Swiss, Germany Agree to Settlement in Tax-Evasion Dispute

Switzerland and Germany completed an accord to end a dispute over tax evasion by wealthy Germans holding cross-border accounts with Swiss private banks.

As part of the settlement, Swiss banks will pay 2 billion Swiss francs ($2.8 billion) to the German government to cover the failure by their clients to disclose undeclared money in the past, the Swiss Finance Ministry said today in a statement. That amount will later be reimbursed to the banks from taxes paid by their customers, the ministry said.

The tax treaty comes after Switzerland agreed in March 2009 to meet international standards to avoid being blacklisted as a tax haven by the Organization for Economic Cooperation and Development. Relations between Germany and Switzerland soured early last year when German authorities began an investigation into tax evasion based on purchased CDs of stolen bank data.

“The times of illicit accounts in Switzerland are now over for good,” Klaus-Peter Flosbach, the financial-policy spokesman in parliament for Chancellor Angela Merkel’s bloc, said in a statement. “The agreement will lead to more tax fairness and strengthen the income basis of federal, state and municipal governments.”

While the agreement protects bank clients’ privacy, it also ensures the “implementation of legitimate tax claims,” the Swiss Finance Ministry said.

Triggering Outflows

The settlement may trigger outflows by Europeans who question the value of cross-border accounts as Swiss banking secrecy crumbles. Switzerland’s commitment to tax compliance is putting pressure on the country’s banks as western European clients repatriate their wealth, Boston Consulting Group said in a May 31 report.

“The agreement draws a line under the German-Swiss discussions, but it may well affect assets under management held offshore,” said Michael Rohr, a Frankfurt-based analyst with Silvia Quandt. “There will be a move toward onshore.”

Going forward, Swiss banks will levy a 26.375 percent withholding tax on interest, dividends and capital gains earned by Germans with offshore accounts, today’s statement said. Revenue generated will go to the German treasury while client identities remain secret.

“The tax agreement does not come without a price tag for the banks,” the Swiss Bankers Association said in a statement. “The implementation of the measures will cost the banks in Switzerland a mid-three-digit million Swiss franc amount.”

Step Forward

The tax on assets from the past will range from 19 percent to 34 percent, depending on the duration of the client relationship and the initial and final amount of capital, the ministry said without giving further details.

Alternatively, account holders can disclose their holdings to German tax authorities.

“It would be completely wrong to say we won the war. We didn’t win the war,” said Michel Derobert, secretary-general of the Swiss Private Bankers Association, whose members include Pictet & Cie. “It’s a great step forward.”

Swiss financial institutions will get better access to the German market, according to the statement.

“The implementation of the exemption procedure for Swiss banks in Germany will be simplified, and the obligation to initiate client relationships via a local institution will be eliminated,” the ministry said.

Information Requests

To prevent new, undeclared funds from being deposited in Switzerland, German authorities can submit requests for information that must state the name of the client, though not necessarily the name of the bank, the Finance Ministry said. The number of requests will be limited to 999 over a two-year period.

The initialed tax agreement should be signed by both governments in the next few weeks and may take effect from January 2013, the ministry said.

“The negotiators conducted tough negotiations and achieved good results,” Swiss Finance Minister Eveline Widmer-Schlumpf said in the statement. “This creates legal certainty and will strengthen the competitiveness and the reputation of Switzerland as a financial centre in the long term.”

More than 10,000 people rushed to declare their holdings in Swiss accounts in the six weeks after German authorities announced their intention to buy a CD containing data on Swiss bank accounts on Feb. 2, 2010. Tax authorities in North Rhine- Westphalia, Germany’s most populous state, first bought a CD for 1.25 million euros ($1.8 million) from an informant, the government told lawmakers in parliament’s finance committee on March 3, 2010. The data yielded “many” investigative leads, it said.

Tax Tension

The practice became a source of tension between Germany and the Swiss government, which refused to offer legal assistance to pursue tax dodgers in the case of stolen data.

About 69 percent of the 280.6 billion francs of offshore assets held by German clients in Swiss banks was undeclared, according to estimates by Helvea SA two years ago. That share may have dropped to 50 percent, Peter Thorne, a London-based analyst with Helvea, said last month.

Switzerland is the world’s biggest center for offshore wealth with about 1.96 trillion francs of assets last year, according to Boston Consulting.

“Increased certainty is likely to be welcomed and ultimately that helps eliminate a persistent concern over the offshore business model,” said Matthew Clark, an analyst at Keefe, Bruyette & Woods Ltd. in London. “Importantly this allows Swiss private banks to hold on to offshore German customers.”

Treaty Template

Credit Suisse Group AG (CSGN), the second-biggest Swiss bank, welcomed the agreement and said it had been “preparing for the changes in cross-border wealth management for a long time.”

Switzerland is negotiating a similar treaty with the U.K. with British authorities likely to receive an upfront payment of 500 million francs from Swiss banks, SonntagsZeitung reported on July 31, citing people familiar with the talks.

“This treaty can be used as a template that other European countries can adapt to their own tax systems” said Alfredo Gysi, the chief executive officer of BSI Group, a Swiss private bank owned by Assicurazioni Generali SpA. (G) “I’m confident we will see other countries follow relatively quickly”

To contact the reporters on this story: Klaus Wille in Zurich at kwille@bloomberg.net; Patrick Donahue at pdonahue1@bloomberg.net

To contact the editors responsible for this story: Craig Stirling at cstirling1@bloomberg.net; James Hertling at jhertling@bloomberg.net

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