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The EU Savings Tax Directive

by the Investors Offshore editorial team, December, 2011
09 December, 2011


Introduction

The European Union Savings Tax Directive (STD), which went into effect on 1st July, 2005, in fact forms merely one part of a major tax reform package launched by the European Commission in 1997. As originally drafted, the STD aimed at a uniform 'information exchange' regime to apply across the Union, with all countries agreeing to report interest on savings paid to the citizens of other Member States to those States' tax authorities.

Because of resistance from EU Member States with strong traditions of banking secrecy, the Commission had to allow Austria, Luxembourg and Belgium to apply a withholding tax (initially at 15%, then 20% and from July 2011, 35% ). Many of the UK's offshore financial centres have been forced to join the STD, along with the Netherlands Antilles (as was), Aruba and some European centres (Andorra, Monaco, Liechtenstein and San Marino). Most of these places took the withholding tax route, as did Switzerland, which was the hardest nut for the EU to crack.

The STD applies to many types of return on savings instruments, all loosely described as interest, when received by individuals, but does not affect interest paid to companies. Under the information exchange system, the identity of recipients is known to their home tax authorities; when tax is withheld, the identity of the recipient is not reported, thus preserving confidentiality.

However, reports have suggested that the revenues raised from withholding taxes so far have fallen well below EU expectations. This is because the directive as it stands is fairly easy for investors to circumvent, either by channelling assets into business entities which are not covered by the rules, such as a company or partnership, or by parking savings in jurisdictions not included in the directive, like Dubai or Hong Kong. Individual countries have released figures showing returns that are perhaps on the low side, while there is plentiful anecdotal evidence to suggest that most investors have either fled to jurisdictions which don't apply the Directive, or have re-arranged their deposits so as to avoid the Directive - something that is quite easily done.

The savings tax directive has applied in 42 jurisdictions since July 1, 2005. These include 27 member states, 5 non-EU 'third countries' (Switzerland, Liechtenstein, Monaco, Andorra and San Marino) and 10 dependent and associated non-EU territories (Anguilla, Aruba, the British Virgin Islands, the Cayman Islands, Guernsey, the Isle of Man, Jersey, Montserrat, the Netherlands Antilles and the Turks and Caicos Islands).

Following the request of the Ecofin Council, the European Commission started discussions with selected Asian financial centres in 2007 regarding the application of the directive, namely Hong Kong, Singapore and Macao. Formal negotiations are also expected to take place with Norway, at its request, whilst other jurisdictions like Bermuda and Iceland have shown interest in participating in the savings taxation arrangements.

Recent Events

In July, 2008, the rate of tax withheld from returns on savings under the EU's Savings Tax Directive increased from 15% to 20%, and the final increase came in 2011 to a massive 35%.

Although the Commission's attempts to broaden the scope of the tax to include jurisdictions like Hong Kong have been firmly rejected so far, it certainly hasn't given up. Urged on by Germany, which is in a stew of righteous indignation over the 'discovery' that thousands of its citizens are making hay while the sun shines in Liechtenstein, a Commission Review Group worked away during 2007 and 2008 to close loopholes which have permitted many investors to escape the tax until now, for example by moving assets from bank accounts to vehicles such as companies and trusts - which weren't included in the legislation - or by shifting money to accounts based in territories out of the reach of the directive's information sharing provisions. The Commission also wants all those countries which still apply a withholding tax to switch to automatic information exchange.

While Switzerland and Luxembourg support the European Union's efforts to ensure that investment income is properly taxed under the Savings Tax Directive, the two countries are insistent that they will not be persuaded by Brussels to adopt exchange of information with other member states for tax purposes.

This was the message relayed by Swiss Finance Minister Hans Rudolf Merz following discussions on the issue of tax and banking secrecy with Luxembourg Prime Minister Jean-Claude Juncker in May, 2008, when he stressed that a paying agent tax, as opposed to automatic exchange of information, was the only means to accomplish the EU's goal of taxing capital yields.

"Switzerland will not deviate from this stance," the Swiss Federal Department of Finance confirmed after Merz met with Juncker in Luxembourg.

