Tax trap foreign currency accounts: This will change from 2025

Dollar, Franken, Crowns: Banks must report foreign currency transactions to the tax office starting at least from 2025. Previously, investors were responsible for this. Dishonesty in the past may become an issue.

Regardless of whether it's a securities deposit, savings account, or savings book: Anyone who earns profits from capital investments must pay taxes under certain circumstances. Dividends, interest, and profitable stock sales exceeding the taxpayer's flat-rate tax allowance of 1,000 Euro per year and the taxable person, trigger automatic 25% withholding tax deducted by the respective financial institution.

How much this amounts to in a calendar year, taxpayers can find out from the so-called tax statement. Banks and savings banks are obliged to provide this document about gains, losses, and paid taxes.

However, this document was not complete in the past. Because banks had to report only those capital flows that were in euros. Anyone who had a so-called foreign currency account and earned income in foreign currencies - for example, Swiss Francs, US Dollars, or British Pounds - had to report these gains themselves to the tax office and pay taxes accordingly in the context of their tax declaration. This changes from this year. Because banks are now obliged to report these gains as well and pay the corresponding tax.

For some taxpayers, this could be a problem. We clarify the most important questions.

What are foreign currency accounts in general, and who has one?

"A foreign currency account is an account that is not kept in Euros but in a foreign currency," explains Marin Burmester, tax advisor and expert for International Tax Law at Nielsen, Wiebe and Partner. Such accounts make sense for investors and traders who frequently deal in securities in foreign currencies. The reason: They can avoid currency risk when buying and selling.

However, no one should accidentally have such an account. Burmester considers this unlikely due to the need to set it up and manage it.

What changes concretely?

In principle, nothing changes about taxation itself. Taxes on foreign currency transactions had to be reported and paid before. However, taxpayers were previously responsible for doing this in the context of their tax declaration. From 2025, banks are obliged to report foreign currency gains and pay the corresponding tax automatically. Some institutions will even do this from this year.

Rolf Müller, a lawyer, tax consultant, and managing partner at the tax consulting firm fintegra GmbH, states that the financial administration has significantly expanded the tax-relevant application area for private foreign currency accounts. Normal everyday payments from interest-bearing foreign currency accounts are now subject to taxation. According to Müller, this could lead unaware investors into a tax trap.

Why could these changes be detrimental to some investors?

"Anyone who has not taken the declaration of their income related to foreign currencies too seriously in the past or simply did not know better can now be discovered," says Marin Burmester. The reason is clear: Until now, the tax office could hardly recognize and check such transactions. Anyone who failed to comply with their reporting obligation and the potential taxation had not had to reckon with being detected and punished for it. This is changing now.

If the bank declares foreign currency gains for the year 2024, it is likely that similar transactions have already occurred in the past years. If the tax office becomes suspicious, it can order an examination for the past ten years. "If undeclared income is discovered, the investor makes himself guilty of tax evasion," says Burmester.

There are estimates within the industry that, despite the existing reporting obligations, more than 90% of all private foreign currency accounts were not disclosed in the past.

How can affected parties get out of this situation?

Investors and investors should examine their declarations to the tax office made in the past thoroughly, advises tax consultant Burmester. If income was not reported, it can be submitted as part of a so-called self-declaration. Under certain circumstances, tax evaders can thus avoid being charged criminally for the offense.

When formulating such a self-declaration, expert help is strongly recommended to meet all requirements regarding content and scope. It is important, for example, that the self-declaration contains complete declarations of all tax offenses of a tax type for the past ten years. In this case, income from rent or undeclared fees for advisors must also be disclosed to avoid losing the chance for immunity.

Affected parties should not wait too long to take action, advises Burmester. On the one hand, it is not clear when the new regulation will actually take effect - some banks will already transmit data in 2024, while others will not before 2025. On the other hand, a self-declaration that is made only after the tax office has become aware of the foreign currency account and inquires about it is only mildly mitigating, says Rolf Müller. The self-declaration then only has a mitigating effect.

What if one does not act in time?

If tax evasion is discovered, severe penalties can result. According to Burmester, high monetary penalties up to imprisonment can be the consequence.

Consulting with an advisor could be beneficial for consumers who are unsure about the implications of the new tax rules for their foreign currency accounts.
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