Switzerland has double taxation agreements with more than 80 other countries, more than 30 of which are based on the OECD model. The general effect of contracts for non-residents of the contracting states is that they can benefit from a partial or total refund of the tax withheld by the Swiss paying body. Although the total amount of the withholding tax is deducted at source, the difference can be recovered from the Swiss tax authorities from the non-resident. If there is no double taxation agreement that deducts withholding tax deducted in foreign jurisdiction on transfers made to a Swiss company, a tax credit is entered into in Switzerland. For all other income and assets, Switzerland applies the “progression exemption” method for contracting states in order to avoid double taxation. As a result, Switzerland will not grant credits for foreign taxes. The only exception is the contractual rate of foreign source interest, royalties and dividends. The protocol became necessary to appease the European Commission, which had considered that the agreement could be contrary to the European Treaty. By threatening to refer the matter to the European Court of Justice, the United Kingdom and Switzerland have agreed that account holders who have already paid the 35% withholding tax due under the European Savings Tax will be subject to a final withholding tax of 13% in order to reduce the tax debt on interest payments. The Federal Council`s decision is implemented within the framework of bilateral double taxation agreements. Greater information exchange will only have a practical effect if the renegotiated agreements come into force. In addition, adjustments must be made to the agreement with the EU on the taxation of savings.
The amendment protocol contains an abuse clause covering the main purpose of an agreement or transaction, thereby ensuring that the DBA is not misused. The agreement will also be supplemented by a compromise clause that will ensure greater legal certainty for taxpayers. On 13 March 2009, the Federal Council announced that Switzerland intends to adopt OECD standards for mutual tax assistance, in accordance with Article 26 of the OECD Model Tax Convention.