While Switzerland and Luxembourg acknowledge that any shortcomings must be resolved first by amending the directive, the Swiss have emphasised that they have no obligation to enter into talks with the EU on a revision of the agreement on the taxation of savings income before 2013.

Furthermore, the Swiss authorities are adamant that the subject of banking secrecy would not be open to negotiation, "even within the scope of such discussions".

"This stance is shared by Luxembourg," a Swiss statement went on to add. As in all EU tax matters, in order to ensure that the proposal is adopted, the unanimous backing of all 27 member states is required.

In November, 2008, the Commission unveiled its amending proposal to the savings tax directive that will widen the scope of the legislation "with a view to closing existing loopholes and eliminating tax evasion."

The EC proposed to extend the scope of the directive to forms of income obtained through investments in some "innovative financial products" as well as investments in certain life insurances products. It also proposed to simplify the technical operation of the directive to make it more "user friendly and efficient."

Laszlo Kovacs, Commissioner for Taxation and Customs at that time, said: "The first report on the operation of the savings tax directive concluded that the directive, although effective within the limits of its scope, can be easily circumvented. The current scope of the directive needs to be extended, in order to meet our goal of stamping out tax evasion, which affects the national budgets and creates disadvantages for the honest citizens."

At present, it is relatively easy for individuals to circumvent the rules of the savings directive by using interposed legal persons or arrangements, such as foundations or trusts, which are not taxed on their income – something that the Commission has long acknowledged.

With regard to interest payments made by paying agents (banks, financial institutions, independent professionals, etc.) established in the EU to certain intermediate structures established outside the EU, the Commission proposes that paying agents in the EU apply the provisions of the directive (exchange of information or withholding tax) at the time of the payment to the intermediate structure, as if this payment was directly made to the individual.

Concerning payments of interest to certain intermediate structures established within the EU, including some non-charitable trusts and foundations, those structures will be always obliged to act as a “paying agent upon receipt” under the proposed new regime. This means that the provisions of the directive must be applied by these structures upon receipt of any interest payment, no matter where they are established and regardless of the actual distribution of any sums to the individual beneficial owners. The suggested definition of "paying agent upon receipt" includes all entities and legal arrangements (trusts, foundations etc) which are not taxed on their income under the general rules for direct taxation in their Member State of residence or establishment.

The savings tax directive can also be circumvented by using financial vehicles other than a classical savings account in a bank. To combat this, the Commission proposes extending the scope of the directive to income from securities which are equivalent to debt claims and life insurance contracts whose performance is strictly linked to income from debt claims.

In addition, the Commission proposal seeks to ensure a level playing field between all investment funds or schemes independently of their legal form. This means that income obtained from those investment funds by individuals resident in the EU will be subject to effective taxation.

At its meeting in December, 2008, the European Council of Finance Ministers (Ecofin) expressed support for the Commission's proposals, calling for "rapid progress of the discussions on the proposal" for new legislation that would expand the scope of the savings tax directive to include a wider array of financial instruments and vehicles.

The Council also invited the Commission to continue its negotiations and exploratory talks with financial centres outside the European Union (EU) in order to expand the directive's geographical net.

In January, 2009, the European Parliament Economic and Monetary Affairs Committee began its consideration of the Commission's proposals. Rapporteur Benoit Hamon, a member of the Party of European Socialists from France, made proposals for some significant changes to the plans already outlined by the European Commission, proposing to end the transitional period with a finite date, rather than by reference to the behaviour of third countries. Under this proposal, the transition period would end three years from the levying of the withholding tax at a rate of 35%, i.e. in 2014.

The Rapporteur proposed to replace the definitions proposed by the Commission, which typically name a country and then set out the type of entity and legal arrangements which would be brought within the Directive, with a list of legal structures and then a list of the countries concerned.

"This could very dramatically expand the number of legal entities caught by the Directive," observed Graham Mather, President of the European Policy Forum. He continued:

"In Switzerland’s case, for example, the Commission proposal mentioned two categories of legal entity, the Trust and the Foundation. Under the new proposal this would be replaced by a list of twenty-four bodies ranging from limited liability companies through international banks, insurance and reinsurance companies, joint-ventures, settlements, funds of all forms etc etc."

