Withholding tax agreement with Germany, the United Kingdom and Austria

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1 TAX ALERT April 18, 2012 Withholding tax agreement with Germany, the United Kingdom and Austria On April 17, 2012, the European Commission has given its approval concerning the tax agreements initialed by Switzerland with Germany and the United Kingdom. The tax agreement between Switzerland and Austria has been approved as well. This agreement has been initialed on April 13, With those three agreements, the concerned countries would like to better prevent tax evasion. The agreement concluded between Switzerland and Germany on August 10, 2011 is broadly comparable to the one concluded on August 24, 2011 between Switzerland and the United Kingdom. The agreements and the Federal Act on the international withholding tax should enter into force on the January 1 st, Actually, the internal approval of the concerned States is still necessary. Notably for Germany, the entry in force of the agreement is more than uncertain due to internal political pressures. This newsletter gives you an overview of the content and the functioning of these agreements. Principle Natural persons domiciled in Germany, in Austria or in the UK who are holders of non declared account in Swiss banks can regularize their banking relationship. They can opt for regularization by an anonymous payment of tax or a voluntary disclosure. Foe the anonymous payment of tax, a final withholding tax is a tax levied at source at a flat rate by the banks and transferred to the tax authority of the partner state. Swiss banks deduct a flat-rate tax on existing assets from German, British or Austrian clients (past) and on investment income and capital gains (future) respectively, and forward this sum to the concerned States. With this transfer, the tax liability is deemed to have been finally settled. Income, from which this final withholding tax has already been deducted, has no longer to be declared to the foreign tax authorities and the clients remain anonymous. However, the clients can still voluntary disclose their banking relationship to their tax authorities on an individual basis. Regularization of the past Concerning the regularization of the past, the tax agreements offer to clients domiciled in Germany, in Austria or in UK two kinds of regularizations of their existing banking relationship in Switzerland.

2 2 First of all, they can pay for the past a one-off flat rate calculated on the amount of assets detained in Switzerland. The tax amount is determined on the basis of a formula contained in the tax agreement. This formula takes into account the duration of the banking relationship and the difference between the initial and final amount of capital. Concerning the banking relationships already existing before the January 1 st, 2003, the initial value taken into account is the one booked on December 31, Therefore, the individual burden on the capital varies between 21 and 41 % for Germany, between 21 and 41 % for the United Kingdom and between 15 and 38 % for Austria. Those rates fluctuate according to the specific individual circumstances (the date on which the account has been created and the amount of assets deposited in the past and non-declared). With this transfer, the tax liability is deemed to have been finally settled. Preliminary projections suggest that the medium tax burden will vary around 25% of the average assets during the considered period. Alternatively, the clients still have the possibility to declare their banking relationships in Switzerland to the concerned foreign tax authorities. Consequently, they accept to be subject to retrospective individual taxation by their tax authorities. Concerning the regularization of the past by the payment of a one-off flat rate, three cumulative conditions have to be fulfilled: Tax agreement between CH-Germany April 5, 2012 Convention CH- UK March 20, 2012 Residency in Germany on Residency in UK on January 1 st, 2013 May 31, 2013 Tax agreement CH-Austr. April 13, 2012 Residency in Austria on January 1 st, 2013

3 3 Clients, who decide not to regularize their position, by a voluntary disclosure or by a oneoff flat rate payment, must close their accounts or custody accounts in Switzerland by the time the agreement comes into force. In the agreement, Switzerland also undertakes to provide the German, British or Austrian authorities with statistical information on clients who have terminated their banking relationships in Switzerland. Which exact information will be given remains unclear. Withholding tax for the future After the agreement enters into force, clients have two possibilities. Either they make an anonymous withholding tax payment or they report to the tax authorities in their country. If they refuse, there will be no other way of opening or maintaining an account. a) Germany The tax applies on interest income which is not already subject to a withholding tax or a voluntary disclosure based on the existing Agreement on the taxation of savings. Furthermore, it applies on dividend income, other income and capital gains. The payments related to these incomes are subject to this tax as well. The withholding tax rate amounts to 25% by analogy with the German withholding tax. Thus, a solidarity surcharge of 5.5% of the withholding tax is added, so that the total tax rate corresponds to 26,375 %. After payment of the withholding tax, the taxes owed in connection with investment income are considered as settled. By this way, the tax payer does not have to disclose his income on his German tax return. b) UK The internal British Law does not have the liberatory withholding tax. In order to avoid arbitral rate, the marginal tax rates applied on the concerned British income will be used to determine the different tax rates applied in Switzerland. In accordance to the international British Law, the agreement foresees several tax rates for different kinds of income and capital gains: 48 % on interest income (instead of 50 %), 40 % on dividends income (instead of 42,5 %), 48 % on other income (instead of 50 %) and 27 % capital gains instead of 28 %). c) Austria With Austria, a flat rate of 25% has been fixed. Tax burden failing on the inheritance a) Germany In case of inheritance, the heir has the choice between the payment of a flat-rate tax discharged of 50% of the value of the assets at the time of death or to disclose his inheritance to the German tax authorities.

