The Revised 1996 Convention Between the United States of America and Switzerland for the Avoidance of Double Taxation With Respect to Taxes on Income

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1 The Revised 1996 Convention Between the United States of America and Switzerland for the Avoidance of Double Taxation With Respect to Taxes on Income a Brief Survey Prepared for the Embassy of Switzerland in Washington, D.C. August 15, 1997 by Dr. Reto Arpagaus LL.M., Attorney-at-law P.O. Box 7689, Bahnhofstr. 106, 8023 Zurich, Switzerland R.Arpagaus@bep-zh.ch / Please note: The following is only a summary. Various exceptions may apply. Therefore, this survey is not a substitute for consulting the detailed provisions of the treaty and/or the advice of legal experts where appropriate. References Official text of the treaty in English, French or German (SR/RO ) Contents Protocol in English, French and German (integral part of the treaty) Memorandum of Understanding in English, French and German I. What is the purpose of the treaty? II. What are the most important changes compared with the 1951 treaty? III. Two basic terms of the treaty. B. Permanent establishment (Betriebsstätte) Fixed base (Feste Einrichtung) IV. Who is entitled to claim treaty benefits? V. What taxes are not covered by the treaty? VI. What are the basic rules for various sources of income under the treaty?. Income from personal services (individuals) 1. Self-employed professionals (Art. 14: G/F/E) 2. Employees (Art. 15: G/F/E, 19: G/F/E) B. C. D. E. F. G. Business profits (Art. 7: G/F/ E) Income from real property (Art. 6: G/F/ E) Income from dividends (Art. 10: G/F/E) Income from interest (Art. 11: G/F/E) Income from royalties (Art. 12: G/F/E) Income from gains (Art. 13: G/F/E) file:///h /LJC/html/tax agreement/tax_agreement_survey.html (1 of 15) [ :33:05]

2 H. I. J. 1. Sale of real property (Art. 13 (1) and (2)) 2. Sale of movable property (Art. 13 (3)) Income from Social Security benefits and other public pensions (Art. 19 (4): G/F /E) Income from pensions and annuities (Art. 18: G/F /E and 19: G/F/E) 1. Past private employment (Art. 18: G/ F/E) 2. Past public employment (Art. 19: G/ F/E) Income from alimony payments and child support (Art. 21: G/F /E) VII. How are contributions to pension plans treated?. Contributions to pension and retirement plans other than Social Security (FICA or AHV/IV/AVS) (Art. 28: G /F/E ) B. Contributions to Social Security (FICA or AHV/IV/AVS) VIII. How does one obtain relief from double taxation?. U.S. residents and citizens 1. Rule: tax credit for taxes paid to Switzerland 2. Interest 3. Dividends 4. Royalties 5. Social Security benefits 6. Pensions and annuities B. Swiss residents 1. Rule: Exemption of income subject to U.S. tax and dual credit method 2. Interest. Exemption from U.S. withholding Refundable Swiss withholding tax in case of payments to Swiss resident nominees 3. Dividends. Dividends entitled to reduction in U.S. withholding Dividends not entitled to any reduction in U.S. withholding 4. Royalties 5. Social Security benefits IX. What about estate taxation? On October 2, 1996, the United States and Switzerland signed a new Treaty for the Avoidance of Double Taxation With Respect to Taxes on Income (hereinafter the ``treaty"). The treaty replaces the previous convention of 1951 (hereinafter the ``1951 treaty") is entered into force in (Index) I. What is the purpose of the treaty? The purpose of the treaty is to avoid double taxation with respect to taxes on income. In broad terms, double taxation is the taxation by tax authorities in different countries file:///h /LJC/html/tax agreement/tax_agreement_survey.html (2 of 15) [ :33:05]

3 of the same sources of income for a certain time period. The treaty rules may or may not correspond to domestic Swiss or U.S. taxation laws. In case of a conflict, the treaty, as a rule, prevails and the taxpayer is entitled to be taxed according to the treaty. In the following, the country of a taxpayer's residence is hereinafter referred to as ``country A" and the country where income is paid out, the source country, is hereinafter referred to as ``country B". (Index) II. What are the most important changes compared with the 1951 treaty? The 5 % withholding tax on interest income is eliminated. The U.S. may now impose a 5% branch profit tax on U.S. branches of Swiss corporations. Certain cross-border contributions by a temporary resident of one country to certain pension plans in the other country are tax deductible under limited circumstances. Switzerland will no longer exempt U.S. source income attributable to U.S. citizens residing in Switzerland. U.S. citizens residing in Switzerland will be taxed by Switzerland on a worldwide income basis. The threshold for the reduced withholding tax rate of 5% on dividends paid to a corporate shareholder is lowered to 10% ownership of voting stock. (Index) III. Two basic terms of the treaty. Permanent establishment (Betriebsstätte) Under the treaty, ``permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on. It includes a place of management, a branch, an office, a factory, or a workshop. For a complete definition, see Art. 5: G/F /E of the treaty. B. Fixed base (Feste Einrichtung) The term ``fixed base" although often used in the treaty, is not defined in it. Generally, its meaning is understood to be comparable to the term ``permanent establishment," as defined in Art. 5: G /F/E. For instance, a fixed base would typically include a doctor's consulting room or the office of a lawyer or an accountant. (Index) IV. Who is entitled to claim treaty benefits? Generally, the treaty applies only to residents of the U.S., Switzerland or both countries (dual residents) as defined in Art. 4: G/F/E of the Treaty. Consequently, only those persons are entitled to claim treaty benefits. Under the treaty, any person (individual, partnership, company, estate, trust, and so forth) who, under the laws of a contracting state, is liable to tax therein by reason of his domicile, residence, nationality, place of management, place of incorporation, or any other criterion of a similar nature is considered to be a resident of that state. Art. 3 (1) and 4 (1) (a). However, not every person as defined in Art. 4 is entitled to claim treaty benefits. Art. 4 (5) and the detailed provisions of Art. 22: G/F/ E contain the limitations on benefits. Swiss citizens holding a ``green card" are subject to tax in the U.S. on their worldwide income regardless of their place of residence. Some exceptions apply. file:///h /LJC/html/tax agreement/tax_agreement_survey.html (3 of 15) [ :33:05]

