A Swiss court has upheld an appeal by a UBS bank client against the handing over of customer details to the United States tax authorities.
The ruling is a test case for more than 20 other appeals challenging the transfer of data on suspected tax dodgers in the US.
The Swiss cabinet said it had taken note of the ruling on Friday by the Federal Administrative Court and would decide on further action at its regular meeting next week.
The defendant allegedly failed to send the US tax authorities a completed W-9 form on exemption from income tax.
As such, this could not be considered fraudulent behaviour and therefore Switzerland could not grant legal assistance in handing over her data to the US as part of their tax probe, the court said.
“The cabinet did not have the power to extend the existing double taxation agreement and put tax evasion on the same level with fiscal fraud;” said court spokesman Andrea Arcidiacono.
He said the 25 similar cases pending at the administrative court would have to be reviewed by the Federal Justice Office.
However, it is not clear how many more account holders will be affected by the ruling.
The Swiss authorities were due to examine details of an estimated 4,450 account holders for alleged fiscal fraud and serious tax evasion, under an accord struck between Washington and the Switzerland last August.
As agreed with the US government as part of the deal, the first 600 files were processed by the end of last year and were due to be handed over pending court appeals.
“It is now up to the Swiss and the US authorities to decide on the next steps, but the bilateral accord remains in force,” Arcidiacono said.
The ruling is seen as another setback for the Swiss government and notably the finance ministry in their attempts to protect UBS from facing legal action in the US.
Earlier this month the administrative court ruled that the transfer of details of 285 account holders by the Financial Market Supervisory Authority (Finma) to the US was illegal, a decision Finma has appealed to the Federal Court.
Paolo Bernasconi, a former top prosecutor, believes the latest court ruling virtually spells the end of the Swiss-American UBS deal.
“The decision is very important and means that UBS must stop handing over customer data to the tax authorities.
“I believe several hundred account holders could be concerned, but I would not put the figure at thousands,” Bernasconi said.
Carlo Lombardini, a banking expert in Geneva, agrees with the judges. He said the bilateral agreement between the Swiss and US governments significantly changed the scope of legal assistance.
“This is in my opinion beyond the powers of the cabinet to do,” Lombardini told the Swiss News Agency.
The main political parties are divided on the issue.
The centre-left Social Democrats and the rightwing Swiss People’s Party said it proved there was an urgent need to set up a parliamentary investigation into the government’s handling of the UBS case.
They called for the UBS deal not to be implemented or at least for it to be re-examined.
However, the centre-right Radicals, a party close to the business community and to Finance Minister Hans-Rudolf Merz, said the ruling showed the independence of the courts and confirmed banking secrecy rules.
In a similar vein the centre-right Christian Democrats argued the government had acted in good faith.
The Swiss Bankers Association (SBA) said it took note of the decision.
“It is of importance to the SBA that the decision demonstrates that the procedure laid down in the US-Swiss Double Taxation Treaty and in the agreement with UBS has been adhered to and that a Swiss court was able to give a final verdict.”
For its part the government said the UBS deal with the US was based on consultations with several experts.
“The aim was to find a legal solution in a conflict between Switzerland and the US and prevent a violation of Switzerland’s sovereignty,” a government statement said.
Urs Geiser, swissinfo.ch with input by Nicole della Pietra and Isobel Leybold
In February 2009 Finma ordered UBS to hand over confidential data about 285 clients to the US authorities investigating cases of tax evasion.
In March the government decided to adopt OECD rules, effectively easing banking secrecy rules for foreign clients of Swiss banks.
A further 4,450 account holder details are to be divulged to the US authorities as part of a deal agreed between the Swiss and the US governments last August.
The Swiss had processed the first 600 files of suspected tax evasion by the end of 2009.
On January 8, 2010 the Swiss federal administrative court ruled that the handing over of confidential UBS bank details to US investigators by the Swiss authorities was illegal. It said Finma had abused its power when it ordered that details of 285 account holders suspected of tax evasion in the US be sent to Washington.