Switzerland: Double Tax Treaties
Other International Agreements
Following the publication of the Administrative Assistance Ordinance in 2010 which sets out when Switzerland will cooperate with other countries, the Swiss Government published the Act on International Assistance in Tax Matters. The Act is based on the principle that administrative assistance will be provided upon request in individual and group cases. No administrative assistance will be provided by Switzerland if a request is based on information which was acquired by acts which are punishable under Swiss law. Information transmitted abroad is only allowed to be used to enforce Swiss tax law, in so far as it could have been obtained in accordance with Swiss law.
Switzerland is also a party to a number of international mutual assistance treaties, some multilateral and some bilateral, including the following:
- The European Convention on Mutual Assistance in Criminal Matters, 1959;
- Treaty on Mutual Assistance in Criminal Matters with the USA, 1973;
- The Federal Act on International Mutual Assistance in Criminal Matters, 1983, as amended in 1997;
- The European Convention on Laundering, Search, Seizure and Confiscation of the Proceeds of Crime, 1993.
The Federal Act, particularly since the 1997 amendments, enables the transmission of documents and information abroad for the purposes of criminal proceedings. From the point of view of banking secrecy the following can be said about the current According to a recent decision of the Federal Supreme Court the transmission of such information requires the permission of the Swiss police authorities who must inform the customer about the order and give him a right to appeal;
It is not permitted to forward information on persons who are not the subject matter of the investigation;
Information will not be given if
- The foreign authorities might use the information for purposes other than those for which it was requested;
- The offence alleged is not equally punishable in Switzerland;
- The requesting state does not offer Switzerland reciprocal treatment in these matters;
The offence is related to tax, politics or military matters.
The Swiss authorities now grant administrative assistance as well as judicial assistance. Administrative assistance is regulator to regulator contact as opposed to judicial assistance which takes place between judicial authorities within the scope of civil or criminal legal proceedings.
The Swiss Federal Banking Commission which regulates banks, mutual funds, stock exchanges and security dealers is the regulator charged with rendering administrative assistance. A number of conditions attach to the granting of administrative assistance by the Swiss Federal Banking Commission namely:
- The foreign authority must be recognized by the Commission as a supervisory authority authorized to request administrative assistance;
- The foreign authority may only use the information for the purposes of direct supervision of the institution concerned;
- The foreign authority must be bound by official or professional secrecy;
- The foreign body can only re-transmit the information under very restrictive circumstances. This is called the principle of specificity and means that information that was given for the purposes of a criminal offence such as drug dealing cannot be used in proceedings for tax evasion. In practice the foreign authority must confirm that it will not so transmit the information unless required to do so by a competent court against whose decision it will appeal. Since the grant of assistance by the commission is discretionary if specificity cannot or was not guaranteed future assistance may be denied though in practice the commission is always eager to be seeing to play its part;
- If the information requested gives the name of a client he must be notitfied and given time to contest the decision;
- There is a right of appeal to the Federal Supreme Court.
In 2001 the European Union began negotiations with Switzerland to attempt to gain agreement to the information-sharing required as part of the EU's withholding tax directive and without which it will not be effective.
Switzerland was politely helpful, offering to extend its 35% withholding tax on resident savings income to non-resident account holders, and to distribute much of the tax collected among EU member states, but the government was adamant that it will not shift on the issue of banking secrecy. The Finance Minister, Kaspar Villiger confirmed this, commenting frequently that: 'Banking secrecy is not negotiable'.
Jean-Baptiste Zufferey, a Swiss tax expert and professor at the University of Fribourg expressed the situation more bluntly: 'It's not because we fear banks would lose business, but most Swiss people have an attachment to the idea that a human being is entitled to financial privacy. It is the problem of foreign countries if they cannot tax their citizens. We in Switzerland don't have to help other countries do their job.'
This posed a serious problem for the EU - not just because the alpine jurisdiction is home to an estimated one third of the world's offshore wealth, but because other countries, in particular Luxembourg and Austria, had said that they would refuse to back information exchange plans if Switzerland does not participate. The EU had set the end of 2002 as the deadline for final adoption of its information exchange plans, but Luxembourg's refusal to accept the Swiss compromise position as acceptable meant that negotiations continued into 2003. After last-minute haggling by Italy and Belgium, it was agreed by mid-2003 that the Directive would enter into force in 2005.
In January, 2004, Switzerland and the Organisation for Economic Co-operation and Development reached a long-awaited compromise deal over certain Swiss tax practices deemed harmful by the OECD. Following two days of discussions with the Paris-based organisation’s fiscal affairs committee, Swiss officials agreed to exchange information with other countries on Swiss holding companies, one of a number of issues that has dogged the relationship between Switzerland and the OECD in recent years.
The two parties also managed to resolve another sticking point involving the issue of administrative notes on how taxable profits are defined by firms. But a third tax issue concerned with the method by which commercial expenses are deducted from tax statements remains unresolved.
