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Germany & UK Sign New Tax Deal Impacting Offshore Bank Accounts with Switzerland
In August 2011, after a long period of negotiations, Germany, the UK and Switzerland finally concluded important tax deals to clamp down on tax evasion by German and UK residents concealing bank deposits in Switzerland. A final withholding tax will be charged on future income from savings and investments on an anonymous basis. "Old wealth" hidden from the German and UK tax authorities will be regularised through an anonymous one-off payment or through disclosure.
Swiss banks will make a guaranteed payment of CHF 2 billion to the German tax authorities and CHF 500 million to the UK Inland Revenue. Germany, the UK and Switzerland will also improve their mutual cooperation on tax matters.
The treaty is expected to be signed by the parliaments of the three countries in the following weeks. It will probably become effective at the beginning of 2013.
Taxand Germany, Taxand Switzerland, Taxand France, Taxand Luxembourg, and Taxand UK take a look at the deal and its impact on individual taxpayers with offshore bank accounts.
It is estimated that Germans have undeclared wealth to the tune of approximately EUR 100 - 200 billion hidden away in Swiss banks. The UK has yet to confirm what figures it has been working with.
Under the new agreement, the future income of Germans with Swiss bank accounts will attract withholding tax at 26.375%. This tax rate is equal to the domestic German withholding tax rate. However, the identity of the Germans holding secret bank accounts in Switzerland will not be disclosed and Switzerland's banking privacy regulations will remain intact.
Under the new UK deal, future profits earned on these accounts will, if the UK chooses the withholding tax option, face tax at a rate just under the current top rate in the UK (48% for income, 40% for dividends and 27% for capital gains).
In practice, withholding taxes will be paid by Swiss banks directly to the German and UK tax authorities. A respective tax certificate will then be issued to account holders as evidence of having fulfilled their tax obligations.
A further step is the retroactive taxation of bank deposits since 2000. German residents affected by this have two alternatives:
1) to regularise their money: German and UK residents can make an anonymous one-off payment for their "old wealth". The tax rate will vary between 19% and 34% and depends on the age of the bank account, and its opening and closing balances.
2) German and UK citizens can report their undisclosed wealth and relationships with Swiss banks directly to their tax authorities.
Mutual assistance in tax matters will be improved. Switzerland has agreed that the German and UK tax authorities can submit requests for information to prevent new tax evasion in the future. The number of requests that can be submitted is limited to a range of 750 to 999 within a two-year time period in the case of German residents and up to 500 enquiries each year for UK residents, but there must be a plausible reason for every request. After some time, it will become possible to adjust the number of requests submitted. However, since the financial privacy of the individual account holder is preserved, there are no so-called "fishing expeditions" allowed.
Mutual market access for banks and other financial institutions will be facilitated: for example, there will be no longer be an obligation for Swiss banks to initiate customer relationships through a local institution.
The agreements with Switzerland provide a mechanism whereby the German and UK tax authorities will be able to make enquiries about their taxpayers' opening accounts in Switzerland. The information published so far does not make clear how this will be done but it is clearly not a licence to conduct 'fishing expeditions'. In general, it has to be said that the OECD has, for years, been exerting relentless pressure on Member States to implement measures to combat banking secrecy. There will be no let-up in this pressure until eventually the only safe haven for undisclosed funds will be a bank accessible only at low tide! Below, Taxand provide their take on the on the new tax deals with Switzerland.
The newly concluded tax deal is a pragmatic solution that resolves what has been a long-standing irritant in the relationship between Germany and Switzerland. The secrecy of Swiss banks and the secrecy of the individuals that bank with them will be preserved and, at the same time, Germany gets its tax revenues.
Under the new agreement some important changes will be introduced. In particular, the taxation of assets deposited by German citizens in Switzerland shows increased cooperation on cross-border tax matters. The key points are: retrospective taxation, final withholding tax for future income as well as preventative measures.
Lastly, it remains to be seen how German tax 'evaders' will react to the new tax deal. It will be a telling sign if they move their money to third countries, e.g. Singapore or Hong Kong.
The reaction in Switzerland has been broadly positive. The bilateral agreement offers Swiss bank clients, who are resident taxpayers in Germany, the possibility to become tax compliant whilst preserving their financial privacy and providing the German tax administration with the tax revenues due.
The agreement will allow Switzerland to focus on the implementation of its future strategy of acquiring and managing taxed assets.
The deal also allows easier market access in the bilateral relationship and the decriminalisation of Swiss banks and their employees - an important basis for future growth in cross-border business with Germany.
In the absence of detailed announcements from either HM Revenue & Customs ("HMRC") or the Swiss Department of Finance, much of the information about the new agreement comes from the Swiss Bankers Association ("SBA") which says that the agreement applies to 'natural persons' resident in the UK including individuals who hold assets through a trust or 'other domiciliary company in which they have a beneficial interest'. The agreement does not apply to 'non-UK domiciled individuals'.
It is clear that many UK taxpayers with undisclosed accounts offshore, which were not opened via a UK bank and who are therefore eligible to make use of the attractive terms of the Liechtenstein Disclosure Facility ("LDF"), have been holding back from registering under the LDF in the hope that the Swiss deal would be more attractive. Without the full detail of the agreement, it is too early to make a definitive judgement.
The uncertainty of how monies previously withdrawn from the accounts will be dealt with is a cause for concern. If the undisclosed funds comprise untaxed profits diverted from a UK business and income arising from these funds, then clearly paying even a top rate of 34% will be much more attractive than a full-scale serious fraud investigation which would be triggered by a disclosure, culminating in tax, say, of 40% plus penalties and interest.
One aspect of the deal which will be particularly galling to those who have come forward under earlier UK disclosure initiatives and have paid tax for the maximum 20-year assessing period plus interest and a penalty of at least 10%, will be the creation of a class of UK tax evader who has ostensibly paid his or her dues in relation to untaxed funds held in Switzerland but whose identity remains unknown to HMRC.
Anyone who wants to achieve finality and peace of mind might be well advised to opt for the LDF route. But clearly such a decision cannot be made until the terms of the UK agreement are known.
In France, various measures have been taken to combat tax evasion. Recent initiatives range from the signing of agreements on exchange of information, within the framework of OECD guidelines on uncooperative tax havens, to the strengthening of anti-abuse measures.
Should France sign an agreement with Switzerland, people holding accounts there may face more stringent tax audits. Still, as long as there is economic substance supporting operations in Switzerland, French taxpayers should have nothing to fear from such a move.
The timeframes for other countries really depend on the signing of other agreements and the success of those now in force, particularly the one signed by Germany.
To protect its domestic banking secrecy, Luxembourg has always favoured a final withholding tax regime rather than an automatic exchange of information, as ultimately envisaged in the Savings Directive. Severe pressure has been brought to bear on Luxembourg by the Member States to abolish its regime of banking secrecy and to adopt the automatic exchange of information model.
From a Luxembourg viewpoint, it is interesting that Germany, in particular, was previously pushing for an automatic exchange of information. The bilateral agreement between Germany and Switzerland has now gone in a different direction. As a result of the Swiss/German tax deal, a non-EU Member State is placed in a better position than a Member State with a final withholding tax of 26.375% for Swiss bank savings, compared with a provisional withholding tax of 35% for Luxembourg bank savings. With this in mind, it is difficult to believe that at EU level Germany can continue to pressure Luxembourg for an automatic exchange of information.
Also, it seems unlikely that Switzerland would now agree to a comprehensive exchange-of-information agreement with the EU while having a different arrangement with Germany.
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