Withholding tax agreements : Rubik
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Brief summary
Since the start of 2011, Switzerland had been negotiating an extension of cross-border cooperation in tax matters with Germany and the United Kingdom. A corresponding agreement was initialled with the United Kingdom in August 2011. The agreement with Germany was signed in September 2011. Both agreements were supplemented at the start of 2012. The aim of the negotiations was to find a solution for the regularisation of previously untaxed assets as well as for a final withholding tax for future investment income. These agreements both safeguard the privacy of bank clients and ensure the implementation of the two countries’ legitimate tax claims. Switzerland is prepared to explore such solutions also with other interested countries. In April 2012, a withholding tax agreement was also signed with Austria. The three agreements should enter into force at the start of 2013. Ratification by the parliaments concerned is still pending.
Withholding tax – an alternative to the automatic exchange of informationThe upheavals on global financial markets that followed in the wake of the 2008 financial crisis caused numerous countries to step up their efforts to combat tax evasion on the part of their inhabitants. With its internationally-oriented financial centre, Switzerland was faced with major challenges in this environment. It wants to achieve its objective of being a tax-compliant financial centre by concluding withholding tax agreements, improving administrative and mutual assistance in accordance with international standards and extending financial institutions’ due diligence requirements.
From the Swiss perspective, the final withholding tax is preferable to the automatic exchange of bank data. Switzerland forwards the tax owed directly to the country concerned and at the same time protects clients’ privacy. Moreover, the Confederation will continue also in the future to provide administrative assistance in tax matters in accordance with the OECD standard. The prerequisite for this assistance is a corresponding double taxation agreement with the enquiring country.
Furthermore, it has been agreed with the three countries that the provision of cross-border financial services is to be simplified. Improved market access for financial institutions constitutes a service rendered in return for collecting taxes for the tax authorities of the partner countries.
How does the final withholding tax work?
The tax is levied on natural persons and any constructs associated with these persons, such as domiciliary companies, institutes or foundations. However, the income of operationally active companies is not covered by the final withholding tax. It is levied on interest, dividends and other investment income. Final withholding tax is calculated at a fixed rate, irrespective of the personal income and asset situation of the taxpayer in question.
The final withholding tax is levied by a paying agent (typically a bank) and passed on anonymously to the Federal Tax Administration (FTA). Details of the client’s country of domicile are provided as part of this process, but the client’s name is not. The total tax revenues received are then passed on to the relevant country of domicile by the FTA. With this transfer, the tax liability is deemed to have been finally settled. Income from which final withholding tax has already been deducted no longer has to be declared to foreign tax authorities.
Regularisation of the past and taxation of future income
Under the tax agreements, persons resident in the relevant countries can retrospectively have their existing bank accounts in Switzerland taxed either by making a one-off payment or by disclosing their accounts. Future investment income and capital gains will be subject to the withholding tax. The tax rates are based on the applicable tax rates in Germany, the United Kingdom and Austria.
Outlook
Although the tax agreements are directly applicable, they nonetheless require legal provisions in Switzerland for enforcement. The Federal Act on International Withholding Tax (IWTA) adopted by the Federal Council in April 2012 contains provisions on organisation, procedure, judicial channels and the applicable criminal law provisions.
The three withholding tax agreements and the associated Withholding Tax Act should be considered by parliament during the 2012 summer session and enter into force at the start of 2013.
Brief summary
Since the start of 2011, Switzerland had been negotiating an extension of cross-border cooperation in tax matters with Germany and the United Kingdom. A corresponding agreement was initialled with the United Kingdom in August 2011. The agreement with Germany was signed in September 2011. Both agreements were supplemented at the start of 2012. The aim of the negotiations was to find a solution for the regularisation of previously untaxed assets as well as for a final withholding tax for future investment income. These agreements both safeguard the privacy of bank clients and ensure the implementation of the two countries’ legitimate tax claims. Switzerland is prepared to explore such solutions also with other interested countries. In April 2012, a withholding tax agreement was also signed with Austria. The three agreements should enter into force at the start of 2013. Ratification by the parliaments concerned is still pending.
Withholding tax – an alternative to the automatic exchange of informationThe upheavals on global financial markets that followed in the wake of the 2008 financial crisis caused numerous countries to step up their efforts to combat tax evasion on the part of their inhabitants. With its internationally-oriented financial centre, Switzerland was faced with major challenges in this environment. It wants to achieve its objective of being a tax-compliant financial centre by concluding withholding tax agreements, improving administrative and mutual assistance in accordance with international standards and extending financial institutions’ due diligence requirements.
From the Swiss perspective, the final withholding tax is preferable to the automatic exchange of bank data. Switzerland forwards the tax owed directly to the country concerned and at the same time protects clients’ privacy. Moreover, the Confederation will continue also in the future to provide administrative assistance in tax matters in accordance with the OECD standard. The prerequisite for this assistance is a corresponding double taxation agreement with the enquiring country.
Furthermore, it has been agreed with the three countries that the provision of cross-border financial services is to be simplified. Improved market access for financial institutions constitutes a service rendered in return for collecting taxes for the tax authorities of the partner countries.
How does the final withholding tax work?
The tax is levied on natural persons and any constructs associated with these persons, such as domiciliary companies, institutes or foundations. However, the income of operationally active companies is not covered by the final withholding tax. It is levied on interest, dividends and other investment income. Final withholding tax is calculated at a fixed rate, irrespective of the personal income and asset situation of the taxpayer in question.
The final withholding tax is levied by a paying agent (typically a bank) and passed on anonymously to the Federal Tax Administration (FTA). Details of the client’s country of domicile are provided as part of this process, but the client’s name is not. The total tax revenues received are then passed on to the relevant country of domicile by the FTA. With this transfer, the tax liability is deemed to have been finally settled. Income from which final withholding tax has already been deducted no longer has to be declared to foreign tax authorities.
Regularisation of the past and taxation of future income
Under the tax agreements, persons resident in the relevant countries can retrospectively have their existing bank accounts in Switzerland taxed either by making a one-off payment or by disclosing their accounts. Future investment income and capital gains will be subject to the withholding tax. The tax rates are based on the applicable tax rates in Germany, the United Kingdom and Austria.
Outlook
Although the tax agreements are directly applicable, they nonetheless require legal provisions in Switzerland for enforcement. The Federal Act on International Withholding Tax (IWTA) adopted by the Federal Council in April 2012 contains provisions on organisation, procedure, judicial channels and the applicable criminal law provisions.
The three withholding tax agreements and the associated Withholding Tax Act should be considered by parliament during the 2012 summer session and enter into force at the start of 2013.