Further agreement was reached, however, in the area of transfer-pricing, and the Swiss authorities have agreed to warn domestic firms to abide by OECD guidelines when transferring profits to subsidiary companies.
It has also emerged that the OECD is to undertake further analysis of the tax regimes under which Swiss finance and leasing companies operate.
In May, 2004, agreement was provisionally reached with Switzerland over the implementation of the EU Savings Tax Directive. The Swiss government had agreed the text of the Directive, but refused to sign it until assurances were given by the European authorities that the Schengen agreement on cross-border crime would not force it to compromise its banking secrecy by reporting on tax evasion, which is not a crime in Switzerland.
The agreed compromise is that Switzerland will provide legal assistance under the terms of the Schengen agreement in cases relating to indirect taxes such as customs, VAT, and alcohol and tobacco levies, but will be exempted from providing such assistances in cases of direct taxation.
Later in the month, representatives from Switzerland and the European Union signed the nine 'bilaterals II' agreements covering various topics including tax and the free movement of people. They had been held up pending agreement on the Savings Tax Directive.
The agreements concern: the taxation of savings; co-operation in the fight against fraud; the association of Switzerland to the Schengen acquis; participation of Switzerland in the “Dublin” and “Eurodac” regulations; trade in processed agricultural products; Swiss participation in the European Environment Agency and European Environment Information & Observation Network (EIONET); statistical co-operation; Swiss participation in the Media plus and Media training programs; and the avoidance of double taxation for pensioners of the Community institutions.
A protocol to the existing agreement on the free movement of persons was also signed, extending the agreement to the new EU Member States.
Right wing parties such as the Swiss People's Party, opposed to the plans to cooperate more closely with Brussels on security and other matters, threatened to force a referendum on the issue, but by November it was clear that the government was going to be able to put through the necessary implementing legislation without needing a referendum, and the Savings Tax Directive duly came into force in July, 2005, with Switzerland applying a 15% withholding tax to the returns on savings of EU residents.
The new Lugano Convention on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters between the the European Commission and certain member states of the European Free Trade Area, which includes Switzerland, was signed on October 30, 2007.
The new agreement aims to align the Convention provisions with the present European Community legal framework. As a result of it, the rules for determining jurisdiction of the courts will now be similar in the EU and the EFTA States concerned. Moreover, the judgments delivered by EU national courts and those of EFTA Member States will be more easily recognised and enforced.
In November 2007, The Swiss Federal Council approved bilateral framework agreements with the eight European Union member states which acceded to the EU in 2004.
It was announced at the end of 2007, that Switzerland had given Malta EUR1.8 million, under the bilateral agreement which implements Switzerland’s undertaking to provide cohesion funds to the new member states of the EU, following its access to the EU internal market.
The individual bilateral agreements by Switzerland with the ten EU member states which joined in 2004 followed the Memorandum of Understanding (MoU) signed between Switzerland and the Council of the European Union in February 2006.
This MoU contained the overall conditions and modalities agreed between Switzerland and the EU for a financial contribution by Switzerland as a compensatory measure to the latter’s participation in the economic and social dimensions of the EU internal market.
An agreement between the Swiss Confederation and the Kingdom of Saudi Arabia on the Encouragement and Reciprocal Protection of Investments entered into force on August 9, 2008.
The core of the agreement lies in the commitment of each contracting party to protect and promote in its territory investments of investors of the other contracting party and in particular to provide these investments National Treatment and Most Favoured Nation Treatment.
An "investment" is defined broadly under the agreement and means every kind of asset invested in accordance with the national laws of the destination country of the investment. In addition, both countries are committed to permit investors of the other country free transfer of payments in connection with an investment.
The agreement also provides elaborate dispute settlement mechanisms in case of disputes between an investor and the host contracting party as well as between the two contracting parties.
The Intellectual Property Office of Singapore (IPOS) and the Swiss Federal Institute of Intellectual Property (IGE) signed a Memorandum of Understanding (MOU) on bilateral co-operation in September 2008.
The signing ceremony, which took place at the 45th World Intellectual Property Organization (WIPO) General Assembly in Geneva marks the start of enhanced cooperation between the two Offices.
The MOU establishes a formalised framework to promote greater co-operation and information sharing between IPOS and IGE. It creates a platform to foster greater interaction between the IP Offices and opens up more opportunities for organising joint projects in areas of mutual interest.
“We are very happy to partner IGE to share knowledge and increase the awareness of IP. We would like to explore further collaborative opportunities with our Swiss partner, particularly in IP capability development, IP awareness as well as IP searches and information services.” commented Ms Liew Woon Yin, Director-General of IPOS.
Mr Felix Addor, Deputy Director General of the Swiss Federal Institute of Intellectual Property added:
“This will strengthen ties between both our IP offices to further facilitate and enhance collaborative efforts, particularly in the sharing of knowledge and experiences, as well as joint activities at the national and international level."
