The Taxation of Savings Income draft agreement between the EU and Switzerland is expected to be initialled today, after which it will be submitted, along with eight other bilateral agreements, to Council as soon as possible for signature and ratification by the Member States.

This agreement is based on four key elements:

• a retention levied by Swiss paying agents on interest payments to EU residents, the revenue of which will be shared with Member States;

• a mechanism for voluntary disclosure;

• the exchange of information on request in cases of ‘tax fraud or the like’; and

• a review clause that allows the contracting parties to review the terms of the agreement to take account of international developments.

Earlier this week European Union Ambassadors reportedly agreed to postpone until July 2005 the introduction of the savings tax directive, originally due to come into force in January. Switzerland is seeking further clarification on what it describes as “crucial details” of the new system. The Swiss Business Federation says the delay is realistic, as implementation of the new tax rules at the beginning of the year would not have been feasible. Additionally, a Swiss Bankers Association spokesman said Swiss banks have been preparing for the new tax system over the past year, but need certain definitions clarified. In the meantime, Swiss officials apparently have told the European Commission that they cannot complete parliamentary procedures in time to make the EU’s original January 1 deadline.

This week’s decision by the ambassadors is expected to be ratified by EU ministers next week.

**Third Party States**

Earlier this month, the EU Council of Economics and Finance Ministers reported that agreement in principle had been reached on all matters of substance with the dependent and associated territories and with Andorra, Liechtenstein, Monaco, San Marino and Switzerland on the necessary arrangements to enable the Savings Tax Directive to be applied.

At that time, it requested the Commission to pursue negotiations with Switzerland on the timing issue and to report back to the Committee of Member States’ Permanent Representatives (COREPER) by the end of June so that the necessary decision could be taken by the Council this month.

After the June 2nd Council Meeting, Taxation Commissioner Frits Bolkestein stated *“I am very pleased to report that the Commission was able to inform the Council today that not only Switzerland, but also Andorra, Monaco, San Marino and Liechtenstein have all agreed to put in place equivalent measures to those to be applied by the EU’s Member States as regards the taxation of income from savings. In particular, they have all agreed to impose a withholding tax on the interest income of EU residents at the same rate as Austria, Belgium and Luxembourg and to hand over 75 per cent of these revenues to the Member State of the EU resident concerned. They have also agreed to exchange information on request in criminal or civil cases of tax fraud or similar misbehaviour.”*

The Commissioner also said there was unanimous agreement in the Council that all matters of substance with these countries, and also with the dependent and associated territories of the Netherlands and the United Kingdom, have been resolved.


A directive was first proposed by the European Commission in 1989. A new proposal then was presented in 1998, which allowed Member States to choose between exchanging information or applying a withholding tax. A further proposal was presented on 18 July 2001, with exchange of information as its ultimate objective.

Under the terms of the Directive as finally adopted:-

• All Member States will ultimately be expected to automatically exchange information on interest payments to non-resident individuals. All Member States, except Belgium, Luxembourg and Austria, will immediately introduce a system of information reporting. These three countries will be entitled to receive information from the other Member States.

• The Directive has a broad scope that covers interest from debt-claims of every kind whether obtained directly or as a result of indirect investment via collective investment undertakings and other similar entities.

• The Directive will apply from 1 January 2005, provided that agreements with certain third countries (Switzerland, Andorra, Liechtenstein, Monaco and San Marino), for equivalent measures and with Member States’ dependent or associated territories for the same measures or the same as those applied by Belgium, Luxembourg and Austria (see next paragraph), will apply from that same date.

• Belgium, Luxembourg and Austria will introduce a system of information reporting at the end of a transitional period, during which they will levy a withholding tax at a rate of 15% for the first three years and 20% for the following three years and 35% thereafter. They will transfer 75% of the revenue of this tax to the investor’s state of residence.

Belgium, Luxembourg and Austria had agreed to implement automatic exchange of information:

• if and when the EC enters into an agreement by unanimity in the Council with Switzerland, Liechtenstein, San Marino, Monaco and Andorra to exchange of information upon request as defined in the OECD Agreement on Exchange of Information on Tax Matters (as developed by the OECD global forum working group on effective exchange of information in 2002) in relation to interest payments, and to continue to apply simultaneously the withholding tax and

• if and when the Council agrees by unanimity that the United States is committed to exchange of information upon request as defined in the 2002 OECD Agreement in relation to interest payments.