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Switzerland Set On Updating Liechtenstein Tax Treaty

by Ulrika Lomas,, Brussels

17 September 2013

During a recent sitting of the Council of States, Swiss Federal Councilor Eveline Widmer-Schlumpf underlined the need to seek improvements to the existing bilateral tax agreement with Liechtenstein, to address the issue of the taxation of cross-border workers and Liechtenstein pensions paid out in Switzerland. Widmer-Schlumpf nevertheless warned that Switzerland is not in a position to dictate the negotiations.

The tax treaty between Switzerland and the Principality of Liechtenstein dates from June 22, 1995. However, over the course of the last few years, a number of significant tax developments, both in Liechtenstein and at international level, have prompted increasing calls in Switzerland for the text to be updated.

A first motion, calling for change, was submitted back in February 29, 2012, by Swiss National Councilor Walter Müller. In the motion, Müller tasked the Federal Council with negotiating a "comprehensive double taxation agreement" with Liechtenstein. Defending his motion at the time, Müller alluded to the fact that Liechtenstein's new tax law entered into force on January 1, 2012, providing for a 3.6 percent withholding tax rate to be imposed on pensions paid out in Switzerland, affecting many pensioners in the Confederation. Switzerland's National Council adopted Müller's motion on June 15, 2012.

While providing its support for the motion, the Swiss Council of States introduced on September 10, 2013, a number of key modifications, before subsequently adopting the revised motion. The Council of States ruled out the idea of a comprehensive DTA and insisted that the status quo regarding the taxation of cross-border workers must be maintained. Under the terms of the 1995 treaty, cross-border workers are currently taxed in their place of residence.

Defending its decision to amend Müller's initiative, the Council of States argued that the move was fuelled by recent events in Liechtenstein. On August 10, 2013, an initiative was submitted to the Liechtenstein parliament proposing that a unilateral withholding tax be imposed on Swiss cross-border employees. Alluding to the fact that around 9,442 Swiss residents currently commute to work in Liechtenstein, compared to just 1,950 Liechtenstein citizens working "abroad," either in Switzerland or Austria, the Council of States made clear that this measure was simply unacceptable and would lead to a revenue shortfall of around CHF22m (USD23.6m) for the Swiss cantons.

Switzerland's Federal Finance Ministry (FDF) is also in favor of negotiating a double taxation agreement with the Principality, to take into account the Principality's new tax law and to take into consideration the OECD's standard on mutual assistance in tax matters. The FDF aims to ensure that the future bilateral accord provides for a 0 percent rate of withholding tax to apply to interest, royalties, and to certain dividend payments, in line with Switzerland's agreement policy.

TAGS: Finance | tax | pensions | interest | royalties | law | Liechtenstein | tax rates | withholding tax | Austria | Switzerland | individual income tax

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