"The Parliament Rapporteur says that the legal entities can be brought back out of the Directive if the country of jurisdiction makes an application to the Commission to have them removed on the grounds that they could not have their place of effective management located in the jurisdiction concerned or on the ground that 'appropriate taxation of interest income paid to these legal persons or arrangements is in fact ensured.' "

"The Rapporteur says his proposal is designed to reduce the possible loopholes in the Directive but what it would do if carried into law would be to expand the scope of the Directive enormously and create a massive traffic of applications by third countries to seek exemption from the Commission."

"Other changes would expand the categories of paying agents caught by the Directive and provide for its review from time to time to focus in particular on the appropriateness of extending the scope to all sources of financial income, including dividends and capital gains, as well as to payments made to all legal persons. This, the Rapporteur says, is in order to 'deal with any potential large scale circumvention of the Directive in the future.' "

Mather points out that the amendments would have to go through negotiation with the Commission, which will be aware that a number of member states especially Austria, Belgium and Luxembourg will be uncomfortable with the dramatic expansion proposed.

He turned out to be right; in January 2011 Austria and Luxembourg continued to block attempts to agree on the terms of an extended directive at the month's Ecofin meeting, with the termination of the transition period during which the opt out of information exchange a particular sticking point.

By May 2011 the Hungarian Presidency thought that enough progress had been made on the discussions that it announced ahead of that month's Ecofin meeting that it would seek the Council's support for the idea of launching negotiations with the relevant third countries (Andorra, Liechtenstein, Monaco, San Marino and Switzerland). The Council was also to hold an "orientation" debate on the Savings Taxation Directive with the objective of reaching conclusions regarding the proposal to amend the Directive.

The European Commission then sought authorization from the Council to begin the third country negotiations in July. At the end of 2011 however, there are few signs that Austria and Luxembourg are any nearer to agreeing a compromise.

Impact of the Savings Tax Directive

There are considerable technical and administrative implications of the Savings Tax Directive (STD) for the financial services industries and the tax departments of all those countries that are caught in the STD's net; but here we are concerned just with the impact of the STD on investors and savers, so we will be describing technical and administrative changes only in so far as they impact on the relationship between relationship between financial services agencies and their clients.

More than 30 countries and jurisdictions are affected by the STD; they are listed in a Table below, with basic information about the regime which each territory is adopting. Here we will focus on the types of financial product and the types of income that will be affected by the STD, and on the mechanics of information-exchange and of withholding.

Who Is Affected?

The Directive does not apply to persons (including EU Nationals) who are resident outside the 27 Member States of the EU or the Crown Dependencies of the UK (Jersey, Guernsey and the Isle of Man). Any new countries joining the EU will be obliged to accept the information-sharing variant of the Directive, and their residents will be caught by the STD as and when those countries accede to the EU.

If you are an individual (natural person) who is resident in an EU Member State, and earn bank interest or other savings income on deposits or investments held in your own name in another EU Member State, third country or territory included in the Table below, then it is likely that you will be affected by the STD.

NB: Alone among non-EU countries and territories, the jurisdictions of Jersey, Guernsey and the Isle of Man have reciprocal STD agreements with the Member States of the EU. This means that a resident of any of these three territories who receives savings income in a Member State of the EU will be subject to the STD, through information-sharing or withholding tax as appropriate.

Definition Of Savings Income

There are four main categories of savings income under the scheme:

  • Interest paid out on debt-claims or credited to accounts;
  • Interest rolled-up and paid out when a debt-claim is repaid or sold;
  • Distributions made by certain unit trusts and other collective investment funds which have invested more than 15% of their investments in debt-claims;
  • Accumulated income paid out when units in certain collective investment funds that have invested more than 40% of their investments in debt-claims are redeemed or sold.

In simpler language, savings income is therefore essentially interest earned on bank deposits, interest from, and proceeds on the sale or redemption of, certain bonds and income from certain types of investment funds (principally open-ended money market retail funds).

