EU states hope to raise billions from the new tax

The move is part of the legendary financial centre's fight to protect its tradition of tight banking secrecy.

The EU wanted Switzerland to pass on data on EU citizens to stop them avoiding tax, eventually settling for a withholding tax instead.

But the deal - reached in 2004 after 15 years of negotiations within the EU - still leaves loopholes wide open.

Limited scope

Only interest earned abroad on a small group of investments and placed in personal Swiss bank accounts by EU citizens is included in the agreement.

Other income - whether dividends on shares, insurance income, capital gains on assets or income from the fast-growing derivatives trade - is exempt.

WHO PAYS, WHO TELLS EU members exchanging information: Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Malta, The Netherlands, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden, United Kingdom Territories exchanging information: Anguilla, Aruba, Cayman Islands, Montserrat EU members levying the tax: Austria, Belgium, Luxembourg Other states levying the tax: Andorra, Liechtenstein, Monaco, San Marino, Switzerland Territories levying the tax: British Virgin Islands, Jersey, Guernsey, Isle of Man, Netherlands Antilles, Turks & Caicos Islands

And accounts in the name of companies are also excluded, meaning individuals could simply set up off-the-shelf companies to act as vehicles for their savings.

The EU acknowledges that it may have to widen the scope of the tax.

And it also says it may have to look further afield, and try to bring other countries on board.

"We know that some of the banks in the countries with which we have passed agreements have already flown to Singapore or Hong Kong, and created some activities there," said Michel Aujean, the European Commission's head of tax policy.

Long argument

The withholding tax is the result of the EU's Savings Tax Directive, finally agreed between both the EU and other states in October 2004 after 15 years of negotiation.

Under it, 22 of the 25 EU member states will share information on savers - such as the names of account holders and how much interest their savings accrue - to allow each other to tax their citizens' savings abroad.

Four dependent territories of the UK and the Netherlands, including the Cayman Islands, are doing the same thing.

But three EU members - Austria, Belgium and Luxembourg - have refused to do so, wanting to protect their own lucrative private banking industries.

Along with Switzerland and 10 other countries and territories, including Monaco and Jersey, they will instead levy the tax on behalf of EU countries from 1 July onwards.

The rate will start at 15%, rising to 20% in 2008 and 35% - the level Switzerland already charges its own citizens on domestically-earned interest - in 2011.

Switzerland hosts the world's biggest private banking industry

Each will keep a quarter of the revenue to pay their own expenses, passing the rest on in bulk to the home countries of the savers concerned.

Protecting the City

Swiss bankers acknowledge that the loopholes mean financial experts will simply offer clients advice on how to structure their savings so as to get round the payments.

But the loopholes result not from Swiss pressure, but from the long arguments within the EU.

The idea of a pan-European withholding tax was first mooted in 1989 - at a time when interest rates and thus potential tax revenues were sky-high - but was shot down largely by the British government to protect the City of London.