Key Provisions of the Swiss US Tax Treaty

The United States and the Swiss Confederation maintain a tax convention designed to mitigate the impact of double taxation on income for individuals and businesses with financial activities in both nations. This agreement establishes clear rules for taxing various types of income and provides a framework for exchanging information to prevent tax evasion. The treaty serves as a foundational agreement for U.S. citizens, residents, and Swiss residents engaged in cross-border work or investment, promoting economic cooperation by reducing tax-related barriers.

Determining Residency for Treaty Purposes

The U.S.-Switzerland tax treaty applies to individuals considered residents of one or both countries. When a person qualifies as a resident of both the U.S. and Switzerland under their domestic laws, a “dual resident” scenario occurs. The treaty provides a series of “tie-breaker” rules to assign residency to a single country for tax purposes.

The tie-breaker rules are applied in the following hierarchical order:

• If an individual has a permanent home available in only one country, they are a resident of that country. If a home is available in both, the next test is used.
• If the permanent home test is inconclusive, residency is assigned to the country where the individual’s personal and economic ties are closer.
• If the center of vital interests cannot be determined, residency is based on the country where the individual habitually abides, or spends more time.
• If residency is still not resolved, the individual is considered a resident of the country of which they are a citizen. If they are a citizen of both or neither, the competent authorities of both nations will settle the question by mutual agreement.

How the Treaty Affects Taxation of Specific Income

The treaty establishes specific rules for different categories of income, often reducing the tax that can be collected by the country where the income originates, known as the source country. The rules vary depending on the type of income, directly impacting how individuals report their earnings and what tax rates they face.

Dividends

For dividends paid by a company in one country to a resident of the other, the treaty limits the withholding tax that the source country can impose. The maximum withholding tax rate on dividends is 15%. This rate is reduced to 5% if the beneficial owner is a company that holds at least 10% of the voting stock of the company paying the dividend.

Interest

The treaty provides a broad exemption for interest income. Interest arising in one country and paid to a resident of the other is taxable only in the recipient’s country of residence. This means the source country cannot levy any tax on interest payments. However, this provision does not apply if the interest is attributable to a permanent business establishment the recipient has in the source country.

Pensions and Annuities

Pensions and other similar remuneration paid to a resident of one country in consideration of past employment are taxable only in that individual’s country of residence. This rule applies to private pensions and annuities, simplifying tax obligations during retirement for individuals who have worked in both countries.

Social Security Payments

Social Security payments are treated differently from private pensions. Payments made by one country under its social security legislation to a resident of the other are taxable only by the country making the payments. For example, a Social Security benefit paid by the U.S. government to a resident of Switzerland is taxable only by the United States.

The Savings Clause and Relief from Double Taxation

The U.S.-Switzerland tax treaty contains a “savings clause,” which preserves the right of the United States to tax its citizens and certain residents as if the treaty did not exist. Because the U.S. taxes its citizens on their worldwide income regardless of where they live, a U.S. citizen in Switzerland cannot use most treaty provisions to reduce their U.S. income tax.

While the savings clause appears to negate the treaty’s benefits for U.S. persons, the primary relief from double taxation comes from the foreign tax credit (FTC). A U.S. citizen or resident who pays income tax to Switzerland on Swiss-source income can claim a credit for those taxes on their U.S. federal income tax return. The FTC directly reduces the U.S. tax liability on the same income that was taxed by Switzerland, though the amount of the credit is subject to limitations designed to prevent it from offsetting U.S. tax on U.S.-source income.

Claiming Treaty Benefits

The required procedures to claim benefits under the U.S.-Switzerland tax treaty depend on whether the individual is a U.S. person seeking to disclose a treaty-based position or a foreign person claiming an exemption from U.S. tax at the source. These steps are necessary to ensure compliance with IRS regulations and to properly apply the treaty’s provisions.

U.S. citizens or residents taking a position that a treaty provision modifies U.S. tax law must file Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b). This form is attached to the income tax return and requires the taxpayer to cite the specific treaty article that justifies their claim for a benefit, such as a reduced tax rate.

Non-U.S. persons, such as a Swiss resident receiving income from U.S. sources, must provide Form W-8BEN to the U.S. payor. By certifying their foreign status and residency in a treaty country on this form, the owner can claim a reduced rate of or exemption from U.S. withholding tax at the time of payment.

Exchange of Information

The treaty includes provisions that facilitate the exchange of tax-related information between the tax authorities of the United States and Switzerland. This cooperation is intended to help both governments enforce their domestic tax laws and combat tax evasion. The agreement allows the IRS and the Swiss Federal Tax Administration to request and obtain information that is relevant to carrying out the provisions of the convention or the domestic tax laws of either country. This exchange of information is reinforced by agreements like the Foreign Account Tax Compliance Act (FATCA), which facilitates a more automatic exchange of information between the two nations.