assistance only in presence of ‘tax fraud’. ‘Tax fraud’ is defined in this context as the use of forged or falsified documents or the use of a scheme of lies to avoid the payment of a substantial amount of tax.

Bank secrecy, however, will not be lifted in judicial assistance proceedings in the presence of a case of ‘tax evasion’. ‘Tax evasion’ is defined as the use of a legal structure chosen for the purpose of saving taxes.

Swiss bank secrecy and administrative assistance in tax matters

Under Art 26 of the OECD Model Convention (OECD MC – See page 29), the competent authorities of a Contracting State will exchange information relevant not only for the correct application of the applicable tax treaty, but also for the correct application and enforcement of domestic tax laws. The information exchanged will be treated as secret and only disclosed to persons or authorities concerned with the assessment or collection of, the enforcement or prosecution in respect of, or the determination of appeals in relation to the taxes referred in the Model Convention.

Art 26 OECD MC lists also a number of limitations under its paragraphs 3 and 5, among others: a contracting state is not obliged to supply information that would disclose any trade, business, industrial, commercial or professional secret or trade process. However, it has been confirmed by OECD member states that bank secrecy is not an obstacle to the exchange of information (Art 26 paragraph 5).

Switzerland has limited the scope of Art 26 OECD MC and made reservations with regard to paragraph 1 and paragraph 5. Switzerland will grant assistance in tax matters only:

  1. For the correct application of a tax convention; and
  2. For the enforcement of domestic law only in cases of tax fraud (as defined by Switzerland).

In specific tax treaties (US, Germany, Norway and, to a limited extent, France) and over the course of the years, Switzerland has, however, broadened its practice and adopted towards European countries and OECD member states a more open practice towards the exchange of information in order to assure upon specific request from a member state or EU state also the enforcement of domestic law in presence of tax fraud.

Tax fraud is a criminal offence punishable in both states and leading to imprisonment. A direct connection between the assistance requested and the fraud must be evidenced in the request. Fishing expeditions are excluded.

Recently, the Swiss and the US governments have agreed to settle amicably on the UBS case. It has been agreed that in 4,450 cases, the US tax administration is invited to file an application for administrative assistance based on Art 26 of the Swiss-US tax treaty. Art 26 of the Swiss-US tax treaty provides, among others, that ‘exchange of information in connection with the enforcement of domestic law is authorised in so far as the information is necessary to prevent tax fraud or the like’.

The Protocol to the Swiss-US tax treaty, dated 2 October 1996, contains concrete definitions of the terms ‘tax fraud or the like’, and extends the definition beyond the use or intention to use of forged or falsified documents to the use of a ‘scheme of lies to deceive the tax authorities’.

Information that is obtained under the tax treaty will include bank records (Memorandum of Understanding of 23 January 2003).

As mentioned above, the applications for administrative assistance will have to refer to concrete cases. The formal proceedings have to be observed. In other words, any application might be subject to a final review by the Swiss Supreme Court, upon appeal.

Switzerland has not adhered to the OECD Model Agreement on exchange of information in tax matters of 2002. The OECD Model Agreement of 2002 represents the standard of exchange of information for the purpose of the OECD initiative on harmful tax practice. This Model Agreement contains in connection with bank secrecy two major provisions: bank secrecy can be lifted not only for criminal matters, but also in the framework of ordinary tax investigations, and, in addition, the principle of dual-criminality is abolished.

Renegotiated tax treaties

As mentioned above, Switzerland has started to renegotiate its tax treaties. The Swiss government has confirmed that the changes will conform to the standards as set in Art 26 OECD MC.

For the Swiss government, the following principles should guide the policy on administrative assistance in tax matters:

  • the relinquishment of Switzerland’s reservations with regard to paragraph 1 and paragraph 5 of Art 26
  • the extension of the exchange of information to cases of pure tax evasion;
  • Swiss bank secrecy will no longer be an obstacle to the exchange of information;
  • any information will be exchanged on the basis of a specific request in a specific case, no fishing expeditions;
  • respect of administrative procedures;
  • limitation of exchange of information for the purpose of the enforcement of taxes covered by the OECD MC;
  • respect of the principle of subsidiarity;
  • exchange of information based on a convention (contractual act).