On October 10, 2008, Federal Councillor Doris Leuthard and then US Trade Representative Susan Schwab signed a joint declaration on e-commerce in Washington, D.C. The declaration envisages cooperation between Switzerland and the USA with a view to improving trade conditions for e-commerce.
In the joint declaration, Switzerland and the USA state their intention to facilitate and encourage electronic commerce, prevent discriminatory measures, guarantee users a higher degree of legal certainty and establish the necessary climate of trust and confidence for electronic transactions. The two parties declare their desire to work together in this regard within the World Trade Organisation and other relevant international organisations, as well as to continue their cooperation at the bilateral level.
This joint declaration on e-commerce was developed under the Swiss-US Cooperation Forum on Trade and Investment.
The Swiss Federal Department of Economic Affairs announced in January 2009 that discussions would be launched later that year with China to examine the feasibility of a bilateral free trade agreement.
President Hans-Rudolf Merz received the Chinese Prime Minister Wen Jiabao on an official working visit on January 27 to discuss bilateral economic cooperation. It was agreed that a Swiss-Chinese working group on the feasibility of an FTA should begin work in the second half of 2009 with the aim of deciding on the commencement of negotiations at the earliest opportunity.
A new bilateral investment protection agreement was signed during the meeting. This new agreement replaces the existing one from 1986, which is now outdated.
Talks with China for a bilateral free trade agreement began on January 28, 2011. Chinese Commerce Minister Cheng Deming said a free trade agreement would enhance mutual trust between the two sides and promote economic development and closer ties between China and Switzerland.
Vietnamese Deputy Prime Minister Nguyen Thien Nhan and Swiss Vice President and Minister of Economics Loris Leuthard met on January 29, 2009, to discuss the possibility of a free trade agreement between their respective countries.
Leuthard asked Vietnam to consider the possibility of a free trade agreement with the European Free Trade Area which consists of Switzerland, Norway, Iceland and Lichtenstein, also proposing an air route between Switzerland and Vietnam to further boost investment and tourist cooperation between the two countries.
A visit by the Tajik Foreign Minister, Hamrokhon Zarifi, in March 2011, included talks with the Swiss President Micheline Calmy-Rey on the development of political and economic cooperation.
The European Council Secretariat on February 24, 2009, published provisional details of an anti-fraud agreement between European Union Member States and Switzerland.
The anti-fraud agreement's aim is to counter fraud and other illegal activities affecting the financial interests of both the EU and Switzerland. It contains provisions relating to administrative assistance and to mutual legal assistance in criminal matters for the protection of financial interests. Within the scope of the agreement are indirect tax (VAT and excise duties) and customs offences (including smuggling), corruption and money laundering. Direct taxation is excluded from the scope of the agreement.
A press release by the EU council on February 15, 2011, announced that an initial debate had taken place on a draft decision which authorises the Commission to negotiate a new anti-fraud agreement with Swizerland. A draft agreement with Liechtenstein which "provides for cooperation between parties through the exchange of information that is foreseeably relevant to tax administrations. It allows the parties to trigger administrative assistance that cannot be refused on the sole grounds that the information is held by a bank or other financial institution, and legal assistance for acts that are punishable under the laws of the parties", is planned to serve as the model for the new negotiations.
In early 2012, the Swiss Federal Administration made clear the view held that the existing anti-fraud agreement provides for the necessary assistance on indirect taxes. It went further by saying that Switzerland prefers to deal with direct taxes through the appropriate double tax agreements.
In September 2011, following purchases of stolen account details by various German tax authorities, Switzerland and Germany signed a tax agreement that would impose one-off withholding tax on interest earned in previous years by German resident account holders. Rates for past taxation were originally set at between 19% and 34% but were increased to between 21% and 41% by a supplementary agreement signed in April, 2012, in line with demands from Germany's opposition parties. German account holders are given the option of voluntary disclosure by giving the Swiss bank written authorisation to disclose their details to the German tax authorities. In this instance, no withholding tax will be applied by the bank. The German account holder also has the option of remaining anonymous, in which case the bank will apply the appropriate withholding tax and forward this to the German tax authority.
The agreement was expected to come into effect on January 1, 2013, however, strong opposition to the agreement meant that it did not pass it's final legislative hurdle in Germany.
In October 2011, Switzerland and the UK signed a Taxation Cooperation Agreement which took effect from January 1, 2013. Rates of tax applied to interest earned in undeclared Swiss bank accounts range from 21% to a maximum 41%, depending on the asset value. The agreement provides for either voluntary disclosure by UK resident account holders or non-disclosure, in which case a one-off payment is due to settle outstanding UK tax on Swiss bank accounts.
A similar agreement was signed with Austria in April, 2012. Interest earned in past years will be taxed at between 15% and 38% depending on the length the account has been held and the value of assets. Future interest will be subject to a 25% tax. The agreement came into effect on January 1, 2013.