The EU ministers of finance adopted the Directive on Cross-Border Taxation of Income in the Form of Interest Payments, which came into force on July 1, 2005.

Under this directive 24 Member States agreed to automatically exchange information between the tax bodies in order to ensure taxation of interest income in the resident state of an investor. Three EU states – Austria, Belgium and Luxembourg – are not obliged to automatically submit this information, though they have the right to request this information from the other 24 Member States. Instead,  they apply the system of “withholding tax to the Member State of residence“, which is structured as follows:

Starting from July 1, 2005 to June 30, 2008  the withholding tax shall be levied at a rate of 15% for the first three years; from July 1, 2008 to June 30, 2011 – at a rate of 20%, and starting from July 1, 2011 – at a rate of 35%.

Switzerland and the European Union also signed an Agreement on Taxation on Interest Taxation. It is based on the above Directive and came into force on July 1, 2005. It is based on taxation of interest paid to individuals taxable in the EU Member States. That is why citizens of EU Member States, who have a bank account in a Swiss bank, are obliged to give their permission to the above- mentioned withholdings, or should agree to voluntary exchange of information, i.e., to notification of tax bodies of their resident countries about their income. With the availability of such permission the automatic information exchange replaces the system of “withholding tax to the Member State of residence“. Such a structure allows Switzerland not to violate the above-mentioned EU Directive on the one hand, and to protect  bank secrecy on the other hand.

The EU Directive regulates taxation of interest income of exclusively physical entities, who receive income in one of the EU Member States while having tax obligations in another Member State. This Directive does not apply to legal entities.

Switzerland transfers 75% of the revenue of this withholding tax to the state of residence of taxpayers from the EU countries, and retains the remaining 25% as compensation for its expenses. So, in 2010 the gross total amount of the collected taxes was CHF 432,000,000, of which CHF 324,000,000 were transferred to the taxpayers’ states of residence.

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