EU/Swiss Savings Tax Agreement Hangs In The Balance

27 March 2003 As the EU's Savings Tax Directive sits becalmed while Italy uses it as a hat-rack for various unrelated demands, details have emerged of the ongoing discussions between Brussels and Switzerland over the details of the withholding tax regime proferred by the Alpine country.

A Memorandum of Understanding has been formulated which contains the following key points:

• The Swiss Confederation and the European Community are entering into an Agreement providing for measures equivalent to those laid down in the Council Directive on the taxation of savings income in the form of interest payments (hereinafter the Directive). This Memorandum of Understanding complements that Agreement.
• As soon as theAgreement is signed, the Swiss Confederation and each Member State of the European Union shall enter into bilateral negotiations with a view to:
  • including in their respective double taxation conventions on income and capital provisions on administrative assistance in the form of exchange of information on request for all criminal or civil cases of tax fraud under the laws of the requested State, or the like with respect to items of income not subject to the Agreement but covered by their respective conventions.
  • defining individual categories of cases falling under "the like" in accordance with the procedure of taxation applied by those countries.
• During the provisional period provided for in the Directive, the European Community shall enter into discussions with other important financial centres with a view to promoting the adoption by those jurisdictions of measures equivalent to those to be applied by the Community.

The Swiss have made it clear however that their adherence to any Agreement with the EU is dependent on the adoption of the current EU proposal, saying: 'In case the Proposal should be changed or the measures proposed by the Swiss Confederation should be regarded as not being equivalent, the Swiss Confederation would have to reconsider its position with respect to the provisions of this draft Agreement.'

The Agreement itself, a much longer document, contains much fine print dealing with detailed operational aspects of a withholding tax. The definition of a 'paying agent' who is responsible for obtaining details about a payee and actually withholding the 15% is as follows:

'For the purposes of this Agreement, "paying agent" in the Swiss Confederation shall mean banks under Swiss banking law, securities dealers under the Federal Law on Stock Exchanges and Security Trading, natural and legal persons resident or established in the Swiss Confederation, partnerships and permanent establishments of foreign companies, which even occasionally, accept, hold, invest or transfer assets of third parties in the course of their business.'

The types of payment which are subject to withholding (loosely labelled 'interest' payments) are as follows:

'For the purposes of this Agreement "interest payment" shall mean:

• interest paid, or credited to an account, relating to debt-claims of every kind including interest paid on fiduciary deposits by Swiss paying agents for the benefit of beneficial owners as defined in Article 4, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor's profits, and in particular, income from government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures, but excluding interest from loans between private individuals not acting in the course of their business. Penalty charges for late payment shall not be regarded as interest payments;
• interest accrued or capitalised at the sale, refund or redemption of the debt-claims referred to above;
• income deriving from interest payments either directly or through an entity referred to in Article 4, paragraph 2 of the Directive distributed by
  • undertakings for collective investment domiciled in a Member State of the European Community,
  • an entity domiciled in a Member State of the European Community , which exercises the option under Article 4, paragraph 3 of the Directive and informs the paying agent of this fact,
  • undertakings for collective investment established outside the territory of the Contracting Parties;
  • Swiss investment funds which at the time of the entry into force of this Agreement or at a later date are exempted from Swiss anticipatory tax on their payments to individuals who are residents of a Member State of the European Community.
• income realised upon the sale, refund or redemption of shares or units in the following undertakings and entities, if they invest directly or indirectly via other undertakings for collective investment or entities referred to below more than 40% of their assets in debt-claims as referred to above:
  • undertakings for collective investment domiciled in a Member State of the European Community,
  • entities domiciled in a Member State of the European Community, which exercise the option under Article 4 paragraph 3 of the Directive and which inform the paying agent of this fact,
  • undertakings for collective investment established outside the territory of the Contracting Parties;
  • Swiss investment funds which at the time of the entry into force of this Agreement or at a later date are exempted from Swiss anticipatory tax on their payments to individuals who are residents of a Member State of the European Community.'

That gives an interesting new definition of the word 'interest', which now appears to mean something much broader!

However, the Agreement still contains a 'level playing field' clause:

' The application of this Agreement shall be conditional on the adoption and implementation by the dependent or associated territories of the Member States of the European Community mentioned in the Council decision of Feira of June 19/20, 2000, as well as the United States of America, Andorra, Liechtenstein, Monaco and San Marino, respectively, of measures which conform with or are equivalent to those contained in the Directive or in this Agreement and providing for the same dates of implementation.'

This appears to mean that if the US fails to authorize the 'non-resident alien' interest reporting measures which are currently being fought over by Treasury staffers and more liberal administration officials, then there isn't an agreement between the EU and Switzerland after all.