The aim of this newsletter is to provide our clients and other interested persons with guidelines to assist them when confronted with the request(s) which will be submitted to them by the Swiss financial institution(s) with whom they hold their account(s) and who invest on their behalf in US securities in particular.

According to new US tax rules which will come into effect on January 1, 2001, financial intermediaries will have to ascertain which of their customers holding US securities are "US Persons" and which are so-called "Non Resident Aliens" ("Non-US Persons").

Under the current situation, a 30% US withholding tax is levied by the withholding agent in the USA on all dividends and interest of US securities and paid outside of the USA. Pursuant to certain double tax treaties, such as the double tax treaty dated October 2, 1996 in force between the USA and Switzerland (hereafter the "USA-CH Treaty"), the rate of the US withholding tax is reduced. Furthermore, US tax law exempts interest paid on obligations issued by a US person after July 18, 1984 ("portfolio interest exemption").

Under the current US regulations expiring December 31, 2000, the US withholding agent who makes a payment to a foreign financial institution on behalf of beneficial owners or other

intermediaries may apply a reduced withholding rate without having to obtain information on the customers or correspondents of the Swiss financial institution. This mechanism, known as the "address system", will be abandoned under the new regime as of January 1, 2001.

In the IRS view, the current regime has proven inefficient to track down US tax evaders and has led to abuse of the double taxation treaties by non-eligible persons. It is the IRS declared objective to prevent these abuses in the future.

2. The new US withholding tax regime 2001

As was the case in the past, under the new regime a US withholding tax of 30 % will be withheld on payments received as interest, dividends, royalties etc., arising from US source income. Under the new tax regime, however, the US withholding agent can only apply a reduced rate of withholding (i.e. the "treaty rate" or the "portfolio interest exemption") if written documentation is provided by the "beneficial owner" of the US source income, i.e., the customer of the Swiss financial institution. Moreover, the lack of proper documentation may lead to adverse tax consequences for the customer on his US assets, ranging from the application of the highest non treaty withholding tax rates on interest and dividends (30%), to the imposition of a special US tax called the" backup withholding tax" of 31% on the proceeds of sale of US securities.

The new regime will apply to all persons (US citizens and non US citizens, individuals and corporate entities) holding US securities on or after January 1, 2001.

A. Rules applying to "US Persons"

A "US Person" is defined as any person who is a US taxpayer : e.g. US citizens, foreign citizens born on US soil, foreign citizens born abroad of a US parent (under certain circumstances), holders of the US permanent residency visa or "Green Card", foreign citizens who spend a significant amount of time in the US either in the current year or in the current and the two previous years (and thus meet the so-called "substantial physical presence" test), and under certain circumstances, foreign citizens married to US taxpayers who have made an election for joint US taxation.

Under the new US rules, as from January 1, 2001, "US Persons" will only be able to retain their US securities deposited with foreign banks if they file a specific US tax form ("IRS Form W-9") disclosing their name and their US "Tax Identification Number" ("TIN") and hence have their identity disclosed by the foreign bank to its US custodian and to the IRS (by signing this Form they release their foreign bank from banking secrecy obligations in relation to the US custodian of the bank and the IRS). US Persons not willing to disclose their US assets and sign an IRS Form W-9 must sell their US assets by the end of the current year.

Otherwise, they will be subject to the special US backup withholding tax of 31% on the proceeds of sale of their US securities (or the redemption of their US bonds) upon their sale after 1.1.2001.

In other words, under the new regime, it will not be possible for US Persons to continue to hold direct investments in US securities and retain their anonymity.

B. Rules applying to "Non-US Persons"

Non US Persons holding US securities will also need to be properly documented by signing a written Form on which they certify their "Non-US status" and specify whether they wish to claim a reduction in US withholding taxes based on an applicable double tax treaty.

The new regime provides some adverse tax consequences for persons having not signed the appropriate documentation (so-called "undocumented persons"): i.e. exposure to highest withholding tax rates, and eventually also exposure to the special US backup withholding tax of 31 % on the sale proceeds of US securities.

The documentation is to be signed by the person who is the "beneficial owner" of the US source income according to the US tax rules.

It is important to highlight the fact that the US notion of "beneficial owner" is a different one from the notion of "economic beneficiary" under Swiss "Know Your Customer Rules" (hereafter "KYC") laid down in the Swiss Bankers Association Code of Conduct ("Convention de Diligence").

Beneficial owners have to sign an IRS Form W-8BEN. In Switzerland IRS Form W-8BEN has been replaced by a specific Form issued by the Swiss Banks based on the model prepared by the Swiss Bankers Association for Non-US Persons. The advantage of the Swiss Form over IRS Form W-8BEN is that the former's validity is not limited in time and the form does not have to be refiled every third year.

Intermediaries and persons which are not considered to be the beneficial owners under the US rules (so-called "look through" or "transparent" entities, e.g. partnerships, certain trusts, etc.) have to document their status on IRS Form W-8IMY and attach a signed IRS Form W-8BEN for each beneficiary.

