The tax treaty between Switzerland and Austria entered into effect on 1 January 2013 and the corresponding treaty between Liechtenstein and Austria entered into effect one year later. These treaties not only provide for the taxation and reporting of current investment income by banks in Switzerland and Liechtenstein to Austria, but also a regularization of the past.
Regularization of the past under the tax treaties with Austria
Under these tax treaties, Austrian bank clients were required to choose between disclosing past assets and making an anonymous lump sum payment. This option gave non-tax-compliant Austrian clients a chance to wipe their slates clean, both simply and anonymously, by making a lump sum payment of between 15% and 38% on any relevant capital.
These provisions for regularizing the past only applied specifically to Austrian clients who still held an account at a Swiss bank on 1 January 2013 or at a bank in Liechtenstein on 1 January 2014. Certain asset management structures in Liechtenstein were also covered by the tax treaty with Liechtenstein.
Tax dodgers from the treaty with Austria
As a result, clients were able to avoid falling subject to the treaty by closing out their bank accounts prior to the date on which the respective treaty was scheduled to enter into force (“tax dodgers”). A presumably large number of these clients decided to repatriate their undeclared assets to Austria since Austria, like Switzerland, still has strong banking secrecy laws. However since assets and capital gains in Austria are subject to a flat rate withholding tax of 25%, at least these assets have been properly taxed since their transfer to an Austrian bank.
Softening of banking secrecy in Austria
The tax treaties called for the authorities in Switzerland and Liechtenstein to report to Austria the ten main countries to which Austrians transferred funds between the signing of the treaties and their entry into force. Of course because of its strong banking secrecy laws, Austria itself topped the list. A “group request” to find tax dodgers then failed due to the legal situation in Switzerland.
In an effort to catch these tax dodgers who have transferred funds to Austria, a Capital Outflow Reporting Act was passed as part of the general softening of Austria’s banking secrecy laws. That act now also requires that certain inflows of capital be reported: Austrian banks must report to Austria’s taxation office any inflows in excess of EUR 50,000 which were transferred from Switzerland between 1 July 2011 and 31 December 2012 or from Liechtenstein between 1 January 2012 and 31 December 2013; a constitutional provision safeguarded the legality of the retroactive application. This ruling only applies to accounts and custody accounts held by individuals or Liechtenstein foundations and establishments resembling foundations.
Anonymous lump sum payment or report to the taxation office
As was already the case in Austria’s tax treaties with Switzerland and Liechtenstein, the new rules provide for two regularization methods:
- retroactive taxation of capital inflows via an anonymous lump sum payment
- report of inflows by the financial institution in question, supplemented by a voluntary disclosure if necessary
However in light of the rules set forth by the tax treaties, both of these options have now been made much stricter.
Until 31 March 2016, holders of accounts and custody accounts can irrevocably declare that retroactive taxation should be performed by means of a lump sum payment. Unlike under the tax treaties, the lump sum payment must only be withheld if this is explicitly declared by the account holder. Otherwise the bank is obligated to submit a report.
The lump sum payment due amounts to 38% of the inflows. Payment of the tax releases the bank from its reporting obligation.
Submission of a voluntary disclosure as an alternative
If the account holder fails to reach a decision on whether to make a lump sum payment and declare this in writing by the 31 March 2016 deadline, the financial institution must submit a report. If the income was taxed correctly and in full, all that needs to be done is to simply wait for a response from the tax authorities. In the case of a tax dodger, however, who consciously circumvented application of the tax treaties, a voluntary disclosure will have to be prepared. It is important that this disclosure be filed in a timely manner because unlike under the tax treaties, the time of discovery is considered to be the date on which the bank’s report is received (which must be filed by no later than 31 December 2016).
A few special rules also apply to the voluntary disclosure:
- The ban on repeated voluntary disclosures is not applicable and restricted to offenses subject to the Reporting Act.
- In any case, the taxes due are raised by between 5% and 30% (for EUR 250,000) depending on the size of the tax base.
In our experience, the amount due through a voluntary disclosure is likely to be more attractive in many cases, particularly in light of the rate levied for the lump sum payment, namely 38%. This is especially true due to the fact that tax liabilities for many profitable years have already passed the statute of limitations yet those for the low-profit years which came in the wake of the financial crisis have not. This, too, has a positive impact on the expected amount of tax arrears. In any case, an experienced advisor should always be consulted when deciding whether to submit a voluntary disclosure or not.
- News für Privatkunden und Private Clients (in German)
- General information on voluntary disclosures incl. country overview