4 (Index ) V. What taxes are not covered by the treaty? Taxes on capital (Usually double taxation issues will not arise since the U.S. does not impose taxes on capital to date) U.S. state and local taxes (but it does include Swiss cantonal and communal taxes) Social Security taxes (but it does include taxes on Social Security benefits) Estate taxation (This issue, however, is covered by the Treaty of July 9, 1951 between the United States and Switzerland for the avoidance of double taxation with respect to taxes on estates, see IX. below) Gift taxation (capital transfer taxation) (Index ) VI. What are the basic rules for various sources of income under the treaty? The general rule in interpreting the treaty is that the more specific provisions take precedence over the more general ones. Therefore the rules hereinafter described under letters A and B only apply if none of the more detailed rules as described under letters C to L applies. If items of income are not dealt with in one of the specific treaty provisions, the catchall provision of Art. 21: G/F/E will apply. Art. 21 provides that such items of income shall be taxable in the country of residence only. A. Income from personal services (individuals) 1. Self-employed professionals (Art. 14: G/ F/E) Income derived by a self-employed professional residing in country A for the performance of services in country B is taxable only in country A unless the individual has a fixed base in country B regularly available to him. In the latter case, the portion of the income attributable to the fixed base may be taxed by country B. Example: A self-employed Swiss resident who renders services in the U.S. is only taxed in Switzerland as long as he does not have a fixed base in the U.S. Unlike the 1951 treaty, the new treaty does not provide for a minimum amount of time that has to be spent in the other country before the individual becomes subject to taxation. If a resident of country A has a fixed base available in country B and performs professional services there, all of the net income derived from such activity will be subject to tax in country B. 2. Employees (Art. 15: G/F/E, 19: G/F/E) As a general rule, salaries, wages, and other similar remuneration derived by an employee residing in country A is taxable where the services are performed (country B), regardless of the place where the remuneration is paid. Example: A Swiss resident employee of a Swiss corporation temporarily assigned to its U.S. branch will, as a rule, be taxed in the U.S. (but see the exceptions below). An important exception to this rule applies, however. If the following three conjunctive requirements are met, the remuneration of an employee will be taxed only in the country of residence (country A): file:///h /LJC/html/tax agreement/tax_agreement_survey.html (4 of 15) [ :33:05]

5 (1) The employee is physically present in country B for a period or periods not exceeding a total of 183 days in any twelve-month period commencing or ending in the taxable year concerned (under the 1951 treaty, the 183 days were computed on a year-by-year basis) (2) The employer paying the remuneration is not a resident of country B (3) The remuneration is not absorbed, directly or indirectly, by a permanent establishment or a fixed base operated by the employer in country B Example: A Swiss resident employee of a Swiss corporation temporarily assigned to its U.S. branch will be taxed only in Switzerland if he spends less than 183 days in the U.S, if the employer is not a resident of the U.S., and if the U.S. branch does not reimburse the Swiss corporation by way of a deductible head office charge. For government officials, the special rules of Art. 19: G/F/E apply. Salaries, wages and other similar remuneration paid by the government of country A to an employee for services rendered in country B shall be taxed in country A only. The length of physical presence is not relevant. Some exceptions apply. Special provisions for directors' fees (Art. 16: G/F /E), artists and sportsmen (Art. 17: G/F/E), students (Art. 20: G/F/ E), apprentices (Art. 20: G/ F/E), and business trainees (Art. 20: G/F /E) apply. ( Index) B. Business profits (Art. 7: G/ F/ E) Under the treaty, the business profits of an enterprise with legal domicile in country A are, as a rule, taxable only in that country. However, if the enterprise conducts business in country B through a permanent establishment (e.g., place of management, branch, office, or factory), the profits attributable to that permanent establishment may be taxed in country B. The treaty contains detailed rules for the attribution of profits (and expenses) in such a case. C. Income from real property (Art. 6: G/F/E) As a general rule, income derived by a resident of country A from real property located in country B may be taxed in country B (situs country). Income from real property includes any income from the direct use, letting, or use in any other form. Under the treaty, a resident of country A who is subject to tax in country B may elect to compute the tax on such income on a net basis. Contrary to the 1951 treaty, such election can no longer be made for each taxable year, but is generally binding for the future. For the rules on taxation of capital gains derived from the sale of real property (or the shares of real property holding companies, see lit. G below. Income derived from indebtedness secured by real property is considered to be interest, see lit. E below. D. Income from dividends (Art. 10: G/F/E) Under the treaty, the term dividends" means income from shares or other equity rights, participating in profits, as well as income which is subject to the same taxation treatment as income from shares under the law of the country in which the income arises. As a rule, dividends derived and beneficially owned by a resident of country A may be taxed by country A. Dividends may, however, also be taxed in country B where such file:///h /LJC/html/tax agreement/tax_agreement_survey.html (5 of 15) [ :33:06]

