From a legal point of view, double taxation occurs when the same income earned by a taxpayer is taxed by two states. To combat the harmful effects that international double taxation imposes on the free exchange of goods and services and on the movement of capital, technology and people, the world's states have concluded bilateral or multilateral conventions providing a means of solving, on a unitary basis, the most common problems that arise in the field of international double taxation.
Thus, double taxation avoidance conventions can be defined as representing the desire of states to clarify, standardize and confirm the tax situation of taxpayers who are engaged in commercial, industrial, financial, or other activities in other countries by applying in states that have signed double taxation treaties a unitary solution in identical cases of double taxation.
Over the decades, Switzerland has signed more than 80 double taxation treaties with countries from all over the world. Half of them are already modernized according to the Organization for Economic Cooperation and Development (OECD) standards. All double taxation treaties signed by Switzerland have one common feature: non –residents of Switzerland are allowed to apply for a partial or total tax refund with the local authorities of each Swiss canton.
Foreign investors can also benefit from important economic advantages even if their country has not signed a double taxation treaty with Switzerland, as they can ask for tax deductions in their home countries. These deductions can be obtained as tax credits in Switzerland.
Double tax treaty between Switzerland and Germany
The first double taxation treaty between Switzerland and Germany was signed in 1972, as the two neighboring states have very strong connections in various aspects such as economic, financial, commercial etc.
Switzerland and Germany have revised and updated an existing double taxation treaty at the end of 2011. One of the most important provisions of the new tax treaty is that there is a new threshold for the tax-free distribution of dividends. The threshold has been lowered from 20% to 10%, which means that the dividends recipient must have at least 10% voting power in a German or Swiss company that is distributing the dividends and thus being able to benefit from a tax exemption. It is important to note that the dividends recipient must own at least 10% participation in a German or Swiss company for an uninterrupted period of at least 12 months in order to qualify for the tax exemption.
In addition, if the period of the participation holding is less than 12 months, a withholding tax of 15% on dividends will be levied, but there is the possibility to reclaim it after the period of required time has elapsed.
The Switzerland – Germany double tax treaty also includes provisions regarding the dividends from real estate companies in Germany, investment companies and investment funds. These all are taxed with a 15% withholding tax.
German entrepreneurs that are interested in opening a company in Switzerland should also be aware of the fact that investments made in Switzerland will be taxed with a tax rate varying between 19% and 34%. The tax rate is established in accordance to the industry sector in which the company is operating. The Swiss banks collect the money levied from the taxation of investments and transfer the money to the German authorities.
Regarding capital and investment income, the revised double taxation treaty establishes a flat-rate withholding tax of 26.375%, the same as the flat-rate withholding tax for capital and investment income in Germany. In this situation, the Swiss banks are also responsible with retaining the tax and transfer the money to Germany.
Tax information exchange between Switzerland and Germany
The new Switzerland – Germany double tax treaty includes certain provisions regarding the exchange of tax information between the two states, as required by OECD standards. The exchange of tax information must take place for all the taxes that are covered by the treaty. However, this type of information is communicated only at the request of tax authorities from Switzerland or Germany.
Requesting information on plausible investors is considerably simplified. The only requirement is to provide the name of the investor for which tax information is requested and a plausible reason for the request. However, there is no permission to select random people and request further information about possible deposits made in Swiss banks by German investors without and plausible reason.