Swiss authorities said they would continue talks with the U.S. to resolve an impasse over the disclosure of secret bank accounts at UBS [UBS] after a Swiss court blocked a deal reached by the two governments last year.

Switzerland’s Federal Office of Justice said the Swiss Federal Council has analyzed the court ruling and decided to continue talks with the U.S., noting that the ongoing threat of conflict over legal and sovereignty matters would have a negative impact on Switzerland as a center of finance and business. A second possibility would be to ask the Swiss Parliament to approve the U.S. treaty request agreement.

The Swiss and U.S. governments agreed last August for UBS to disclose the identities of 4,450 U.S.-based taxpayers who had accounts with the bank. That followed an earlier agreement by UBS last February to disclose the identities of about 255 accounts and pay $780 million to the U.S. Justice Department to avoid prosecution.

However, the Swiss government has been reviewing appeals by taxpayers who want their account information to remain secret, and last week a Swiss court ruled that the deal violated the country’s banking secrecy laws after reviewing a request by one of a group of 26 taxpayers who wanted her account kept confidential.

The Federal Administrative Court reached the conclusion on three separate points of law. It classified the August treaty request agreement with the U.S. as merely a mutual agreement that permitted no change to the terms that had been given binding definitions in the bilateral double taxation agreement. In the view of the court, the protocol to the double taxation agreement defines “tax fraud or the like” conclusively as tax or duty fraud, and does not include any serious tax offenses in the sense of the continued evasion of large sums of tax.

The Federal Council said it approved the treaty request agreement after carefully examining the legal situation and on the basis of expert opinions, but the Federal Administrative Court viewed the legal situation differently. The Federal Council, however, must acknowledge the court’s ruling and put it into action. It has thus instructed the Federal Department of Finance to cancel the additional 25 final decisions that are still pending before the Federal Administrative Court.

Given that the Federal Administrative Court's benchmark ruling is legally enforceable, the council believes that treaty assistance will be ruled out in around 4,200 cases. Only in around 250 cases may information be exchanged with the U.S. authorities. If the problem cannot be resolved through consultations or negotiations, under the UBS agreement the U.S. might take “proportionate rebalancing measures” to rectify the inequality that has arisen between the agreed rights and obligations. The Swiss government warned there might be a risk that the U.S. will resume the civil proceedings through the “John Doe” summons proceedings against UBS, and that a U.S. court may rule that the bank must hand over data relating to around 4,450 accounts.

“The United States has an agreement with the Swiss government to produce information on U.S. account holders at UBS,” the IRS said in a statement. “We expect the Swiss government to continue to honor the terms of the agreement.”

The Swiss Federal Council plans to continue its talks with the U.S. authorities to explain the situation from its perspective and discuss its options for action with U.S. authorities. In addition, Switzerland will request that the U.S. provide detailed information on the client data that has been received under the IRS’s voluntary disclosure program.

The IRS said 14,700 U.S. taxpayers have come forward to reveal their offshore bank holdings, but it is not clear how many of them have accounts in Switzerland. In a possible second step, the Federal Council might then put the UBS agreement to Parliament for approval, an approach that the court indicated in its ruling as a possible solution. If the agreement were approved by the Swiss Parliament, the Federal Administrative Court could not then regard the agreement as merely a mutual agreement in any future appeals. Instead, the agreement would stand as a treaty with the same status as the older and more general bilateral double taxation agreement and, according to general rules of interpretation, would take precedence over the latter.

In the meantime, the council noted that UBS could continue to fulfill its obligations to the Swiss Federal Tax Administration, and the Swiss tax authorities would continue the process of reviewing the accounts and issuing final decisions on them. The client dossiers could not be sent to the U.S. authorities, however, until the agreement has been approved by parliament, but this approach would make it possible to comply with the deadlines set in the treaty request agreement, which remains binding under international law.