6 dividends are paid out (``source country"). Under the treaty, such withholding tax rate is generally 15%. But, if the dividends are paid by a company to its corporate shareholder that holds at least 10 % of the voting stock, the tax rate is only 5% of the gross amount of the dividend. The minimum shareholding that is required for the application of the reduced tax rate is lowered in the revised treaty. However, in contrast to the 1951 treaty, only direct shareholding is relevant for determining the required ownership. In an attempt to treat branches the same way as subsidiaries, the U.S. imposes a tax on the ``dividend equivalent income" of the branch, the so called ``branch profit tax". Such dividend equivalent income is the amount of net after tax profits that could be distributed to the parent company had the branch been incorporated as a subsidiary. As a result, the dividend equivalent income realized by a U.S. branch of a Swiss corporation will be taxed at a rate of 5 % by the U.S. under the revised treaty. ( Index) E. Income from interest (Art. 11: G/ F/E) Under the treaty, the term ``interest" means income from debt claims of any kind, including income from government securities and income from bonds and debentures. Interest derived and beneficially owned by a resident of country A shall be taxable only in the country of residence (country A). Under the treaty, country B where such interest is paid out may not impose any withholding tax. This rule avoids double taxation by eliminating withholding taxation at the source country. However, income from interest will be taxed in country B if the payee maintains a permanent establishment or a fixed base in country B (source country) and the debt claim is attributable to such a permanent establishment or fixed base. Art. 11: G/ F(6) contains additional exceptions. F. Income from royalties (Art. 12: G/ F/E) The term ``royalties" means payments of any kind received as a consideration for the use of, or the right to use, any copyright, patent, trademark, design or model, plan, secret formula or process or other like right or property, or for information concerning industrial, commercial or scientific know-how. The term royalty includes gains from the sale of any such right or property which are contingent upon the productivity, use, or disposition thereof. Royalties derived and beneficially owned by a resident of country A are taxable in country A only unless the beneficial owner of the royalties carries on business in country B through a permanent establishment, or, renders independent personal services from a fixed base and the royalties are attributable to the permanent establishment or fixed base in country B. Like interest payments, royalties are generally exempt from withholding taxes imposed by country B. (Index) G. Income from gains (Art. 13: G/ F/E) Note: Special provisions apply for income derived from the sale of ships and aircraft as well as for income derived from the sale of property in the course of a reorganization, merger, or similar transaction. Art. 13 (4) and (6). 1. Sale of real property (Art. 13 (1) and (2)) Gains derived by a resident of country A from the sale of real property (including shares or an interest in a company, partnership, trust, etc., the file:///h /LJC/html/tax agreement/tax_agreement_survey.html (6 of 15) [ :33:06]

7 assets of which consist wholly or principally of real property) located in country B may be taxed in country B where the real property is located. Example: A U.S. resident selling real property in Switzerland will be taxed in Switzerland for the gains he may realize. 2. Sale of movable property (Art. 13 (3)) Gains derived by a resident of country A from the sale of movable property are taxable in country A only unless such gains are attributable to a permanent establishment or fixed base in country B. In the latter two cases, gains may be taxed in the country B in accordance with its law. Example: A U.S. resident selling shares of a Swiss company (not exclusively or principally holding real property in Switzerland) will only be taxed in the U.S. on the gain he or she may realize in connection with the sale of such shares unless the gains of the U.S. resident are attributable to a permanent establishment or a fixed base in Switzerland. (Index) H. Income from Social Security benefits and other public pensions (Art. 19 (4): G /F/E) Social security benefits and other public pensions paid by country B to an individual who is a resident of country A may be taxed in country A. However, such payments may also be taxed in country B but the withholding tax so charged shall not exceed 15% of the gross amount of the payment. I. Income from pensions and annuities (Art. 18: G/F /E and 19: G /F/E) 1. Past private employment (Art. 18: G/ F/E) As a rule, pensions, retirement benefits and any other similar remuneration awarded for past private employment derived by a resident of country A are taxable in country A only. Also, income from private annuities (Renten) derived by a resident of country A is taxable in country A only. 2. Past public employment (Art. 19: G/ F/E) Pension payments by country A to former government officials residing in country B shall be taxed by country A (source country) only. Some exceptions apply. Example: A U.S. resident receiving pensions and/or annuities from his or her former government employer in Switzerland will be taxed for that income only in Switzerland. Special rules for income received from government agencies engaged in a trade or business apply. J. Income from alimony payments and child support (Art. 21: G/ F/E) Since no specific treaty provisions address this issue, the catchall provision of Art. 21 applies. Therefore, such payments may, as a rule, only be taxed in the country of residence (country A). (Index) file:///h /LJC/html/tax agreement/tax_agreement_survey.html (7 of 15) [ :33:06]

