On 23 January 2019, the Swiss Federal Tax Administration (FTA) published revised CRS guidance notes. The update mainly incorporates previously released guidance and disappointingly only contains limited material amendments. In addition, several examples (e.g. on the identification of controlling persons) and explanations (e.g. on the wider approach) were removed, without changing the underlying rules and thus having a limited impact. Finally, a number of linguistic errors and references were corrected, one of which also resulted in a re-release on 28 January 2019. Read on for a summary of the most important changes for Swiss financial institutions (FIs).
Integration of previously released guidance
The previous version of the Swiss CRS guidance notes dated back to 2017. This revision integrates some of the additional guidance and amended legislation published since.
Most notably, the 2019 CRS guidance notes now reflect the abolition of the “white list” approach as of 1 January 2019. Interestingly though, the effect this has on the due diligence requirements for accounts held by professionally managed investment entities in jurisdictions that ceased to be participating is not addressed in this document although it is included in the explanatory memorandum to the amended CRS Ordinance. For further information on this topic, please refer to our previous blog post here.
In addition, the guidance regarding the exchange rates for the conversion of thresholds and other USD values mentioned in the CRS or applicable exchange agreements, previously published on the website of the Swiss FTA, has been incorporated. The applicable CHF-USD conversion rate for 2019 is still 1:1. If relevant, an updated conversion rate will be communicated in October 2019.
Finally, the 2019 guidance notes integrate some of the FAQs from the CRS Qualification Committee, specifically with regard to:
- Reporting of payments in relation to futures contracts; stipulating that entering into a short future contract is the sole reportable event for such products, even though this approach is neither practical (as there is no cash flow at this point in time) nor does it reflect the economic reality (as these contracts are usually cash settled or offset)
- Treatment of precious metal investments; clarifying when holding such investments constitutes a financial account
- Client notification requirement; reinforcing that this is a one-off requirement, while not otherwise limiting the information right of reportable persons under the Swiss Data Protection Act
- Registration requirements for Trustee-documented Trusts (TDTs); clarifying that they must indicate “=TDT” before their name but do not need request and provide an entity identification number (UID), if they have not obtained one in the past
- Investments in real estate; confirming that direct holdings in real estate are non-financial assets (even if debt financed)
- The “nonfinancial group” requirement for holding NFEs and treasury centers; removing the requirement to consider parent and sister companies for the holding NFE status determination (i.e. only subsidiaries are relevant) and thereby aligning the requirements with the OECD interpretation, while inexplicably keeping the stricter standard for treasury centers.
New interpretative “guidance”
In addition to incorporating previous guidance, the 2019 CRS guidance notes include a few additional tax technical amendments. The key updates concern:
- Reportable payments for FI trusts: Deletion of a sentence indicating that distributions in kind are not reportable payments. In our view, this probably means that distributions in kind should be reported, which, although not confirmed, would be in line with the OECD view on this topic. This amendment concerns distributions in the form of art objects, real estate and the like, and may have a profound impact on FI trusts not having already implemented the rules in such a way.
- TDT status for foundations: Deletion of the provision explicitly allowing entities similar to trusts, such as foundations, to also use the TDT concept. This leaves the industry with uncertainty as to whether this means that the TDT concept is no longer available for such entities. If this were the case, Switzerland would enforce a stricter approach than the OECD CRS Commentary, which explicitly allows entities similar to trusts to apply the TDT concept. Thus, the motive for this is unclear to us.
- Financial asset definition: Removal of a sentence that indicated that shares in entities that solely hold non-financial assets (e.g. real estate, art objects and the like) are also non-financial assets. We interpret the deletion to be an admission that the previous guidance was not in line with relevant OECD guidance on this topic. This may have significant impact on entities that relied on this exclusion as the participations they hold should now be considered financial assets and their CRS classification may change from a non-financial entity to FI status.
- Protectors of FI trusts: Protectors were added as an example of persons that could be considered to exercise ultimate effective control over an FI trust and thus being account holders. Unfortunately, it was not clarified whether this should be interpreted to mean that protectors are always considered account holders of FI trusts, as suggested in the OECD FAQs, or only if the protector has specific rights with respect to the trust (e.g. the right to replace the trustee).
It is helpful that the various pieces of guidance have been centralised to some extent. However, it is unclear why certain FAQs from the CRS Qualification Committee were not included, specifically the ones on “interpretative questions”, which are still available on the respective website. With regard to the omission of the FAQ regarding the account aggregation rules for the preexisting account due diligence, we think the Swiss FTA hastily concluded that all Swiss FIs have completed the preexisting account due diligence by 31 December 2018, which is not necessarily true if they applied a staggered approach.
Summarising, the Swiss FTA missed a great opportunity to use the 2019 update to create one single, comprehensive guidance document for Swiss FIs. Instead, guidance remains spread over various documents and websites, important questions remain open for interpretation and other existing flaws have not (yet) been rectified. As such, it can be expected that further updates become necessary, sooner or later.
Contributor: Giulia Hobi, Financial Services Tax
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