The Council of EU Finance Ministers drafted a new directive on the taxation of savings with a view to taxing cross-border interest payments. Pursuant to the directive, all EU member states as well as their dependent and associated territories, with the exception of Belgium , Luxembourg and Austria , must introduce a system to exchange information automatically starting in July 2005 . The directive also provides that Belgium , Louxembourg and Austria must introduce a withholding tax at a rate of 15% initially as an alternative to the automatic change of information.

Non-EU member states, including Switzerland , must adopt equivalent measures.

On 26 October 2004 the EU and Switzerland signed an agreement aimed at introducing a withholding tax system similar to that planned for Belgium , Luxembourg and Austria . Based on that agreement, the clients of Swiss banks can choose between the exchange of information and a withholding tax amounting initially to 15% on interest payments.

Main result : Banking Secrecy is maintained under the agreement, which has been successfully implemented now that the necessary changes to Swiss federal legislation have taken effect.

3. EU Withholding Tax Rates

Under the agreement, the EU withholding tax rates are as follows:

•  15% from 1 July 2005

•  20% from 1 July 2008

•  35% from 1 July 2011

4. Persons affected

The EU withholding tax is levied on all interest payments received by individuals resident in EU member states.

5. Persons and Entities not affected

The following persons and entities are not affected:

- Swiss residents who receive interest from a Swiss bank

- Persons with expense-based lump-sum taxation agreements in Switzerland (i.e. tassazione forfettaria, impôt à forfait)

- Persons who are not residents of an EU member country

•  Corporate entities, incl. offshore companies

6. Income subject to EU withholding tax

Only income in the form of interest payments is subject to the withholding tax, i.e. interest, both accrued and capitalised, derived from debt instruments of any kind, such as bonds, fiduciary deposits and mutual funds which invest in debt securities.

The tax is levied irrespective of the issuing country and currency of the interest payment.

7. Income not subject to EU withholding tax

Interest paid on bonds issued before 1 March 2001 that are exempt from the EU withholding tax (grandfathering). However, if a further issue of such bonds is made after 1 March 2002, the EU withholding tax is levied on the entire issue in the case of government bonds and only the new issue in the case of non-government bonds.

Income derived from equity instruments, in particular shares.

Interest Income subject to Swiss withholding tax

Distributions made by distributing mutual funds that invest no more than 15% of their assets in debt securities.

Income resulting from the sale of redemption of shares of accumulating funds that invest less than 40% of their assets in bonds and other debt securities that would normally be subject to the EU withholding tax.

Derivatives and structured products on interest rates, as well as structured products without any interest component.

Interest derived from insurance products.

8. Exchange of information or EU withholding tax?

The Swiss bank offers its clients a choice between the information-exchange system and the withholding tax system. The information exchange system applies only upon specific request made by the client. Clients of non-disclosed accounts have to check with the Swiss bank that the interest payments are subject to the withholding tax system.

The Swiss Tax Authorities collect first tax savings income for EU

The Swiss banks and the federal tax administration (ESTV, Eidg. Steuerverwaltung) collected for the first time the withholding tax and pay the bulk to the EU. The first taxation of savings income on EU residents' accounts held in Switzerland shows the system - enabling the preservation of the Swiss banking secrecy - works.

On 10 April 2006 the federal tax administration announced that they had received about Swiss Francs 138 million (USD 107 million) for the 2005 collection period, which ran from 1 July to 31 December 2005. Alain Bichsel, a spokesman for the Swiss Bankers Association, added that the Swiss banks had done their homework, noting they had made considerable investments to make the system work smoothly.

Although there are no exact figures, it has been estimated that the banks spent up to Swiss Francs 300 million on introducing the withholding tax scheme. About Swiss Francs 103 million of the money collected will be transferred to the beneficiary EU states. Switzerland will receive Swiss Francs 34 million as payment for additional operating expenses. The Swiss Bankers Association said it did not want to comment on the amount of money that had been collected in the first six months by virtue of the Swiss-EU Agreement signed on 26 October 2004.

What we can do for you?

The private banking industry is in transition. Tax and other authorities have focused on the flow of funds across international borders. New tax legislation, new governments and political risk, regulatory, confidentiality and compliance issues are emerging throughout the world. How do you meet your business objectives while managing these problems? Sometimes the private banker hesitates to solve the client's problem because he is afraid that said problem can become a problem of the bank. We, in our capacity as Swiss lawyers, are independent and committed to the client's interest only.

Advokaturbüro Fischer & Partner has a Private Banking Team directed by Prof. Dr. Daniel Fischer and Enzo Caputo. Due to our expertise matured in the Swiss private banking industry we are prepared to analyse the bank-accounts of our international clients. We are in a position to compare the terms and conditions, the performance and the pricing offered by the major Swiss banks. For our clients we can negotiate a preferential treatment with the banks. We offer a tailor-made support on how to structure the client's assets in a tax-efficient manner. We assist our clients in the set-up of offshore and fiduciary structures. We assist our clients in the dispute resolution with the bank. We provide our clients with the resources they need to effectively collaborate across borders, time zones, markets and cultures.

Enzo Caputo, attorney-at-law