8 VII. How are contributions to pension plans treated? As a rule, the question whether contributions to pension plans are tax deductible, is a question of domestic taxation legislation and is not covered by the treaty. However, as an exception, Art. 28: G/F /E of the treaty contains rules on the deductability of contributions to pension plans other than Social Security.. Contributions to pension and retirement plans other than Social Security (FICA or AHV/IV/AVS) (Art. 28: G /F/E ) Payments made to a pension or a retirement plan, other than Social Security, by an individual resident in country A as a self-employed individual or an employee performing services in country B are deductible from the income subject to tax in country B, provided that such pension or retirement plan has been recognized by country B and payments were also made prior to the performance of services in country B. However, the deductability of such payments is limited to a period of five years. After five years, the deductability will be determined by the applicable domestic law of country B. Example: Contributions of a Swiss resident working temporarily in the U.S. to a Swiss pension fund (Berufliche Vorsorge) are deductible from his or her U.S. income tax for a period of five years if the pension fund is recognized by the U.S. and if the taxpayer also made contributions to the pension fund prior to the performance of services in the U.S. B. Contributions to Social Security (FICA or AHV/IV/AVS) Contributions to Social Security are not covered by the treaty. The tax deductability of such contributions is determined by the domestic taxation legislation of the country where the tax has to be paid. Under Swiss law, contributions to Social Security are tax deductible. (Index) VIII. How does one obtain relief from double taxation? A. U.S. residents and citizens 1. Rule: tax credit for taxes paid to Switzerland When a U.S. resident or citizen derives income that, in accordance with the treaty, is taxed in Switzerland, the U.S. shall, as a rule, allow a U.S. resident or citizen the appropriate amount of tax paid to Switzerland as a credit against the U.S. income tax. If Switzerland levies income taxes that are not provided for by the treaty, or, at a higher rate than provided for by the treaty, then the U.S. resident is generally entitled to a refund. 2. Interest Under the treaty, interest payments by Swiss borrowers to U.S. residents may only be taxed by the U.S. As long as Switzerland continues to levy a 35% withholding tax (as it did under the 1951 treaty, Art. 13 (1) (a) WTA and Art. 1 of the Federal Ordinance of November 2, 1951), U.S. residents will be entitled to a tax refund. file:///h /LJC/html/tax agreement/tax_agreement_survey.html (8 of 15) [ :33:06]

9 Swiss Citizens residing in the U.S. who are neither citizens of the U.S. nor citizens of a third country can claim the refund by submitting Form 829 to the Federal Tax Administration in Berne, Switzerland. Other individual U.S. residents, U.S. corporations, and other U.S. entities may file Form 82 duly completed and signed before a U.S. notary public with the FTA. (Index) 3. Dividends Under the treaty, Switzerland may impose a withholding tax of 15% or 5% on dividend payments by a Swiss corporation to a U.S. resident. As a relief, the U.S. shall, as a rule, allow the appropriate amount of Swiss withholding tax as a credit against the U.S. income tax. As long as Switzerland imposes a 35% withholding tax on dividends (as it did under the 1951 treaty, Art. 13 (1) (a) of the Federal Act on Withholding Tax of October 13, 1965 (``WTA"), as amended, and Art. 1 of the Federal Ordinance of November 2, 1951), the U.S. resident is entitled to a refund by Switzerland of the difference between the tax credit allowed by the U.S. and the 35% withholding tax levied by Switzerland. Swiss citizens residing in the U.S. who are neither citizens of the U.S. nor citizens of a third country are entitled to claim against their U.S. income tax liability a tax credit for the Swiss withholding tax of 35%. If the amount of the Swiss withholding tax is not fully allowable in the U.S. as a tax credit, the taxpayer can claim a refund for the difference by submitting Form 829 to the Federal Tax Administration in Berne, Switzerland. Individual U.S. residents other than Swiss citizens who are not also U.S. citizens, U.S. corporations, and other U.S. entities may file Form 82 duly completed and signed before a U.S. notary public with the FTA. 4. Royalties Under the treaty, royalty payments may only be taxed by the residence country. There is no Swiss withholding tax on Swiss source royalties paid to U.S. residents. Therefore, no double taxation issue will arise. (Index) 5. Social Security benefits Under the treaty, Switzerland would be entitled to levy a 15% withholding tax on Social Security benefits (AHV/IV- Leistungen). However, as of today, Switzerland does not levy any withholding tax on Social Security benefits paid to U.S. residents. Art. 8 (1) (c) WTA. Therefore, no double taxation issue will arise. 6. Pensions and annuities Under the treaty, pensions and annuities awarded for past private employment may only be taxed in the country of residence. As long as Switzerland continues to levy a 1% withholding tax for certain pension payments (Art. 96 of the Federal Act on Federal Income Tax of December 14, 1990 (``FITA"), as amended), U.S. residents are entitled to a refund. The Forms may be obtained by the pension funds. Pensions and annuities for past public employment may only be taxed in the source country. Switzerland levies a 1% withholding tax for these payments (Art. 95 FITA). If the U.S. also taxes such payments, the U.S. resident is entitled to a tax credit or other relief. (Index) file:///h /LJC/html/tax agreement/tax_agreement_survey.html (9 of 15) [ :33:06]

