Banks seek ways to exploit EU tax “loopholes”

Bank Leu has launched a new fund that will invest in Euro bonds Keystone Archive

Banks are cobbling together new financial products to help well-heeled European Union residents avoid a new withholding tax on their Swiss-held savings.

Tax experts say banks and financial advisors have for months been looking for ways to circumvent tax obligations in the recently-concluded bilateral agreements with the EU.

“There are a lot of loopholes in the EU’s taxation directive, which underpins the agreement between the EU and Switzerland,” Thomas Jaussi, a Basel-based tax specialist with accounting firm KPMG told swissinfo.

“In my personal opinion, if you have a lot of money, you will be able to find a way of avoiding this tax,” he said.

The bilateral accords, agreed after Switzerland received guarantees that the deal would not compromise banking secrecy, include the introduction of a withholding tax on interest earned by EU residents with savings in Switzerland.

The levy ranges from 15 to 35 per cent. Of that, three-quarters will be sent to EU tax authorities, with Switzerland keeping the rest to cover costs.

However, it will not apply to income from dividends, share funds, insurance policies, derivatives and gold.

Exploiting loopholes

Government bonds issued before March 2002 are also exempt, providing a loophole that at least one bank has openly sought to exploit.

Last month the private Bank Leu launched a new fund that will invest in Euro bonds which will allow customers to sidestep the new levy.

Product development teams at other banks, including Credit Suisse and UBS, have also reportedly been working on “individual solutions” for clients.

For Switzerland’s wealth management industry, the loopholes could generate a healthy windfall.

With wealthy customers shifting their savings into specialised financial products, banks should be in a position to harvest a new range of management fees.

One Swiss newspaper recently estimated that at least SFr200 billion could be “re-allocated” in this way. A management fee of just one per cent would generate significant earnings.

Offshore entities

A second source of weakness – according to tax experts – is the fact that the EU levy is not “withheld” at the source, but by the “paying agent”.

“Normally, this will be a bank,” said Jaussi. But if the paying agent is outside Switzerland or the EU, the tax will not be levied.

Related to this is the treatment of trusts and foundations, which fall into a grey area.

For example, an individual could bundle ownership of a portfolio of securities into an offshore entity.

“This is not subject to the tax because the beneficial owner – an individual domiciled in the EU – doesn’t receive direct interest income, but indirect income via the legal entity,” Jaussi said.

Restructuring assets

According to Jaussi, an added allure of such vehicles is the fact that the EU’s taxation directive – a document designed to create a pan-European taxation system – contains no express penalties for abuse.

Some analysts predict that only those who are not wealthy enough to afford good advice or set up a foundation will be hit with the new levy.

“It’s only worth doing if you have enough money to restructure your fortune,” said Jaussi.

The Zurich-based “Tages-Anzeiger” newspaper this week described the new system as a “tax only for dummies”.

swissinfo, Jacob Greber in Zurich

Key facts

The new tax directive is due to come into effect on January 1, 2005.
Switzerland will withhold a levy on a sliding scale of between 15 and 35 per cent of interest on EU citizens’ savings.
Three-quarters will go to account holders’ domestic tax authorities in the EU.
Tax experts say loopholes will enable wealthy Europeans to minimise the withholding tax.
Banks could earns billions in fees from new financial vehicles designed to sidestep the tax.