As mentioned above, the content of the revised tax treaties is not known at this stage, except with regard to the tax treaty renegotiated with Denmark. This treaty strictly follows the pattern of Art 26 OECD MC. Fishing expeditions are excluded and any application for administrative assistance will have to refer to a concrete, specifically identified case. In order to enter into force, the other renegotiated tax treaties will have to be signed and ratified by the Swiss government and parliament and are also subject to a facultative referendum. Further information on these will therefore not be released until later.

Domestic law

Any changes or limitation to bank secrecy adopted at an international level will not impact the national context. At domestic level, the Swiss-resident taxpayer will still be protected in its relation with the bank and bank secrecy can only be lifted in the presence of tax fraud (not tax evasion) as evidenced in each specific case.


The changes initiated by Switzerland in the field of exchange of information for tax purposes will lead in the future to a dual approach:

  • in conformity with Art 26 OECD MC, in an international context, with exchange of information for the purpose of the enforcement of the taxes covered by Art 26 OECD MC extended to tax evasion, and Swiss bank secrecy no longer an obstacle to the exchange of information;
  • in conformity with Swiss internal rules in a purely domestic context with exchange of information limited to tax fraud (not tax evasion), with bank secrecy being lifted only under these limited circumstances.

The national tax scene remains to be monitored to ascertain whether the international trend will in future also impact the Swiss national tax practice.

Finally, it is worth recalling that the Swiss financial centre does not define itself solely by bank secrecy, but by a high standard of quality of services and financial expertise. These are the cornerstones on which the past, the present and the future of Switzerland’s financial centre is built.

OECD model convention

Article 26; Exchange of Information

  1. The competent authorities of the Contracting States shall exchange such information as is foreseeably relevant for carrying out the provisions of this Convention or to the administration or enforcement of the domestic laws concerning taxes of every kind and description imposed on behalf of the Contracting States, or of their political subdivisions or local authorities, insofar as the taxation thereunder is not contrary to the Convention. The exchange of information is not restricted by Articles 1 and 2.
  2. Any information received under paragraph 1 by a Contracting State shall be treated as secret in the same manner as information obtained under the domestic laws of that State and shall be disclosed only to persons or authorities (including courts and administrative bodies) concerned with the assessment or collection of, the enforcement or prosecution in respect of, the determination of appeals in relation to the taxes referred to in paragraph 1, or the oversight of the above. Such persons or authorities shall use the information only for such purposes. They may disclose the information in public court proceedings or in judicial decisions.
  3. In no case shall the provisions of paragraphs 1 and 2 be construed so as to impose on a Contracting State the obligation:
    1. to carry out administrative measures at variance with the laws and administrative practice of that or of the other Contracting State;
    2. to supply information which is not obtainable under the laws or in the normal course of the administration of that or of the other Contracting State;
    3. to supply information which would disclose any trade, business, industrial, commercial or professional secret or trade process, or information the disclosure of which would be contrary to public policy (ordre public).
  4. If information is requested by a Contracting State in accordance with this Article, the other Contracting State shall use its information gathering measures to obtain the requested information, even though that other State may not need such information for its own tax purposes. The obligation contained in the preceding sentence is subject to the limitations of paragraph 3 but in no case shall such limitations be construed to permit a Contracting State to decline to supply information solely because it has no domestic interest in such information.
  5. In no case shall the provisions of paragraph 3 be construed to permit a Contracting State to decline to supply information solely because the information is held by a bank, other financial institution, nominee or person acting in an agency or a fiduciary capacity or because it relates to ownership interests in a person.
Author block
Dr Sibilla Cretti, Karin Rüfenacht

Dr Sibilla Cretti TEP is an Attorney at Law and Principal at Ernst & Young Ltd.
Karin Rüfenacht is a STEP Student and Senior Tax Consultant at Ernst & Young Ltd.

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