The European savings agreement of 2004

Directive 2003/48/EC and the Swiss alternative

The European Union adopted Council Directive 2003/48/EC of 3 June 2003 on taxation of savings income in the form of interest payments in order to ensure that interest paid in one Member State to an individual resident in another was taxed in the state of residence. The directive rested on the automatic exchange of information between Member States, with a transitional period during which Austria, Belgium and Luxembourg could levy a withholding tax instead.¹ Its effectiveness depended on the participation of the main financial centres outside the Union, and above all of Switzerland. The Swiss government refused automatic exchange but offered an equivalent measure in the form of a withholding tax that preserved the anonymity of the client. This offer became one of the agreements of the second package of bilateral agreements between Switzerland and the European Community.

The Agreement between the Swiss Confederation and the European Community providing for measures equivalent to those laid down in Council Directive 2003/48/EC was concluded on 26 October 2004 and entered into force on 1 July 2005 (SR 0.641.926.81).² Under Article 1, Swiss paying agents withheld a retention tax on interest payments to individuals resident in a Member State at a rate of 15 per cent during the first three years, 20 per cent during the following three years and 35 per cent thereafter. Article 8 provided that Switzerland retained 25 per cent of the revenue and transferred 75 per cent to the Member State of residence of the beneficial owner.³ The rate thus rose to 20 per cent on 1 July 2008 and to 35 per cent on 1 July 2011.

Voluntary disclosure and exchange in cases of fraud

The agreement offered the client an alternative to the retention. Under Article 2, the beneficial owner could expressly authorize his Swiss paying agent to report the interest payments to the tax authority of his state of residence, in which case no tax was withheld.⁴ Article 10 provided for the exchange of information on request in cases of tax fraud or similar misconduct under the law of the requested state. The Swiss government accepted this extension of assistance because it did not touch the protection of clients guilty of mere evasion. The agreement therefore left the essential structure of Swiss banking secrecy intact. It forced an Italian client of a Lugano bank to choose between paying an anonymous tax on his interest and disclosing his account to Rome, but it did not oblige the bank to disclose anything without his consent.

The scope of the agreement was narrow. It applied only to interest payments to individuals and not to dividends, capital gains or most insurance products. Payments to companies, foundations and trusts fell outside it unless the paying agent looked through the structure. Banks and their clients could therefore restructure portfolios to avoid the retention. Equity funds, structured products that did not produce interest within the meaning of the agreement and holdings through domiciliary companies became common responses. The Swiss Federal Tax Administration's statistics show that the gross retention collected rose from CHF 159 million in the half-year 2005 to CHF 738 million in 2008. It then fell to CHF 535 million in 2009 and CHF 432 million in 2010 as interest rates collapsed after the financial crisis.⁵

Notes

1. Council Directive 2003/48/EC of 3 June 2003 on taxation of savings income in the form of interest payments, OJ L 157 of 26 June 2003, p. 38, https://eur-lex.europa.eu/eli/dir/2003/48/oj, Art. 10 para. 1 (transitional period during which "Belgium, Luxembourg and Austria shall not be required to apply the provisions of Chapter II"), and Arts. 11 and 12. The directive was repealed by Council Directive (EU) 2015/2060 of 10 November 2015, https://eur-lex.europa.eu/eli/dir/2015/2060/oj. ↩
2. Agreement between the Swiss Confederation and the European Community providing for measures equivalent to those laid down in Council Directive 2003/48/EC, concluded on 26 October 2004, in force on 1 July 2005, SR 0.641.926.81, text via LexFind, https://www.lexfind.ch/tolv/157727/it; Swiss Federal Department of Foreign Affairs, Fiscalità del risparmio (factsheet, June 2013), https://www.newsd.admin.ch/newsd/message/attachments/31181.pdf. ↩
3. Savings agreement (above), Arts. 1 and 8; Fiscalità del risparmio (above): 15 per cent from July 2005 to June 2008, 20 per cent from July 2008 to June 2011, "35 per cento dal 1° luglio 2011", of which "il 75 per cento viene retrocesso allo Stato membro". ↩
4. Savings agreement (above), Art. 2. ↩
5. Fiscalità del risparmio (above), table of annual retention: 2005 CHF 159 million, 2006 CHF 537 million, 2007 CHF 653 million, 2008 CHF 738 million, 2009 CHF 535 million, 2010 CHF 432 million, 2011 CHF 506.5 million, 2012 CHF 615.4 million. ↩

For general information only. This article does not constitute legal or tax advice, does not replace advice on an individual case and creates no lawyer-client relationship. It reflects the legal position as of August 2025.