Most other types of income (for example, dividends on ordinary or preference shares of companies, salary and pension payments) fall outside the definition and are therefore outside the scope of the STD. Some specific types of payment which do not qualify are as follows:

  • Payments under contracts for differences;
  • Manufactured payments arising during stock loans or under sale and repurchase agreements (including where the underlying security is a money debt);
  • Debts which do not arise from a transaction for the lending of money (for instance where there is a late payment and compensation interest is paid);
  • 'Grandfathered bonds'. Certain negotiable debt securities were not treated as money debts if they met certain conditions for the duration of a transitional period which finally ended on 31 December 2010. These securities (“grandfathered bonds”) did not then count as money debts for all purposes of the regulations: interest, premiums and discounts derived from these bonds were not savings income; and investment in these bonds did not count when deciding whether the thresholds which determine whether income from certain collective investment funds is savings income had been passed. A security is a grandfathered bond if it was first issued before 1 March 2001 or the prospectus was first approved by the appropriate regulatory authority before that date, and no further issue was made on or after 1 March 2002. If the bond is a government bond (or issued by a related public authority or an international organisation and a further issue is made on or after 1 March 2002, the whole of the issue (whether made before, on or after 1 March 2002) is not a grandfathered bond. The whole issue of the bond is a money debt. If the bond is issued by another type of issuer (e.g. a commercial company) and a further issue is made on or after 1 March 2002, only the part of the issue made on or after 1 March 2002 is not a grandfathered bond. This part of the bond issue is treated as a money debt; the rest of the issue (made before 1 March 2002) is not a money debt.
  • Distributions and other payments derived from funds which are not UCITS or elective UCITS are not reportable as savings income under the regulations. A UCITS is an ‘undertaking for collective investment in transferable securities’ authorised in accordance with the UCITS Directive. Non-EU funds may or may not be UCITS depending in a complex way on their nature. Even when a fund is a UCITS, its distributions are only taxable under the STD when the 15% threshold for income from money debts is breached. The rules are complex.

Definition Of 'Paying Agent'

The STD states that ‘paying agent’ means any economic operator who pays interest to or secures the payment of interest for the immediate benefit of the beneficial owner. The ‘operator’ can either be the debtor of the debt claim or can be the operator charged by the debtor or the beneficial owner with paying or securing the interest.

The paying agent is always ‘the last link in the payment chain’ before the relevant payee or residual entity and is the person that actively initiates a payment directly to a relevant payee or residual entity, or to his or its instructions. However, banks, other financial institutions or other businesses which have a role in the payment process are not regarded as making a payment if their role is essentially passive (they act on instructions from others) or auxiliary (they merely provide services to help the paying agent). A bank or similar institution does not therefore make a payment merely by issuing or sending a cheque, or arranging for the electronic transfer of funds on behalf of one of its customers.

A financial institution which has outsourced many of its administrative or back-office functions to an independent contractor remains responsible for the transaction and is therefore a paying agent. However, registrars or other third parties involved with making payments of interest on bonds or from funds are likely to be paying agents because they have a direct relationship with the beneficiary. Likewise, trust companies, stockbrokers or other professionals may be paying agents. The situation can be complicated where trusts or their equivalent (eg foundations) are involved.

The Two STD Regimes

With minor variations, countries or territories applying the STD use one of two regimes, an 'information-sharing' regime or a 'withholding tax' regime. The Table in the next section specifies which regime is in force for each country or territory.

In the case of some countries applying the withholding tax regime, the client has a choice to accept information-sharing instead of being taxed. However, this choice is more apparent than real in most cases, since it depends on the willingness of a financial institution to enable the choice, and many banks or funds may not wish to take on the extra administrative work that is necessary to implement information-sharing.

Information-Sharing

You are paid the interest on your savings gross, ie without deduction of tax, but the bank or other financial institution which you patronise (known as a 'paying agent') will require to provide details of your tax residence.

You may be asked for your Tax Identification Number (TIN). This is your tax registration number in your country of residence. The STD requires banks and other paying agents to obtain customers’ TINs where possible. Whatever information the banks have, they will pass on to the tax authorities in your country of residence, along with information about the income you have received (as defined above).

