Cross-border private banking before 2008

The business model and its legal architecture

The cross-border private banking business that Zurich and Geneva had built after the Second World War rested on a combination of economic and legal features. Wealthy individuals from neighbouring states and from overseas entrusted assets to Swiss banks because Switzerland offered political stability, a strong currency, discreet professional service and a legal system that protected the confidentiality of the banking relationship. Article 47 of the Federal Banking Act of 1934, discussed in Part F of this book, made the disclosure of client information by bank employees a criminal offence. A foreign tax authority that wished to learn about an account in Zurich could therefore obtain information only through the channels of international assistance, which Swiss law kept narrow.¹

The decisive element of this architecture was the distinction between tax evasion and tax fraud. Swiss law treated the mere failure to declare income or assets, Steuerhinterziehung, as an administrative contravention to be sanctioned by the tax authorities through back taxes and fines. Tax fraud, Steuerbetrug, required a deception of the tax authorities by means of falsified or untrue documents and constituted a criminal offence that could justify lifting banking secrecy. The Historisches Lexikon der Schweiz notes that the distinction favoured the flight of foreign capital into Switzerland, because foreign tax authorities obtained information about Swiss-held assets only when they could demonstrate fraud and not in cases of simple non-declaration.² Since assistance in fiscal matters was granted only for fraud, and since most double taxation agreements contained exchange-of-information clauses limited to what was necessary for applying the treaty itself, the typical undeclared account of a foreign client lay outside the reach of his home state.

The distinction also governed mutual legal assistance in criminal matters. The Federal Act on International Mutual Assistance in Criminal Matters of 1981 excluded assistance for offences that appeared aimed at reducing fiscal duties, with the exception of tax fraud.³ A foreign prosecutor investigating a citizen who had simply failed to declare his Zurich portfolio therefore received no help. The Federal Council repeatedly defended this position as a matter of principle, arguing that the protection of financial privacy formed part of the relationship between citizen and state in Switzerland and that the Swiss system of withholding tax and self-declaration secured domestic tax compliance without intrusive controls.

For the banks, the result was a large pool of assets held by non-residents, a substantial part of which had not been declared in the clients’ countries of residence. Neither the banks nor the authorities published figures on the share of undeclared money, and estimates varied widely. The business was highly profitable because such clients were less sensitive to fees and performance than onshore clients. Relationship managers travelled to visit clients abroad, conducted meetings in hotels and at events, and offered services such as “hold mail” arrangements, under which correspondence was retained at the bank so that no statements reached the client’s home. Numbered accounts, domiciliary companies in Panama or the British Virgin Islands and foundations in Liechtenstein added further layers between the client and the assets. Much of this practice was lawful under Swiss law. Its legality under the law of the client’s home state was a different question, which Swiss banks generally treated as the client’s responsibility.

The European Union savings tax agreement

The first significant breach in this system came from the European Union. After the adoption of the EU Savings Directive, which provided for the automatic exchange of information on interest payments among member states, the Union sought to prevent the flight of savings into third countries by concluding agreements with Switzerland and other financial centres. Switzerland accepted an arrangement that preserved banking secrecy while securing revenue for the Union. The Agreement on the Taxation of Savings Income was signed on 26 October 2004 as part of the second package of bilateral agreements and entered into force on 1 July 2005.⁴

The agreement obliged Swiss paying agents to levy a withholding tax on interest payments to individuals resident in EU member states. The rate rose in three stages, from 15 per cent until 30 June 2008 to 20 per cent until 30 June 2011 and to 35 per cent thereafter. Three quarters of the revenue went to the member state of residence, with the remainder retained by Switzerland. Instead of suffering the tax, a client could authorise the paying agent to report the interest to the tax authority of the state of residence. The agreement applied only to interest paid to individuals, which meant that dividends, capital gains and income routed through companies or many trust structures fell outside its scope.⁵ Clients and their advisers soon learned how to arrange their portfolios so that little or no income was subject to the tax.

The savings tax agreement mattered for two reasons. It showed that Switzerland would accept a tax on foreign clients’ income where that tax preserved anonymity, a model the country would try to extend a few years later. It also created a legal framework in which Swiss banks systematically identified clients resident in the European Union and classified their income, which later eased the transition to automatic exchange. The agreement was replaced by a protocol of amendment signed in 2015, which turned it into an agreement on the automatic exchange of information applicable from 2017, with the first exchange of data in 2018.⁶ In retrospect, the withholding tax of 2005 was a transitional arrangement that lasted barely more than a decade.

Notes

1. Federal Act of 8 November 1934 on Banks and Savings Banks (Banking Act, BankG), SR 952.0, Article 47, bilingual edition, https://www.droit-bilingue.ch/de-fr/9/95/952.0-47-100.html. On the origins of the provision and its role in the post-war business model, see Part F of this volume. ↩
2. Ruedi Brassel-Moser, “Steuerhinterziehung”, Historisches Lexikon der Schweiz (HLS), version of 21 February 2012, https://hls-dhs-dss.ch/de/articles/013773/. The article also records the tax amnesties of 1944 and 1968–1969 and estimates of revenue losses from domestic evasion. ↩
3. Federal Act of 20 March 1981 on International Mutual Assistance in Criminal Matters (Mutual Assistance Act, IMAC), SR 351.1, Article 3 paragraph 3, bilingual edition, https://www.droit-bilingue.ch/de-en/3/35/351.1-3-7.html. The provision excludes requests concerning offences that appear aimed at reducing fiscal duties and admits assistance under Part Three of the Act where tax fraud (Abgabebetrug) is the subject of the proceedings. Its second sentence was amended by the Federal Act of 3 October 2008 with effect from 1 February 2009. ↩
4. IFF Forum für Steuerrecht 2006, “Praxis-Forum: EU-Zinsbesteuerung”, University of St. Gallen, https://ile.unisg.ch/wp-content/uploads/fstr_publications/unprotected/EU-Zinsbesteuerung.pdf. ↩
5. Ibid. The IFF contribution describes the progressive rates, the revenue sharing of 75 per cent to the member states and the alternative of voluntary disclosure. ↩
6. Federal Department of Foreign Affairs, Directorate for European Affairs, “Automatischer Informationsaustausch in Steuersachen (ehem. Zinsbesteuerungsabkommen)”, https://www.europa.eda.admin.ch/de/automatischer-informationsaustausch-in-steuersachen. ↩

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 September 2025.