Swiss-US Tax Cases

Legitimate Group Request or IRS Fishing Expedition?

Federal Supreme Court – Case no. 2C_269/2013, 5 July 2013 Summary Facts On September 26, 2011, the Internal Revenue Service (IRS) filed a request for administrative assistance with the Swiss Federal Tax Administration (FTA). On April 5, 2012, the Federal Administrative Court granted an appeal that had been brought against the decision by the FTA, enjoining the FTA from transferring any information. The court held that the request primarily concerned people who were at most guilty of tax evasion – an offense for which the Swiss-US Tax Treaty does not foresee the granting of administrative assistance. As a result of this judgment, the FTA reconsidered decisions it had already issued in connection with the aforementioned request for administrative assistance. Among them was a decision concerning the individuals A.X., B.X., and C.X. as well as the legal entity Y. Ltd. On July 3, 2012, the IRS filed a new request for administrative assistance asking for information pertaining to certain U.S. taxpayers who held domiciliary companies that held certain accounts or securities accounts with Credit Suisse. The IRS requested the disclosure of information regarding US taxpayers who, at any point in the years 2002 to 2010, had a signatory right or power…

Swiss Data Protection vs. Disclosure of Information

Federal Supreme Court - Case no. 4A_83/2016, 22 September 2016 Summary Facts The Swiss Bank A. participated in the Program for Non-Prosecution Agreements or Non-Target Letters for Swiss Banks (the Program) that was agreed upon between Switzerland and the United States in 2013. The Program was designed to regulate disputes between Swiss banks and the US authorities regarding taxpayers evading US taxes by hiding behind and exploiting Swiss bank accounts. According to Article 2 (D)(2)(b)(5) of the Program Swiss banks were able to obtain a non-prosecution agreement with the US Department of Justice (DoJ) if they disclosed information including “the name and function of any relationship manager, client advisor, asset manager, financial advisor, trustee, fiduciary, nominee, attorney, accountant, or other individual or entity functioning in a similar capacity known by the bank to be affiliated with said account” pertaining to US-related accounts. A. planned to comply with the above rule in order to obtain a non-prosecution agreement by disclosing the identity of two Swiss lawyers as well as a Swiss law firm. Subsequently, B., C., and D. filed a suit before the Commercial Court of Zurich, arguing that the intended transfer of the information violated the provisions on banking secrecy,…

Swiss Taxation of US Stock Options

Tax Court Basle-Land - Case no. 104/2003, 10 October 2003 Summary Facts During the years 1992, 1993, and 1994, X. resided and was employed in the United States. As part of his compensation during those years, he received stock options. In 1995 X. moved to and took up residence in Switzerland. In the year 2000 X. exercised the stock options and was taxed on the resulting income in accordance with Circular No. 5 of the Federal Tax Authority of 30 April 1997 (Circular). Due to a recent change in assessment procedures (from a praenumerando to a postnumerando method), ordinary income accrued in the years 1999 and 2000 was not taxed. However, a special annual tax was levied on extraordinary income. The Cantonal Tax Authority deemed the income resulting from the exercise of the stock options to be extraordinary income and therefore levied a tax in 2000. Consequently, X. appealed this decision to Cantonal Tax Court. X. argued, that the income derived from the exercise of the stock options constituted ordinary income and therefore was not to be taxed. Alternatively, even if the income was deemed extraordinary, it should be deemed exempt from Swiss taxation as it was part of his…

Exchange of Information Preventing Tax Fraud

Federal Supreme Court – Case no. 2A.608/2005, 10 August 2006 Summary Facts A.Y. and B.Y. were US taxpayers and owned 13 commercial properties. In each tax year, the deducted the amount of $1.7 million from their taxable income as mortgage interest. The loans were in fact provided by the establishment X. despite A.Y. and B.Y. initially stating that the loans were provided by G., a loan servicing company. A.Y. and B.Y. stated orally that they maintained no further business relationships with X. but were not willing to confirm this in writing. X. had also granted mortgage loans to three trusts which each held real estate for their sons. Due to the mortgage interest and real property taxes, all trusts recorded financial losses. Consequently, the IRS suspected that X. was being controlled by A.Y. and B.Y. or another closely related party. The IRS requested that the Swiss Federal Tax Administration (FTA) collect and provide relevant information related to the ownership, the founders, the directors of X. and persons authorized to represent X. In case X. proved to not be a “valid business entity but rather a customer with a bank account” the IRS requested bank records, from, amongst others, the bank…

