Germany: 253. Revisions to Swiss Tax Treaty

Reiner Denner, Daniela Rudolf, and Rainer Krieg

KPMG Zurich

In December 2001, the German and Swiss negotiating teams reached agreement on changes to the tax treaty between Switzerland and Germany. The official protocol, dated 12 March 2002, has since been released. Certain changes are retroactive to 1 January 2002.

The primary changes are as follows:

• No withholding tax will be levied on dividends paid to a parent company in the other treaty state that holds a 20 % share in the distributing corporation. Furthermore, Switzerland is expected to implement an exemption procedure similar to that available in Germany to avoid the need to file for a refund. Dividends due for payment on or after 1 January 2002 by the terms of the shareholder resolution authorising the dividend should qualify for zero rate withholding retroactively once the amendments have entered into force. For constructive dividends, the date on which the constructive dividend diminishes the net assets of the corporation (Mittelabfluß) is controlling.

• Shares held through partnerships will also qualify for full relief from dividend withholding tax in the future. Previously, full relief was not available where a corporation in one treaty state held shares in a corporation in the other treaty state through an interposed partnership. There is still some uncertainty whether the new rules will apply to all partnerships or only to German and Swiss partnerships.

• The limitations on benefits clause in Article 23 of the treaty will be abolished. Instead, treaty shopping will be addressed by applying the domestic law of the respective treaty states. This means that Switzerland will apply its anti-avoidance directive and Germany will apply § 42 AO (Tax Procedure Act) and § 50d (3) EStG (Income Tax Act – anti-treaty-shopping provision, former § 50d (1a) EStG). The new provisions apply the year after the effective date of the amendments (approx. 2003).

• Exchange of information between the tax authorities of the treaty states is significantly expanded in matters involving tax fraud. In case of tax crimes punishable by imprisonment – under the law of both countries – the tax authorities are entitled to request information and assistance similar to that previously reserved to the criminal investigative agencies. The new provisions require reasonable cause to suspect that a tax crime has been committed (konkreter Anfangsverdacht) and are limited to discovery of information regarding the act of tax evasion itself, as opposed to the subsequent use made of the proceeds of tax evasion (investment in Switzerland etc.). The new provisions apply for tax crimes committed the year after the effective date of the amendments (approx. 2003).

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