10 B.Swiss residents 1. Rule: Exemption of income subject to U.S. tax and dual credit method If a Swiss resident derives income that, in accordance with the treaty, ``shall be taxable only" or ``may be taxed" in the U.S., Switzerland shall, as a rule, exempt under Art. 23 (2) (a) of the treaty such income from tax. In computing the tax, however, Switzerland may apply the tax rate that would have been applicable if the exempted income had not been so exempted (Progressionsvorbehalt). If a Swiss resident is a U.S. citizen, the so called dual credit method" applies under Art. 23 (3) of the treaty. This dual credit method will replace the exemption method under the 1951 treaty when all items of income derived from the U.S. (U.S. source income) were excluded from taxation in Switzerland. Under the new dual credit method, Switzerland will first grant an exemption or a credit for the tax that the U.S. would have levied if the U.S. source income had been earned by a Swiss resident who is not a U.S. citizen. For the purpose of computing U.S. tax, the U.S. will then allow a credit for the Swiss income tax calculated in the first step. (Index ) 2. Interest. Exemption from U.S. withholding The treaty exempts interest payments by U.S. borrowers to Swiss residents from the 30% U.S. withholding tax. Some exceptions apply for the prevention of treaty abuse. Art. 11(6): G/F/E. Refundable Swiss withholding tax in case of payments to Swiss resident nominees Under Art. 14 (2) of the Federal Ordinance governing the 1951 treaty, interest payments by U.S. borrowers to Swiss resident nominees (e.g. banks, fiduciary agents, etc. who receive such payments on behalf of their undisclosed resident or nonresident customer) were, in addition to the 5% U.S. withholding allowed under the 1951 treaty, subject to an additional, however refundable, Swiss withholding tax of 25% (zusätzlicher Steuerrückbehalt). This additional but refundable withholding tax will continue to apply under the treaty. Therefore, some Swiss residents will still have to apply for a refund of 25% with the federal tax administration in Berne. (Index) 3. Dividends. Dividends entitled to reduction in U.S. withholding Where a Swiss resident derives income from dividends that is subject to the reduced 5% or 15% U.S. withholding tax rate under Art. 10 (2): G/ F/E, the treaty provides for three options to grant relief: a deduction, a reduction or a partial exemption. Switzerland has to determine the appropriate relief and regulate the procedure. Under Art. 14 (1) of the Federal Ordinance governing the 1951 treaty, The additional (but refundable) Swiss withholding tax (zusätzlicher Steuerrückbehalt) applies with a rate of 15% of the gross amount of the file:///h /LJC/html/tax agreement/tax_agreement_survey.html (10 of 15) [ :33:06]

11 dividend paid to Swiss resident nominees. Dividends not entitled to any reduction in U.S. withholding Where a Swiss resident derives income from dividends that is subject to the unreduced 30% U.S. withholding tax, Switzerland will allow a tax deduction in the amount of the tax levied in the U.S. from the gross amount of such income. Switzerland will therefore tax such dividend income only on the net after U.S. withholding tax amount. (Index) 4. Royalties In general, the U.S. levies a 30% withholding tax on U.S. source royalties paid to foreign persons. Since the treaty provides for the taxation of royalties in the country of residency only, no U.S. withholding tax is allowed with respect to payments to Swiss residents and no double taxation issue will arise. 5. Social Security benefits Social Security benefits and other public pensions paid by the United States to a Swiss resident are subject to a mixed system of relief provided for by Art. 23 (2) (d): G/F/E. These payments may, under Art. 19 (4): G/F/E, be subject to a U.S. withholding tax not exceeding 15% of the gross amount of the payment. The relief to Swiss residents is granted in three steps, (a) by a limitation of the U.S. withholding tax rate on 15 % (currently 25.5%), (b) by a 15 % deduction from the taxable income in Switzerland, and (3) by a tax exemption of one third of the net, after tax, amount received from U.S. sources. Art. 19 (4): G/F/ E and Art. 23 (2) (d): G/F/E. (Index) IX. What about estate taxation? Estate taxation is not covered by the 1996 Revised Convention Between the United States of America and Switzerland for the Avoidance of Double Taxation With Respect to Taxes on Income. There is, however, a specific treaty of 1951 between the United States and Switzerland for the avoidance of double taxation with respect to taxes on estates (hereinafter estate taxation treaty"). The estate taxation treaty covers U.S. federal taxes on estates and Swiss taxes on estates levied by the cantons and their political subdivisions. As a general rule, the estate taxation treaty provides that both the U.S. and Switzerland shall allow a partial tax exemption or a deduction on their own tax (usually in the form of a tax credit) to the extent of the tax paid to the other country with respect to certain assets of the estate. Requests for a tax credit or reimbursement must be filed within five years computed from the date of death of the deceased.. (Index) file:///h /LJC/html/tax agreement/tax_agreement_survey.html (11 of 15) [ :33:06]

