Swiss-German withholding tax deal is signed

11th August 2011

Switzerland and Germany have signed an agreement under which interest paid by Swiss banks to their German clients will be taxed at source.

The withholding tax is set at 26.375 per cent for investment income and capital gains, as from January 2013. This is in line with the 25 per cent German tax rate, plus a "solidarity surcharge".

Undeclared payments made to German taxpayers in previous years will be taxed retrospectively at between 19 and 34 per cent of the client's Swiss assets, depending on the initial and final amount of the capital and the length of time it has been concealed. The Swiss Bankers' Association (SBA) estimated that most of their clients will pay an effective tax rate of 20-25 per cent of total assets.

Income thus taxed will be exempt from German taxation, and clients will remain anonymous - even those who choose to make lump-sum tax payments to the German authorities to settle their historical tax liabilities.

But the Swiss banks will collectively pay a SFr2 billion up-front guarantee, in case the deal causes a flight of German funds from Switzerland before coming into force. This amount will be offset against actual regularising payments made by clients. German clients who refuse to make regularising payments by 31 May 2013 will have their accounts closed.

The two countries announced their intention of negotiating the deal last autumn. It has taken many months to reach agreement, with the amount of the Swiss banks' surety being one of the sticking points.

Another contentious issue was the German authorities' powers to monitor enforcement of the withholding tax. The Swiss have agreed to comply with a limited number of requests for information about named German taxpayers. Up to a thousand such requests will be honoured in the first two years of the agreement. As always, the Swiss insist that "fishing expeditions are not permissible", so each request will have to have "plausible grounds"; though the German authorities will not need to know which bank the taxpayer is using.

There are two other areas of disagreement that, according to the Swiss Federal Department of Finance, have been resolved, but the solutions have not been publicly disclosed. The first is the German tax authorities' habit of purchasing stolen Swiss banking data; the German authorities have now agreed not to use stolen data in proceedings against Swiss banks or their employees.  The second issue is the prosecution of bank employees for past acts of abetting tax evasion. The SBA said the agreement "provides for ... decriminalisation of banks and their employees"; which presumably means a general amnesty.

In return, Switzerland obtained some minor concessions on access to German financial markets. Swiss banks operating in Germany will no longer have to recruit new clients via a local institution, and the exemption procedure will be simplified.

The SBA described the agreement as "positive overall" and satisfactory for clients. "Protection of financial privacy remains intact for clients who are tax compliant", it said, while stressing that the measures will cost banks something of the order of SFr500 million.

It also welcomed Germany's acceptance that withholding tax is equivalent to the automatic exchange of information. "The EU proponents of an automatic exchange of information will now have a less ideological position on this issue", it said.

Prospects for revision of the European Savings Tax Directive, which the European Commission has been canvassing for several years, were weakened by the deal. The Luxembourg Bankers' Association issued a statement claiming that the Swiss-German agreement "fundamentally changes the debate on the taxation of savings in all of the European Union." Both Luxembourg and Austria also impose anonymous withholding taxes rather than sharing tax information with other EU member states.

Richard Hay of tax specialists Stikeman Elliott agreed, noting that Switzerland is already negotiating a similar deal with the UK. "Plans to snare holdouts [i.e. Austria and Luxembourg] in the Savings Tax Directive must now be in doubt", he said. "The agreement has key significance for the offshore world."

The European Network on Debt & Development (Eurodad) said the agreement "undermines the prospect of automatic information exchange globally". Moreover, it noted that France and Spain are also currently considering similar agreements with Switzerland. If such agreements are concluded, the European Savings Tax Directive, which imposes a higher withholding tax rate, could effectively be killed off.

"It seems Switzerland has been pursuing the withholding tax deals precisely because they undermine the EUSTD, and damage the prospects of other international automatic information exchange deals", said Eurodad.

Both countries' legislatures will have to approve the deal before it becomes binding. Switzerland will probably also hold a referendum, although the SBA urged parliament to pass it as soon as possible in order to be ready for the 2013 deadline.

Sources

Swiss Federal Department of Finance

Wall Street Journal Online

Swiss Bankers' Association

SBA (Q&A as PDF file, in English)

Reuters (via LSE)

Reuters (2)

Businessweek

AWP/Romandie News (in French)