Actions Amounting to Tax Fraud

Federal Supreme Court – Case no. 2A.233_2003, 22 December 2003 Summary Facts X., the founder and president of Y. Inc. and Z. Inc. was suspected of not having fully disclosed all income in the years 1996-1999. The IRS requested the Swiss Federal Tax Administration (FTA) to collect and provide all relevant information related to X., Y. Inc., and Z. Inc. as X. was under the suspicion of having invested undeclared funds with the assistance of a Swiss asset management company (F. AG). F. AG produced documents to the FTA. Subsequently, the FTA complied with the request by forwarding the requested information to the IRS and issued a decision which the three taxpayers appealed to the Federal Supreme Court. Issues In this case, the Court’s focus was on whether the taxpayer’s actions amounted to “tax fraud and the like” as is required by Art. 26 (1) of the Swiss-US tax treaty to legitimize the exchange of information. The court also ruled on the issue of whether the disclosure of information to the IRS violated Swiss banking secrecy laws. Decision In determining the term “tax fraud or the like” the Court found that for the conduct in question to qualify, the taxpayer…

Legal Nature of LLCs for Tax Purposes

Federal Supreme Court – Case no. 2C_894/2013 and 2C_895/2013, 18 September 2015 Summary Facts A Swiss taxpayer held a 50% interest in a U.S. limited liability company (LLC), incorporated in Wyoming. The remainder of the shares were held by their business partner, a U.S. citizen. On 10 August 2007, they entered into an “Exclusive Option Agreement to Purchase Units and No-Shop Agreement”, in which the taxpayer, for the amount of $3 million, granted the partner the exclusive right to purchase the taxpayer’s share of the LLC. In exchange for granting the exclusive right, the parties agreed that the taxpayer was to receive $687,500. The option was to be exercised by 31 December 2007 but foresaw the possibility of a 1-year extension if payment of a further $687,500 was made. Despite the LLC transferring $682,500 and $694,845 in 2007 and 2008 to the taxpayer, the partner ended up not exercising their option. Subsequently, the tax administration of the Canton of Thurgau concluded that the payments constituted ancillary income from a self-employed activity and were, therefore, subject to individual income tax. The taxpayer disagreed, stating that the payments were to be treated as capital gains and were therefore tax-exempt. The decision of the…

Federal Supreme Court – Case 2A.416/2001

Federal Tax Administration - Information Exchange - March 12 2002 Summary   Case Tribunale federale Tribunal federal {T 0/2} 2A.416/2001/dxc Arrêt du 12 mars 2002 IIe Cour de droit public Les juges fédéraux Wurzburger, président de la Cour, Hungerbühler, Müller, Yersin, Merkli, greffier Dubey. X.________, Y.________, Z.________, recourants, tous les trois représentés par Me Douglas Hornung, avocat, c/o Etude Fontanet Jeandin & Hornung, 84, rue du Rhône, 1204 Genève, contre Administration fédérale des contributions, 3003 Berne. entraide administrative à l'Internal Revenue Service des Etats-Unis d'Amérique à Washington (recours de droit administratif contre la décision de l'Administration fédérale des contributions du 21 août 2001) Faits: A. Le 3 janvier 2001, l'Internal Revenue Service des Etats-Unis d'Amérique, à Washington (ci-après: Internal Revenue Service), a déposé une requête d'entraide administrative auprès de l'Administration fédérale des contributions (ci-après: Administration fédérale) en application de l'art. 26 de la Convention du 2 octobre 1996 entre la Confédération suisse et les Etats-Unis d'Amérique en vue d'éviter les doubles impositions en matière d'impôt sur le revenu (ci-après: CDI-USA 1996 ou convention de double imposition américano-suisse de 1996; RS 0.672.933.61, en vigueur depuis le 19 décembre 1997). Selon la requête, X.________ ainsi que ses fils Y.________ et Z.________, citoyens…

Our international tax law attorneys are ready to work for you.

Get a confidential case evaluation.