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16 Bilateral Agreement with the US Index: (Not part of the Agreement. G = German, F = French) Article 1: Personal Scope (on that page) Article 2: Taxes Covered Article 3: General Definitions Article 4: Resident (s. Survey) Article 5: Permanent Establishment (s. Survey) Article 6: Income from Real Property (s. Survey) Article 7: Business Profits (s. Survey) Article 8: Shipping and Air Transport Article 9: Associated Enterprises Article 10: Dividends (on Page 2 of 3) (s. Survey) Article 11: Interest (s. Survey) Article 12: Royalties (s. Survey) Article 13: Gains (s. Survey) Article 14: Independent Personal Services (s. Survey) Article 15: Dependent Personal Services (s. Survey) Article 16: Directors' Fees Article 17: Artistes and Sportsmen Article 18: Pensions and Annuities (s. Survey) Article 19: Government Service and Social Security (s. Survey) Article 20: Students and Trainees (on Page 3 of 3) Article 21: Other Income (s. Survey) Article 22: Limitation on Benefits Article 23: Relief from Double Taxation Article 24: Non-discriminatio n Article 25: Mutual Agreement Procedure Article 26: Exchange of Information Article 27: Members of Diplomatic Missions and Consular Posts Article 28: Miscellaneous (s. Survey) Article 29: Entry into force Article 30: Termination Protocol Memoradum of Understanding Brief Survey file:///h /LJC/html/tax agreement/dta_e_art1-9.html (1 of 8) [ :33:21]

17 Convention Between The Swiss Confederation and The United States of America For the Avoidance of Double Taxation With Respect to Taxes on Income (Articles 1-9) The Swiss Confederation and The United States of America, DESIRING to conclude a Convention for the avoidance of double taxation with respect to taxes on income, have agreed as follows: Article 1: Personal Scope (G/F) 1. Except as otherwise provided in this Convention, this Convention shall apply to persons who are residents of one or both of the Contracting States. 2. Notwithstanding any provision of this Convention except paragraph 3 of this Article, the United States may tax a person who is treated as a resident under its taxation laws (except where such person is determined to be a resident of Switzerland under the provisions of paragraphs 3 or 4 of Article 4 (Resident)) and its citizens (including its former citizens) as if this Convention had not come into effect. 3. The provisions of paragraph 2 shall not affect:. the benefits conferred by the United States under paragraph 2 of Article 9 (Associated Enterprises), paragraphs 6 and 7 of Article 13 (Gains), Articles 23 (Relief from Double Taxation), 24 (Non-Discrimination), and 25 (Mutual Agreement Procedure); and the benefits conferred by the United States under paragraphs 1 and 2 of Article 19 (Government Service and Social Security), and under Articles 20 (Students and Trainees) and 27 (Members of Diplomatic Missions and Consular Posts) and paragraph 4 of Article 28 (Miscellaneous), upon individuals who are neither citizens of, nor have immigrant status in, the United States. (Index) Article 2: Taxes Covered (G/F ) 1. This Convention shall apply to taxes on income imposed on behalf of a Contracting State. 2. The existing taxes to which the Convention shall apply are:. in Switzerland: the federal, cantonal and communal taxes on income (total income, earned income, income from property, business profits, etc.); in the United States: the Federal income taxes imposed by the Internal Revenue Code and the excise taxes imposed on insurance premiums paid to foreign file:///h /LJC/html/tax agreement/dta_e_art1-9.html (2 of 8) [ :33:21]

18 insurers and with respect to private foundations. The Convention shall, however, apply to the excise taxes imposed on insurance premiums paid to foreign insurers only to the extent that the risks covered by such premiums are not reinsured with a person not entitled to the benefits of this or any other Convention which provides exemption from these taxes. 3. The Convention shall apply also to any identical or substantially similar taxes which are imposed after the date of signature of the Convention in addition to, or in place of, the existing taxes. The competent authorities of the Contracting States shall notify each other of any significant changes which have been made in their respective taxation laws. (Index) Article 3: General Definitions (G/F) 1. For the purposes of this Convention, unless the context otherwise requires:. the term "person" includes an individual, a partnership, a company, an estate, a trust and any other body of persons; c. d. the term "company" means any body corporate or any entity which is treated as a body corporate for tax purposes under the laws of the Contracting State in which it is organized; the terms "enterprise of a Contracting State" and "enterprise of the other Contracting State" mean respectively an enterprise carried on by a resident of a Contracting State and an enterprise carried on by a resident of the other Contracting State; the term "nationals" means: i. ii. all individuals possessing the nationality (i.e., citizenship, in the case of the United States) of a Contracting State; and all legal persons, partnerships and associations deriving their status as such from the laws in force in a Contracting State; e. f. the term "international traffic" means any transport by a ship or aircraft, except when such transport is solely between places in the other Contracting State; the term "competent authority" means: i. ii. in Switzerland: the Director of the Federal Tax Administration or his authorized representative; and in the United States: the Secretary of the Treasury or his delegate; g. h. the term "Switzerland" means the Swiss Confederation; the term "United States" means the United States of America, but does not include Puerto Rico, the Virgin Islands, Guam, or any other United States possession or territory. 2. As regards the application of the Convention by a Contracting State any term not defined therein shall, unless the context otherwise requires or the competent file:///h /LJC/html/tax agreement/dta_e_art1-9.html (3 of 8) [ :33:21]

