Germany and Switzerland have signed a withholding tax agreement in light of recent events, which could have significant effects on German taxpayers in particular
After a now infamous ‘data CD’ was obtained from Switzerland by the German government – a CD containing bank details of alleged tax avoiders – the suspicion held by a lot of Germans that wealthy people had transferred considerable amounts of money to Switzerland with the intention of avoiding tax in Germany was confirmed.
Understandably, there was a feeling of outrage. The German finance minister at the time, Peer Steinbrück (Labour), promised to “send in the cavalry” to make sure tax evasion of this kind becomes impossible. The language used – designed to please voters and to put pressure on Switzerland – had a significant effect on German-Swiss relations. However, after the dust had settled, negotiations for a tax agreement that would pry open Swiss bankers’ secrecy and help the German fiscal authorities to collect taxes began. Those negotiations culminated in the initialling of a tax treaty and a complementary amendment governing how both countries deal with German money invested in Switzerland on a ‘tax neutral’ basis.
German fiscal authorities can request information from Swiss banks to secure the intended purposes of any agreement
Future income from investments held in Swiss banks (dividends and capital gains) will be taxed with withholding tax at a uniform rate of 26.37 percent. This level of tax corresponds to the German withholding tax (Abgeltungssteuer) on capital investment income. Initially, interest income was supposed to be taxed at the same rate. However, it was decided that interest income should not fall into the scope of the agreement; instead – as is already the case today – the EU directive will apply (35 percent anonymous withholding tax or reporting procedure).
An important issue regulated by the new tax agreement that will be of particular interest for investors is the question of how it deals with taxation of income generated in the past and the associated issue of a possible amnesty for tax evasion. Until the agreement comes into force – it is currently planned for the beginning of 2013 – investors have the possibility of a voluntary tax declaration.
Once the agreement has come into force, investors can choose between two options. The first option is to authorise the bank in writing within five months to give information regarding an investor’s account to the Swiss fiscal authorities who will, in turn, forward those details to the German fiscal authorities. This so-called voluntary notification is qualified as a voluntary tax declaration from the moment of the bank’s authorisation.
Alternatively, if no authorisation is granted to the bank, the investor will automatically participate in the so-called ‘subsequent taxation procedure’, which works as follows.
Investors subject to tax are to be granted a one-off opportunity to pay a flat-rate tax for past undeclared investment income. The tax rate is set between 21 percent and 41 percent of the asset holdings, depending on the length of time the account had been held, as well as the initial amount and closing level of the portfolio. The Swiss bank in question then collects the one-off payment. At the same time, the investor receives a confirmation stating the amount of the payment and how this amount was determined. Once the investor approves the contents of the confirmation or does not object within 30 days, the bank transfers the respective amount to the Swiss fiscal authorities, who in turn forwards the money to the German fiscal authorities. Once the one-off payment has been credited to the bank’s operating account, the following tax debts for the past deriving from the assets incorporated in the confirmation are regarded as expired:
- Income tax
- Value added tax
- Wealth tax
- Trade tax
- Inheritance tax
- Gift tax
However, this amnesty only applies if the concerned assets do not derive from a crime as defined by German criminal law, or if the German authorities have not already had sufficient actual evidence for untaxed assets and the investor knew about this evidence or had to reckon that the fiscal authorities were onto him. This one-off payment amnesty option is favourable for investors with high income from their assets or respectively a considerable increase of the value of their assets in the period under consideration.
Voluntary tax declarations
Alternatively, German investors could go down the route of making a voluntary tax declaration by way of a voluntary notification. Based on my experience in this area from successfully handling numerous voluntary tax declarations in the past, this option could be a better alternative in many cases. Investors who did not achieve a considerable increase in value of their assets in the period under consideration whilst a low German tax rate is in place will be charged less after a voluntary tax declaration than they would have to pay had they chosen to go for the one-off payment option. This applies even more if
allowable tax losses or higher income-related expenses were incurred in the assessment
periods to be declared subsequently in the voluntary tax declaration.
To summarise the issue of amnesty in the new tax agreement it has to be pointed out that where substantial assets are involved, German investors should check – or, even better, have an experienced professional tax adviser check – whether a voluntary tax declaration or a one-off payment is the better, more viable option. However, investors should also be aware that the tax treaty does not come into effect until the start of 2013. Until then there is a greatly increased risk of detection by the German fiscal authorities in comparison with previous years, due to the recent amendment to the disclosure clause in the double taxation agreement. If investment income has been concealed in Swiss accounts, it is likely that a voluntary tax declaration will remain the recommended alternative for residents of Germany who, in the past, have not complied with their tax obligations in relation to investment income as in this instance, time is not on their side.
Inheritance tax deriving from inheritances incurred after the tax agreement has come into force will also fall into its scope. In such a case, heirs will either have to agree to a tax rate of 50 percent or a notification to the German fiscal authorities. The current tax rates for inheritance tax in Germany are between seven and 50 percent, depending on the degree of relation and the value of the estate. In most cases a notification will therefore be more favourable than a 50 percent flat charge.
German fiscal authorities can request information from Swiss banks to secure the intended purposes of any agreement. This right is subject to the condition that the request is made giving the identity of the investor liable to tax in Germany and a plausible reason for the requirement of information. The initial agreement restricted the maximum amount of requests for information within a two year period to 999. However, this figure has been increased in the agreement’s recent complementary amendment to 1,300.
All Swiss banks and all other Swiss domiciles have the obligation to inform their account and depot holders about the contents of the tax agreement and the rights and duties resulting from it for their clients. This also includes information on whether a voluntary tax declaration or voluntary notification is more favourable than an anonymous one-off payment. For the determination of tax liability resulting from a voluntary notification or voluntary tax declaration it is advisable to consult a German tax lawyer.
The transition of the tax agreement with its recent complementary amendment is not done and dusted. The agreement is supposed to come into force on January 1, 2013, should parliamentary consent be achieved in Germany. This, however, is uncertain. Labour leader Sigmar Gabriel has – according to a press release – announced that all Labour governed federal states will vote against the transition in the Federal Council. The Green Party also refused to give its approval to an agreement “that grants lasting anonymity to tax dodgers”.
The Swiss parliament, however, has recently approved the tax agreement. All in all, German investors holding accounts or deposits in Switzerland need to be aware that their position regarding the German fiscal authorities’ access to those assets is not going to get any better. It is vital to make sure one does not miss the opportunity to make use of an amnesty option. At the very least it should be determined what options would be more favourable in each case, so the investor and their respective tax adviser are prepared when the tax agreement does come into force.
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