Switzerland: Court decision restricts application of U.S. tax treaty on basis of citizenship

Switzerland: Application of U.S. tax treaty

A court decision imposes greater restrictions with regard to whether an individual qualifies for benefits under the Switzerland-United States income tax treaty.



U.S. citizens are subject to U.S. tax because of their citizenship.

In 2011, 2012, and 2015, a U.S. citizen residing in the United Kingdom filed requests with the Swiss federal tax administration for a refund of Swiss withholding tax levied on dividends received from Swiss entities.

The Swiss tax administration granted the 2011 refund request, but scrutinized the subsequent ones and requested that the individual taxpayer prove qualification as a U.S. tax resident, per the Switzerland-United States income tax treaty. Specifically, Article 4(1) (a) of that treaty provides that a U.S. citizen (who is not a Swiss resident) is considered to be a U.S. resident "only if such person has a substantial presence, permanent home or habitual abode in the United States."

The taxpayer claimed to have a permanent home in the United States and asserted he had met one of the three—in his opinion, alternative—criteria above. The Swiss tax administration disagreed, rejected the 2012 and 2015 withholding tax claims for refund and demanded that the taxpayer repay the amount of the refunded withholding tax for 2011.

Lower court decision

The matter eventually ended up in front of the Federal Administrative Court, which confirmed the tax administration’s position that the treaty Article 4(1)(a) called for the three criteria to be applied as a tie-breaker rule if there were a conflict regarding the residence when a third country was involved. The court considered that the “permanent home” test was not satisfied and that the taxpayer was not a U.S. resident as per the tax treaty provision. In its decision, the court stated that lowering the bar for a U.S. person to be regarded as a U.S. resident for the purposes of applying the tax treaty could lead to taxpayers claiming withholding tax refunds on the basis of two different tax treaties and this could result in Switzerland having to pay out a double refund. The taxpayer appealed to the Swiss Supreme Court.

Swiss Supreme Court decision

The high court agreed the tax administration and the lower court as to the outcome of the case. Because the taxpayer did not argue that either of the other two criteria were met, the only question addressed by the high court was whether the taxpayer had a permanent home in the United States (which the high court found was not the case). However, in contrast to the findings of the lower court, the Supreme Court did not take any position as to the alternative or cumulative nature of the criteria provided for by Article 4(1)(a).

Read a February 2021 report prepared by the KPMG member firm in Switzerland

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