19 authorities agree to a common meaning according to the provisions of Article 25 (Mutual Agreement Procedure), have the meaning which it has under the laws of that State concerning the taxes to which the Convention applies. (Index) Article 4: Resident (G/F) 1. For the purposes of this Convention, the term "resident of a Contracting State" means:. any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, nationality, place of management, place of incorporation, or any other criterion of a similar nature, except that a United States citizen or alien lawfully admitted for permanent residence (a "green card" holder) who is not a resident of Switzerland by virtue of this paragraph or paragraph 5 shall be considered to be a resident of the United States only if such person has a substantial presence, permanent home or habitual abode in the United States; if, however, such person is also a resident of Switzerland under this paragraph, such person also will be treated as a United States resident under this paragraph and such person's status shall be determined under paragraph 3; the Government of that State or a political subdivision or local authority thereof or any agency or instrumentality of any such Government, subdivision or authority; c. i. ii. a pension trust and any other organization established in that State and maintained exclusively to administer or provide pensions, retirement or employee benefits, that is established or sponsored by a person resident in that State under this Article; and a not-for-profit organization established and maintained in that State for religious, charitable, educational, scientific, cultural or other public purposes; that by reason of its nature as such is generally exempt from income taxation in that State; or d. a partnership, estate, or trust, but only to the extent that the income derived by such partnership, estate, or trust is subject to tax in that State in the same manner as the income of a resident of that State, either in its hands or in the hands of its partners or beneficiaries. 2. Notwithstanding paragraph 1, the term "resident of a Contracting State" does not include any person who is liable to tax in that State in respect only of income from sources in that State. 3. Where by reason of the provisions of paragraph 1 an individual is a resident of both Contracting States, then his status shall be determined as follows:. he shall be deemed to be a resident of the State in which he has a permanent home available to him; if he has a permanent home available to him in both States, he shall be deemed to be a resident of the State with which his personal and economic relations are closer (center of vital interests); if the State in which he has his center of vital interests cannot be determined, or if he has no permanent home available to him in either State, he shall be deemed to be a resident of the State in which he has an habitual abode; file:///h /LJC/html/tax agreement/dta_e_art1-9.html (4 of 8) [ :33:21]

20 c. d. if he has an habitual abode in both States or in neither of them, he shall be deemed to be a resident of the State of which he is a national; if he is a national of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement. 4. Where by reason of the provisions of paragraph 1 a person other than an individual is a resident of both Contracting States, such person shall be treated as a resident only if and to the extent that the competent authorities of the Contracting States so agree pursuant to Article 25 (Mutual Agreement Procedure), including paragraph 6 thereof. 5. An individual who would be a resident of Switzerland by reason of the provisions of paragraphs 1 and 3, but who elects not to be subject to the generally imposed income taxes in Switzerland with respect to all income from sources in the United States, shall not be considered a resident of Switzerland for the purposes of this Convention. (Index) Article 5: Permanent Establishment (G/F) 1. For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 2. The term "permanent establishment" shall include especially:. a place of management; c. d. e. f. a branch; an office; a factory; a workshop; and a mine, an oil or gas well, a quarry or any other place of extraction of natural resources. 3. A building site or construction or installation project, or an installation or drilling rig or ship used for the exploration or development of natural resources, constitutes a permanent establishment only if it lasts more than twelve months. 4. Notwithstanding the preceding provisions of this Article, the term "permanent establishment" shall be deemed not to include:. the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise; c. d. the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery; the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise; the maintenance of a fixed place of business solely for the purpose of file:///h /LJC/html/tax agreement/dta_e_art1-9.html (5 of 8) [ :33:21]