The minimum amount of information that 'paying agents' (banks and other financial institutions - see definition above) are required to pass on to the 'competent authorities' of member states consists of: identity and residence of the beneficial owner; name and address of the paying agent; account number of the beneficial owner; and interest payment data including the amount of interest income earned, plus information regarding any proceeds from sale, redemption or refunds.

If someone claims to be resident in a country different to that on his or her passport or I.D. card, the rules stipulate that "residence shall be established by means of a tax residence certificate issued by the competent authority of the third country in which the individual claims to be resident."

Some countries or territories have issued sets of regulations to their financial institutions which may define the extent of the information you are required to give. In the absence of this local legislation, there there is no obligation placed on banks or other paying agents to request the TIN; agents are permitted to rely on passports or identity cards, or other documentary proof of identity that is in their possession.

Withholding Tax

Under the withholding tax option, banks and other paying agents automatically deduct tax from interest and other savings income earned and pass it to their local tax authority, indicating how much of the total amount relates to customers in each Member State.The local tax authority then keeps 25% of the total amount collected and remits 75% to the various tax authorities within the Member States.

The receiving country gets a bulk payment which is not broken down in terms of the individuals who are covered.

The rates of withholding tax are 15% from July 2005, 20% from July 2008, and 35% from July 2011.

Those EU Member States which were initially permitted to apply a withholding tax (Austria, Luxembourg and Belgium) are supposed to switch to the information-sharing regime, although the timetable for this remains obscure. Only third countries (eg Switzerland) and (perhaps) some dependent territories will be able to continue to apply the withholding tax option after the switch.

NB: In some countries, notably Jersey, Guernsey and the Isle of Man, the withholding tax is called a 'retention tax'. But it's exactly the same animal.

In the three Member States which will apply a withholding tax, the STD specifies that they also need to provide one or both of the following procedures in order to ensure that a relevant payee may request that no tax be withheld:

  • a procedure which allows the relevant payee expressly to authorise a paying agent to report information to his Member State of residence; and/or
  • a procedure which ensures that withholding tax is not levied where a relevant payee presents to his paying agent a certificate drawn in the name of a competent authority of his Member State of residence.

The second of these procedures applies also to all those third countries and territories which are implementing a withholding tax. As explained above, the first procedure is effectively voluntary in the case of non-EU Member States.

In June, 2009, the Isle of Man government announced that it was to opt for the automatic exchange of information with regards to interest gained on the accounts held by depositors resident in countries within the European Union. The new tax policy took effect from July 1, 2011 and means the withholding tax option previously available to customers having accounts with Isle of Man banks by virtue of the transitional arrangements in the EUSD has been withdrawn.

Commenting on the move to automatic exchange Treasury Minister, Anne Craine, said in July 2011 that: “By moving fully to automatic exchange of information with our EU partners, the Isle of Man has again demonstrated its commitment to being an internationally responsible and co-operative finance centre which maintains an effective and pro-business regulatory environment; enabling us to weather the challenges being faced by all countries in the global economic downturn."

The Effect Of The STD On Offshore

Now to the $64,000 question: What impact has the directive had on the flow of capital and investments into the offshore jurisdictions hit by the new rules? Opinion from industry participants and observers alike appears to be generally negative. According to a survey of the 500 senior finance professionals from the Isle of Man, Jersey and Guernsey, conducted by IoM-based firm Acuity in 2004, more than 50% of those polled believed that the directive was "bad news", although some 30% felt that the planned withholding tax would not have a negative impact on the jurisdictions. The survey results also revealed that 70% of those polled believed that the three islands had been wise to opt for a withholding tax, rather than for automatic exchange of information.

The results of this survey suggest that the industry is certainly uncomfortable with the information exchange aspect of the legislation, and many observers, particularly those opposed to global tax enforcement initiatives, believe the effect of measures like the EU directive has resulted in capital flowing to jurisdictions where interest reporting is not an issue. However, the Caribbean offshore jurisdictions appear to have survived the litany of new regulations thrown at them by the likes of the OECD and FATF over the last decade, and only time will tell what impact the EU directive will have on offshore business.