4 4 b) UK The heir has the possibility to submit the succession to a flat-rate tax discharged of 40% of the amount of the assets at the time of death or to disclose his inheritance to the British tax authorities. c) Austria No rule has been foreseen in this case. Austria has abolished the taxation of inheritance since Pre-financing Swiss banks have to make an advance payment after the agreements enter into force. An amount of two billion Swiss francs will be paid to Germany and 500 million Swiss francs will be paid to the United Kingdom. On the contrary, no payment is foreseen for Austria. This advance should ensure minimum tax revenues to partner states. For the Swiss banks, it implies administrative burden and heavy costs. However, the agreements exclude the public prosecution of Swiss banks employees who could have participated in the past to fiscal fraud. Thus, Germany and the UK give up active acquisition of stolen bank data. However, the passive acquisitions still remain possible. Fishing expedition In order to prevent tax avoidance in the future, the partner states can submit request for information. If suspicions prove to be well-founded, the partner state will seek information regarding the existence of Swiss banking relationships of a particular tax payer. The admissibility criteria of this kind of request are still vague and do not protect the tax payers from a fishing expedition («Pêche aux renseignements», «Ersuchen ins Blaue hinein»). Actually, as a first step, Switzerland commit itself to providing up to 1300 names to Germany (and this amount only in the first two year following the entry into force of the agreement), and up to 500 names per to the UK as a first step as well. Again, the number of names that will be given in the next years is vaguely described, but surely extends and supplements the minimum standards foreseen in the recently renegotiated DTT. Closure of account By the time the agreement comes into force, clients who decide not to regularize their position must close their bank accounts in Switzerland. The agreements foresee also the indication to the partner states of the countries or territories to which the assets are transferred. So far the framework of this data base provision is still unclear. Our point of view The agreement with the United Kingdom has had a signal value. After Germany and Austria, more countries, like France, Spain, Italy or Greece, will probably be interested by this model. Effectively, the tax agreements initialed by Switzerland imply high costs for the Swiss banks, the retrospective tax payment of the deposited and non declared assets

5 5 in Switzerland and weaken the Swiss bank secrecy. Currently, according to Swiss law, a tax payer who is actively hiding money from the tax authorities commits fraud. However, a person who forgets to declare all or part of its income or wealth to the tax authorities commits tax evasion. So far, in case of suspicion of tax evasion, the Swiss law prevented the banks to be forced to disclose data of the clients concerned. With the agreements initialed, the Swiss bank secrecy is weaker and takes different degrees depending on the country concerned. Furthermore, even if the EU approved these agreements, they still require the approval of parliament in every country concerned. Therefore, these partner states and other non-signatory states (for example France) could put pressure on Switzerland in order to obtain the automatic exchange of information, balancing the risk of public prosecution against the Swiss banks and their employees, the withdrawal of the banking license or the refusal of the agreements concerning mutual assistance with EU the concerned country. Given the hastiness with which the Swiss government so far yielded to foreign pressure, it appears with reasonable certainty that the Swiss bank secrecy died, at least vis-à-vis foreign countries. The entry in force of the Agreement with Germany is more than uncertain due to internal political pressures. Nevertheless the entry in force of the Agreements with Austria and the UK can be considered as certain as of January 1 st, For any further questions regarding the subject, Daniel Spitz stands at your disposal to discuss. Daniel Spitz Expert Fiscal Diplômé T: +41(0) M: +41(0) dspitz@dsconsulting.ch