21 purchasing goods or merchandise or of collecting information for the enterprise; e. f. the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, advertising, the supply of information, scientific research, or other activities which have a preparatory or auxiliary character; the maintenance of a fixed place of business solely for any combination of the activities mentioned in subparagraphs a) to e) of this paragraph, provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character. 5. Notwithstanding the provisions of paragraphs 1 and 2, where a person - other than an agent of an independent status to whom paragraph 6 applies - is acting on behalf of an enterprise and has, and habitually exercises, in a Contracting State an authority to conclude contracts in the name of the enterprise, that enterprise shall be deemed to have a permanent establishment in that State in respect of any activities which that person undertakes for the enterprise, unless the activities of such person are limited to those mentioned in paragraph 4 which, if exercised through a fixed place of business, would not make this fixed place of business a permanent establishment under the provisions of that paragraph. 6. An enterprise shall not be deemed to have a permanent establishment in a Contracting State merely because it carries on business in that State through a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business. 7. The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other State (whether through a permanent establishment or otherwise), shall not of itself constitute either company a permanent establishment of the other. (Index) Article 6: Income from Real Property (G/F) 1. Income derived by a resident of a Contracting State from real property (including income from agriculture or forestry) situated in the other Contracting State may be taxed in that other State. 2. The tem "real property" shall have the meaning which it has under the law of the Contracting State in which the property in question is situated. The term shall in any case include property accessory to real property, livestock and equipment used in agriculture and forestry, rights to which the provisions of general law respecting landed property apply, usufruct of real property and rights to variable or fixed payments as consideration for the working of, or the right to work, mineral deposits, sources and other natural resources; ships and aircraft shall not be regarded as real property. 3. The provisions of paragraph 1 shall apply to income derived from the direct use, letting, or use in any other form of real property. 4. The provisions of paragraphs 1 and 3 shall also apply to the income from real property of an enterprise and to income from real property used for the performance of independent personal services. 5. A resident of a Contracting State who is subject to tax in the other Contracting State on income from real property situated in the other Contracting State may, subject to the procedures of the domestic law of the other Contracting State, elect to compute the tax on such income on a net basis as if such income were attributable to file:///h /LJC/html/tax agreement/dta_e_art1-9.html (6 of 8) [ :33:21]

22 a permanent establishment or a fixed base in such other State. Any such election shall be binding for taxable years as provided by the domestic law of the Contracting State in which the property is situated. (Index ) Article 7: Business Profits (G/F) 1. The business profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment. 2. Subject to the provisions of paragraph 3, where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the business profits which it might be expected to make if it were a distinct and independent enterprise engaged in the same or similar activities under the same or similar conditions and which shall include only those profits derived from the assets or activities of the permanent establishment. 3. In determining the business profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the permanent establishment, including a reasonable allocation of executive and general administrative expenses, research and development expenses, interest, and other expenses incurred for the purposes of the enterprise as a whole (or the part thereof which includes the permanent establishment), whether incurred in the State in which the permanent establishment is situated or elsewhere. 4. Insofar as it has been customary in a Contracting State to determine the business profits to be attributed to a permanent establishment on the basis of an apportionment of the total profits of the enterprise to its various parts, nothing in paragraph 2 shall preclude that Contracting State from determining the profits to be taxed by such an apportionment as may be customary; the method of apportionment adopted shall, however, be such that the result shall be in accordance with the principles contained in the other paragraphs of this Article. 5. No business profits shall be attributed to a permanent establishment by reason of the mere purchase by that permanent establishment of goods or merchandise for the enterprise. 6. For the purposes of the preceding paragraphs, the business profits to be attributed to the permanent establishment shall be determined by the same method year by year unless there is good and sufficient reason to the contrary. 7. Where business profits include items of income which are dealt with separately in other Articles of the Convention, then the provisions of those Articles shall not be affected by the provisions of this Article. 8. For the purposes of this Convention the term "business profits" includes income derived from the rental of tangible movable property and the rental or licensing of cinematographic films or works on film, tape, or other means of reproduction for use in radio or television broadcasting. ( Index) Article 8: Shipping and Air Transport (G/F ) 1. Profits of an enterprise of a Contracting State from the operation in international traffic of ships or aircraft shall be taxable only in that State. file:///h /LJC/html/tax agreement/dta_e_art1-9.html (7 of 8) [ :33:21]

23 2. For the purposes of this Article, profits from the operation of ships or aircraft in international traffic include profits derived from the rental of ships or aircraft if such rental profits are incidental to other profits described in paragraph The provisions of paragraph 1 shall also apply to profits from the participation in a pool, a joint business or an international operating agency. (Index) Article 9: Associated Enterprises (G/F) 1. Where. an enterprise of a Contracting State participates directly or indirectly in the management, control or capital of an enterprise of the other Contracting State, or the same persons participate directly or indirectly in the management, control or capital of an enterprise of a Contracting State and an enterprise of the other Contracting State, and in either case conditions are made or imposed between the two enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly. 2.. Where a Contracting State proposes to include in the profits of an enterprise of that State, and to tax accordingly, profits on which an enterprise of the other Contracting State has been charged to tax in that other State, the competent authorities of the Contracting States may consult pursuant to Article 25 (Mutual Agreement Procedure). If pursuant to Article 25 the Contracting States agree on adjustments to the profits of each such enterprise that reflect the conditions which would have been made between independent enterprises, then each State shall make the agreed adjustment to the amounts charged on the profits of each such enterprise. (Index) file:///h /LJC/html/tax agreement/dta_e_art1-9.html (8 of 8) [ :33:21]