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Switzerland and Germany initial tax agreement

Today in Bern, German and Swiss negotiators concluded the negotiations on outstanding tax issues and initialled a tax agreement. Under this agreement, persons resident in Germany can retrospectively tax their existing banking relationships in Switzerland either by making a one-off tax payment or by disclosing their accounts. Future investment income and capital gains of German bank clients in Switzerland will be subject to a final withholding tax, and the proceeds of this will be transferred to the German authorities by Switzerland. In addition, mutual market access for financial services will be improved. The agreement should be signed by both governments in the next few weeks and could enter into force at the start of 2013.

The text of the agreement initialled by the negotiators Michael Ambühl (State Secretary, Swiss Federal Department of Finance) and Hans Bernhard Beus (State Secretary, German Federal Ministry of Finance) not only respects the protection of bank clients' privacy, but also ensures the implementation of legitimate tax claims. Both sides acknowledge that the agreed system will have a long-term impact that is equivalent to the automatic exchange of information in the area of capital income.

As usual, the complete text of the agreement will be published after it has been signed by both governments in a few weeks' time. The agreement includes the following points in particular:

  • Final withholding tax for the future: Future investment income and capital gains should be directly covered by a final withholding tax. The single tax rate has been set at 26.375%. This is in line with the current flat-rate withholding tax in Germany. The final withholding tax is a tax at source. After it has been paid, the tax obligation towards the country of domicile will generally have been fulfilled.
  • In order to prevent new, undeclared funds from being deposited in Switzerland, it has been agreed that the German authorities can submit requests for information in the context of a safety mechanism that must state the name of the client, but not necessarily the name of the bank. The number of requests that can be submitted is limited and there must be plausible grounds. The number will be within the range of 750 to 999 requests for a two-year period; an adjustment will then be made based on the results. So-called fishing expeditions are not permissible.
  • Back taxation: To retrospectively tax existing banking relationships in Switzerland, persons resident in Germany should be given one chance to make an anonymous lump-sum tax payment. The size of this tax burden will vary from between 19% to 34% of the assets in question, and will be determined based on the duration of the client relationship as well as the initial and final amount of the capital. Instead of such a payment, those affected should also have the possibility of disclosing their banking relationship in Switzerland to the German authorities.
  • Further elements: Switzerland and Germany have decided to facilitate mutual market access for financial institutions. In particular, the implementation of the exemption procedure for Swiss banks in Germany will be simplified, and the obligation to initiate client relationships via a local institution will be eliminated. Likewise, the problem of purchasing data relevant for tax collection purposes has been resolved. The package also includes a solution for the problem of possible prosecution of bank employees.
    In order to ensure a minimum income from the retrospective taxation of existing banking relationships as well as to state their resolve to implement the agreement, the Swiss banks have undertaken to pay a guarantee in the amount of CHF 2 billion. The funds advanced by the banks will then be offset by the incoming tax payments and refunded to the banks.

Next steps

The negotiations on the tax agreement commenced in January 2011 based on a joint declaration signed in autumn 2010. The next step after initialling is the signing of the agreement by both countries' governments in the weeks ahead. Then the legislative organs of both countries must endorse the agreement. In Switzerland, the agreement will probably be subject to an optional referendum. The agreement should enter into force at the start of 2013.