Switzerland Agrees to Refund Tax Reclaims to Regulated Investment Companies

Washington, DC, July 12, 2001 - The Swiss Federal Tax Administration (FTA) has agreed to begin processing tax reclaims filed by regulated investment companies (RICs) under the US-Switzerland Income Tax Treaty, payment of which has been suspended since 1998.

In regards to investment companies, a "tax reclaim" represents a receivable owed to a regulated investment company (RIC) by the Swiss tax authorities in an amount equal to the difference between the 35 percent Swiss withholding tax rate on dividends and the lower withholding tax rate of 15 percent to which the RIC is entitled under the Treaty.

The agreement applies both to reclaims filed with respect to tax withheld during calendar years 1998 through 2001 and prospectively. If the FTA decides to modify the agreed procedures, any such change would apply only to tax withheld after the modification is announced.

Pursuant to the agreement, a RIC will be entitled to a full refund of all withheld amounts if more than 95 percent of its direct shareholders are citizens or residents of the United States. Most RICs are likely to satisfy this 95 percent threshold and, therefore, will receive full refunds of their Swiss tax reclaims.

If a RIC has 5 percent or more non-US direct shareholders, the RIC will be entitled to a proportionate refund. For example, if a RIC certified that 92 percent of its direct shareholders were US citizens or residents, the RIC would receive 92 percent of outstanding tax reclaims from Switzerland.

These ownership percentages would be determined as of March 31, 2001 for reclaims attributable to calendar years 1998 through 2001, and each March 31 for reclaims attributable to subsequent years (e.g., March 31, 2002 for reclaims attributable to calendar year 2002). While the Institute maintains its position that RICs are entitled to full refunds under the Treaty because they beneficially own the income, the FTA’s letter acknowledges that the Institute and the FTA have agreed to disagree on this point in the interest of resolving this issue.

The FTA has not completely clarified the precise procedures for filing RIC reclaims. It has indicated, however, that it will require a RIC to certify, to the best of its knowledge and belief, both

• the percentage of the RIC’s total shares held directly by investors (i.e., not through broker or other intermediary accounts) and
• the percentage of the RIC’s shares held by US persons, extrapolated from shares held directly in the RIC. Under the agreement, the FTA will respect this extrapolation, without regard to the percentage of a RIC’s total shares held directly by investors (e.g., whether a RIC has 1 percent or 99 percent of its shares held directly in the RIC).

Where a RIC had no direct shareholders, the RIC could apply for refunds, on a case-by-case basis, by providing other evidence to the FTA regarding the percentage of the RIC’s shares held by US persons. The FTA reserves the right to audit information provided by the RIC.