30 January 2025 Switzerland and United States sign new Competent Authority Arrangement with implications for US 81-100 Group Trusts
In December 2024, Switzerland and the United States signed a new Competent Authority Arrangement (CAA) regarding certain US and Swiss pension and other retirement arrangements' eligibility for treaty benefits under the double tax treaty between the two countries. While the new CAA retains most of the wording contained in the previous CAA, a new section introduces the procedure for US 81-100 Group Trusts1 claiming treaty benefits from Switzerland. The new section details, in particular, the information that an 81-100 Group Trust should include regarding its participants when submitting its reclaim application. In 2004, the competent authorities of the United States and Switzerland entered into an agreement regarding the qualification of certain US and Swiss pension and retirement arrangements for benefits under article 10(3) of the double tax treaty between the two countries (US-CH DTT). In its 2004 form, article 10(3) of the US-CH DTT stated that dividends could not be taxed in the originating jurisdiction if the beneficial owner of the dividend income: (1) was resident in the other jurisdiction; (2) qualified as a pension or other retirement arrangement established, maintained and recognized for tax purposes in one contracting state, provided that the other contracting state had agreed that the arrangement generally corresponded to a pension or other retirement arrangement that it recognized for tax purposes; and (3) had beneficiaries, members or participants, more than half of whom were entitled to benefits under article 22 of the US-CH DTT (limitation on benefits clause). Subject to these conditions, the 2004 CAA considered the following types of US pension or retirement arrangements to be the beneficial owners of dividends paid to them by Swiss corporations (i.e., considered these arrangements to qualify for treaty benefits under article 10(3) of the US-CH DTT):
Under the 2004 CAA, individual retirement accounts (IRAs, under IRC Section 408) or Roth IRAs (under IRC Section 408A) did not qualify for benefits under article 10(3) US-CH DTT. The list of qualifying pension or other retirement arrangements was not meant to be exhaustive; any other type of US pension or other retirement arrangement could present its case to the Swiss competent authority for eligibility under article 10(3) US-CH DTT or seek a bilateral mutual agreement between the US and Swiss competent authorities. The 2004 CAA also explicitly stated that the status of any US arrangement claiming benefits under article 10(3) US-CH DTT was subject to verification by the Swiss tax authorities; the tax authorities were also entitled to request information under article 26 US-CH DTT (exchange of information clause), if they considered this to be necessary. Finally, the 2004 CAA contained explanations on the appropriate procedure for filing a reclaim request with the Swiss Federal Tax Administration (SFTA). It stated that the SFTA would grant benefits under article 10(3) US-CH DTT if the US pension or retirement arrangement provided (1) a Form 6166 for the taxable years in question and (2) a (completed) Swiss reclaim Form 82E with an attached statement that the US pension or retirement arrangement did not control the dividend-paying company and that it met all necessary requirements (as listed at the beginning of this section). The 2004 CAA was effective retroactively from 1 February 1998 and was applicable to dividends paid until 31 December 2019. The US-CH DTT was amended by a Protocol, signed in 2009, which, in part, amended article 10(3) of the US-CH DTT. The scope of the revised article 10(3) US-CH DTT was more expansive, in that benefits would be available not only to pension and other retirement arrangements, but also to individual retirement savings plans, provided that all other treaty requirements were met. In its revised form, article 10(3) US-CH DTT stated that dividends could not be taxed in the originating jurisdiction if the beneficial owner of the dividend income: (1) was resident in the other jurisdiction; (2) qualified as a pension or other retirement arrangement or an individual retirement savings plan set up in and owned by a resident of that jurisdiction; and (3) the competent authority of the other contracting state had agreed that the arrangement generally corresponded to a pension or other retirement arrangement or an individual retirement savings plan that it recognized for tax purposes. Article 10(3) US-CH DTT would not apply if the arrangement controlled the dividend-paying company. The 2021 CAA removed any explicit mention of article 22(2) US-CH DTT. Instead, the 2021 CAA stated only that the pension or other retirement arrangements and individual savings plans would need to satisfy "all additional applicable requirements set forth in the Treaty, including Article 22 (Limitation on Benefits)." The 2021 CAA notably removed US common trust funds (IRC Section 584) from its list of qualified US pension or other retirement arrangements while leaving the rest of the list unchanged (refer to the previous section of this Alert for details on qualified arrangements). Although 81-100 Group Trusts remained on the list of qualified US pension or other retirement arrangements, the wording of the relevant subparagraph was amended to include the following: "A group trust described in IRS Revenue Ruling 81-100 … , provided that it is operated exclusively or almost exclusively to earn income for the benefit of pension funds that are themselves entitled to benefits under the Treaty as a resident of the United States." A new section was introduced to the 2021 CAA pursuant to which the following US individual retirement savings plans qualified for benefits under article 10(3) of the US-CH DTT:
