The bilateral tax treaty proposals, which were voted through by the German lower house, would have allowed for a 25% withholding tax from 2013 on capital gains received by German taxpayers with accounts held in Switzerland, enabling capital gains in both countries to be treated the same way.
There would also have been a 50% tax on inheritances in Switzerland, unless German residents opt to declare their inheritance to the German tax authorities, and taxation of previously undeclared and untaxed assets held by German taxpayers at withholding tax rates ranging from 21% to 41%.
But the Social Democrat and Green Parties voted against the agreement, saying that it was too lenient on tax evaders in its current form and contains too many loopholes.
The treaty already has the thumbs up from the Swiss parliament, with the intended plan for it to take effect on January 1, 2013.
There is still a possibility that the German coalition government will aim to thrash out a last ditch compromise deal before the end of the year.