What will happen to the documentation signed by Non-US Persons ? Will it be forwarded to the US custodian and the IRS (no banking secrecy) or will it be kept in the files of the Swiss Bank (and covered by banking secrecy) ?

The answer to this very important question will depend on how the Swiss Bank holding the customer's assets will have positioned itself vis-à-vis the IRS.

3. The Swiss Bank's status : Qualified Intermediary vs. Non Qualified Intermediary

Swiss Banks have the choice of either (i) submitting to the general regime, in which case they will have the status of a "Non Qualified Intermediary" (a "Non QI/NQI"), or (ii) they can become a "Qualified Intermediary" (a "QI") by signing a special Agreement with the IRS (the "Qualified Intermediary Agreement").

A Bank which will have the status of a Non QI will have to collect the documentation from all of its customers holding US securities (US and Non-US Persons) and submit it to its US custodian and the IRS (no banking secrecy). Failure to comply with these rules while holding US securities on behalf of its customers will expose the Non QI bank to substantial risks and in the last resort to the freezing of its assets in the US.

A bank entering into the Qualified Intermediary Agreement with the IRS becoming a "Qualified Intermediary" will be able to maintain banking secrecy for its Non-US person customers : The documentation signed by these clients will remain in its files and the Bank's US custodian will withhold the proper rates based on the QI's reporting of anonymous, i.e. "pooled" accounts. Furthermore, the rates will be reduced at source by the US custodian, and the QI's clients will no longer have to claim tax refunds in the US. The QI Agreement will impose specific obligations on the QI and special audit procedures by its external auditors (approved by the IRS).

In view of the foregoing, non US clients holding US securities should approach their Swiss Bank and inquire whether it intends to obtain QI status or not. Clients of banks that have not addressed the problem or which do not intend to become a QI should consider whether they want to maintain their account at this bank or whether they want to transfer their US assets to another institution which will obtain the QI status.

For US persons maintaining US securities, the status of their Swiss Bank is not relevant. IRS Form W-9 have to be transmitted to the US custodian and the IRS irrespective of the Swiss Bank's status as QI. For these customers, it is important to instruct their Banks to sell their US assets by December 31, 2000, if they do not wish to file an IRS Form W-9 under the new regime.

4. Documentation of entities (foreign corporations, trusts, foundations etc.)

As already mentioned, the US rules 2001 require that IRS Form W-8BEN (or the Swiss Form) be signed by the "beneficial owner" of the US source income, as defined by US KYC/tax rules (which are different from Swiss KYC rules).

In general, under US KYC/tax rules, a foreign corporation (even if it is a pure holding structure) generally is considered to be the beneficial owner of the assets it holds and thus can sign Form W-8BEN or the Swiss Form.

However, the treatment of other structures commonly used by customers of Swiss Banks for the holding of their assets, like foreign trusts, family foundations, establishments, etc. is a more difficult question. Under US KYC/tax rules, some of these structures will be considered as "beneficial owners" of the assets they hold (W-8BEN), while other structures will be treated as mere "look through" entities (W-8IMY and W-8BEN signed by all beneficial owners and statement of the trustee determining how much of the trust's income is to be allocated to which beneficiary).

The answer to the above question of whether a structure can claim to be the beneficial owner of the assets it holds or whether it will be disregarded and compelled to identify its beneficiaries will depend on a specific US test called the "non grantor complex trust test". It is to be noted that structures created by a US Person will, during the US settlor's/founder's life, invariably be considered transparent by the IRS.

This classification is important, because many Swiss Banks intend to exclude the "look through" entities from the scope of their QI Agreement (a QI can decide to exclude certain accounts from the coverage of its QI Agreement) and act as a non QI with respect to these accounts, which will expose the beneficial owners of these structures to full disclosure in the US. The reason for this attitude is that it will be very difficult for Swiss Banks, if not to say virtually impossible, to cope with the very burdensome reporting requirement imposed by the new US 2001 regime for those accounts, if they are included in the QI Agreement.

Consequently, structures that do not pass this special US test may want to take certain measures by the end of the current year to avoid any adverse impact of the new US regime on them (e.g. modification of their statutes and by laws in order to enable the structure to pass this test, incorporation of an underlying company, sale of direct US investments and/or purchase of certain investment funds, etc.).

Therefore, clients having created special holding structures for their assets held with Swiss Banks should contact their advisors to determine whether their structures will be classified as non-transparent under this special US test. In the event the structure cannot qualify, the client advisors should determine - if need be with the Swiss Bank - which measures need to be taken by year end in order to protect the client's and/or the beneficiaries' confidentiality after 1.1.2001.

Geneva, May 25, 2000

Secretan Troyanov

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The material in this newsletter discusses in a general way certain consequences of the new US witholding tax rules. It is not a legal opinion.

We therefore recommend that our readers seek special advice from their usual contact partner or Cyril Troyanov and David Forbes-Jaeger before making decisions in concrete cases.