As with the 2004 CAA, the list of qualifying arrangements was not meant to be exhaustive; any type of arrangement not explicitly listed in the 2021 CAA could present its case for entitlement to benefits pursuant to article 10(3) US-CH DTT to the US and Swiss competent authorities under a mutual agreement procedure. Finally, the 2021 CAA removed all mention of the appropriate procedure for filing a reclaim request. The 2024 CAA retains most of the wording from the 2021 CAA. In a notable change, the preface to the list of qualified US pension or other retirement arrangements newly states "the following arrangements are U.S. pension or other retirement arrangements that should qualify for benefits under Article 10(3)," whereas the 2021 CAA (and the 2004 CAA) stated that such arrangements "will qualify" (emphasis added). The preface to the list of qualified US individual retirement savings plans contains the unchanged "will qualify" wording. This list was also amended slightly to include the following as a qualified US individual retirement savings plan: a trust that is an IRA under IRC Section 408(a) or an annuity or endowment contract that is an individual retirement annuity under IRC Section 408(b). The most notable change from the 2021 CAA to the 2024 CAA is the introduction of wording detailing the procedure for US 81-100 Group Trusts claiming treaty benefits from Switzerland. When claiming a refund of Swiss taxes withheld from the Swiss Federal Tax Administration under article 10(3) US-CH DTT, a US 81-100 Group Trust should include a list of its participating pension funds in its reclaim application package. This list should specify, for each participant:
The list will be used to confirm that at least 95% of the 81-100 Group Trust's participants, as residents of the US as of January 1 of the dividend payment year, were themselves entitled to benefits under the US-CH DTT. The procedural section explicitly states that information requested by the Swiss Federal Tax Administration in the course of reviewing a reclaim application "should be limited only to the information specified above" (emphasis added) relating to the 81-100 Group Trust's participants, "if such information has not been previously provided by the U.S. Group Trust." The 2024 CAA is applicable to dividends paid on or after 1 January 2020, thus amending the 2021 CAA ab initio and superseding it. With the 2024 CAA retaining most of the 2021 CAA's wording, the latest CAA should not have any major implications for Swiss withholding tax reclaims filed by pension or other retirement arrangements that are not 81-100 Group Trusts. The wording change in the preface of the list of qualified US pension or other retirement arrangements seems to indicate that the Swiss Federal Tax Administration will have some leeway in determining whether it will consider an arrangement on the list to be the beneficial owner of dividend income and thus treaty eligible in individual cases. As outlined above, the most notable change wrought by the 2024 CAA is the introduction of wording detailing the procedure for US 81-100 Group Trusts claiming treaty benefits from Switzerland. The new wording is in line with the outcome of earlier negotiations between the Investment Company Institute, the Swiss State Secretariat for International Finance and the Swiss Federal Tax Administration. Though the basic process for filing an application for refund of Swiss taxes withheld remains the same, the 2024 CAA provides some welcome clarity on additional information that 81-100 Group Trusts should provide to the Swiss Federal Tax Administration when filing their reclaim application packages. The additional information that may be requested as per the 2024 CAA, as well as the format in which it should be provided, are in line with market participants' experiences with previous and pending reclaim applications. The 2024 CAA's wording makes clear that the Swiss Federal Tax Administration cannot, in general, request US certificates of residence (IRS Form 6166) for the 81-100 Group Trust's participants (i.e., the Group Trust should only be required to file its own IRS Form 6166 for the tax years being reclaimed). Additionally, the wording indicates that the Swiss Federal Tax Administration should not request such information as a matter of course, but rather only if the information has not yet been provided. In practice, this will likely cover an 81-100 Group Trust's first-ever reclaim and cases in which the composition of underlying participants changes (entry/exit of plan participants). Finally, the wording also clarifies that an 81-100 Group Trust will be deemed to operate "exclusively or almost exclusively" to earn income for the benefit of US-resident pension funds if 95% or more of its participants qualify as US-resident pension funds under the US-CH DTT. By expressly stating that information requested by the Swiss Federal Tax Administration in the course of reviewing a reclaim application "should be limited only to the information specified above," relating to the 81-100 Group Trust's participants, the Swiss Federal Tax Administration seems to be reserving the right to request more or different information in individual cases, if there are grave and warranted doubts as to either the 81-100 Group Trust's qualification as such or the veracity of its participant information. With the 2024 CAA amending the 2021 CAA ab initio and superseding it, market participants with pending claims relating to dividend income paid on or after 1 January 2020 should be able to have this new practice, established by the 2024 CAA, applied to their claims. For market participants that have had their claims relating to dividend income paid on or after 1 January 2020 wholly or partially rejected, it could be worthwhile to examine whether a refiling of those claims under the new practice, as established by the 2024 CAA, makes sense and is possible in terms of the statute of limitations not yet having expired.
Document ID: 2025-0362 | ||||||||