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Germany Sheds Light On Uncertain Swiss Tax Deal

by Ulrika Lomas, Tax-News.com, Brussels

27 September 2012


The German finance ministry has recently published details of the bilateral tax deal with Switzerland.

The timing of the publication is ironic as the very future of the accord hangs in the balance, with experts warning of the grave shortcomings of the agreement.

The German-Swiss tax treaty is designed to ensure the taxation of German capital assets located in Switzerland and to place bilateral fiscal relations between the two countries on a sustainable footing. The deal is also a lucrative one for Germany as it is expected to yield billions of euros in additional fiscal revenues for the state.

The bilateral agreement of September 21, 2011, between the Federal Republic of Germany and the Swiss Confederation in the area of taxes and the financial market, as amended on April 5, 2012, pertains to the taxation of financial deposits of German taxpayers held in Swiss banks. Due to enter into force and apply from January 1, 2013, the agreement was approved by the Swiss parliament in July of this year, and the ratification process is to be concluded in Germany in the autumn.

The agreement provides crucially for the ‘equal’ tax treatment of financial deposits in Germany and Switzerland, ensuring that the capital assets and income of German taxpayers managed by Swiss banks are taxed in the same way as domestic investments. The treaty also resolves past non-disclosures by providing for the taxation of untaxed money already held in the Confederation.

In addition, the accord imposes a 50% rate of tax on German taxpayers’ inheritances in Switzerland, unless the competent German tax authorities are notified. An extended Organization for Economic Cooperation and Development standard serves to increase the chances of discovering so-called ‘black money’ in Switzerland.

Investment income, notably interest, dividends, other income and gains, will be subject to a capital gains tax of 25% under the terms of the agreement, plus a 5.5% solidarity surcharge, making the tax rate 26.375%. German taxpayers can opt to pay church tax of 9%, resulting in an overall tax rate of 27.9951%. The treaty ensures that Switzerland is notified of any changes to the tax rate in German law triggering corresponding amendments to be made simultaneously in Switzerland.

The untaxed assets of German residents already held in Swiss accounts or deposits will be subject to a tax of between 21% and 41% of the capital depending on the holding time and on the amount of the investment, calculated according to a specific formula.

The relocation of the capital assets of German taxpayers from Switzerland to a third country will not be possible without prior notification following entry into force of the agreement. Swiss banks have already pledged not to transfer capital to a third state for tax purposes. Indeed, the Swiss Bankers Association has even recommended that banks do not transfer money to foreign branches. Compliance with this recommendation will be strictly controlled by the Swiss Financial Market Supervisory Authority (FINMA).

Despite these firm reassurances of the solidity and fairness of the treaty from the German finance ministry, experts recently warned that the text requires improvements to be made, not only as regards the tax rates, but also as regards provisions on the exchange of information for undeclared and untaxed money in the Confederation. These latest recommendations have served to add fuel to the fire for the Opposition, namely the Social Democrats and the Green Party, who have threatened to veto the treaty in the Bundesrat from the outset, arguing that the provisions are too lenient for tax evaders.

One thing is certain: Switzerland has firmly and repeatedly insisted that there is no scope to renegotiate the agreement.

The Bundesrat is due to vote on the tax deal shortly.

TAGS: tax | investment | offshore confidentiality | interest | law | banking | offshore | agreements | offshore banking | banking secrecy | tax rates | withholding tax | Germany | Switzerland | dividends

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