Withholding tax: voluntary tax declaration remains an interesting option
Agreement between Germany and SwitzerlandMunich, 16 August 2011 – It began as a threat from the former German Federal Finance Minister Peer Steinbrück to send in the cavalry. Protracted negotiations have now culminated in the initialling of a tax treaty governing how both countries deal reciprocally with money invested in Switzerland on a "tax neutral" basis.
Agreement has now been reached on the introduction of withholding tax at a uniform rate of 26.375% at a later stage. This level of tax corresponds to the German final withholding tax on capital investment income. What should be even more interesting for many investors, however, is how the treaty deals with taxation and the associated issue of a possible amnesty for the past. 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 at between 19% and 34% 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. Alternatively, the option of making a voluntary tax declaration is to remain open to German investors.
Based on the relevant experience of WTS in successfully handling numerous voluntary tax declarations in the past, this option could indeed be a better alternative in most cases. The financial liability due to subsequent tax declaration of investment income was in most cases substantially less than the level expected through taxation related to the past. This was especially the case if, in the assessment periods to be declared subsequently, allowable tax losses or higher income-related expenses were incurred and there were no additional special factors, e.g. through subsequent tax declaration of circumstances subject to gift tax or inheritance tax.
"When substantial assets are involved, one shouldn't buy a pig in a poke but should at least check whether the viable route of voluntary tax declaration is the better alternative", says lawyer Dr. Offerhaus, co-head of the Private Clients & HR Tax Services competence area at the WTS Group. "Investors should also be aware that the tax treaty does not come into effect until the start of 2013. Until that time there is a greatly increased risk of detection by the German authorities in comparison with previous years, due to the recent amendment to the disclosure clause in the double taxation agreement. It is also still unclear which tax liabilities are actually covered by the taxation related to the past, also under criminal law (including, for example, inheritance and gift tax liabilities). In this respect it is certainly advisable to wait for the exact wording of the treaty and then also transposition into national law. If investment income has been concealed on 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."