Early indications are that the Directive is a paper tiger. Whereas many commentators expected capital to fly out of such jurisdictions as Jersey, and the Isle of Man, totals for bank deposits and investment funds in these places continued to rise, indeed they rose even faster than before, although it is hard to disentangle the effects of the Directive from those of a boom period in many stock markets. Even if the European offshore centres are thriving, places like Dubai, Hong Kong are Singapore were doing even better, at least until the general global unravelling in 2008 and 2009.

Jersey, for instance, reported disappointing figures for the first year of the Directive. Individuals who reside in an EU Member State with relevant savings income arising in Jersey can opt for information on the savings income received to be exchanged with their domestic tax authority rather than be liable to the retention tax. It was estimated that approximately 30% had chosen this option, but the Jersey authorities expected this percentage to increase with time.

A statement by the States of Jersey revealed that both the Comptroller of Income Tax and the President of the Jersey Bankers’ Association were satisfied that the process of exchanging information and the retention of tax had worked smoothly.

"Both information and tax have been transferred efficiently to the Income Tax Department for onward transmission to the relevant competent authorities in the EU Member States before the 30 June 2006 as required under the Agreements," the statement explained. Commenting, Senator Walker, Chief Minister, noted that: “This first payment of retention tax to the EU Member States is ample evidence, if it is needed, of the good neighbour policy we follow in our relations with the EU, a policy that we expect to see reciprocated."

But a straightforward calculation shows that, at 15% tax, with interest rates of 5%, the GBP13m collected would represent underlying deposits of GBP3.5bn. Since Jersey's assets, including bank deposits and investment funds, are about GBP360bn, according to a recent announcement by Jersey Finance, those figures suggest that only a tiny fraction of assets held on the island are being caught by the Directive.

Due to the fuller effect of low interest rates, the amount of tax retained in Jersey in 2010 was significantly less than in 2009, when GBP8.85m was remitted to the Member States and GBP2.99m was retained by the Treasury.

In September, 2009, the Cayman Islands Tax Information Authority released statistics showing that while the number of reports made under the STD to EU countries had increased, the amount of reported savings income actually fell. The 2008 statistics showed that:

As in 2007, the largest number of reports on accounts based in the Cayman Islands were sent to the French tax authority, with 2,159 having been sent last year (an increase from 1,579 in 2007), followed by the United Kingdom with 1,643 (up from 1,283 in 2007). However, the USD13m in savings income reported to the UK was substantially higher than the USD1.2m reported to the French authorities, although money reported to the UK dropped by USD9m in 2008 compared to the 2007 figures. The second highest aggregate amount of savings income was reported to the Netherlands (USD5.8m) from 47 reports. In total, 5,679 reports were made to EU member states by the TIA on USD25.7m in savings income held in the Cayman Islands. The number of reports increased by 1,817, but total savings income reported decreased by USD10m on 2007.

These figures are miniscule in relation to total Cayman Islands banking deposits of around one trillion US dollars.

The Swiss government announced in May, 2008, that gross revenues collected from interest payments under the European Savings Tax Directive had increased between 2006 and 2007, but still only amounted to CHF653.2m. That seems like a hefty chunk of change, but at a low interest rate of 5% would represent only CHF80bn in savings deposits. Nobody knows how much money is tucked away in Switzerland, but USD1 trillion is thought to be a conservative estimate.

In 2010, it was reported that the amount of revenue remitted to European Union (EU) taxpayers’ home countries in respect of tax payable on interest payments made in Switzerland during 2009 fell to CHF534.8m (USD465.5m) for the fiscal year 2009, from CHF738.4m in 2008.

The UK itself has received significant payments from countries operating withholding taxes under the STD, gaining about GBP70m in the fiscal year 2007/2008, with the largest contribution coming from Switzerland. At 20%, this represents about GBP350m in interest received, and at an interest rate of 5%, about GBP7bn in underlying assets. The Channel Islands alone report bank deposits of more than GBP400bn; Switzerland is thought to be home to more than GBP350bn of deposits.

Billions of euros in assets have reportedly flown to parts of the world where the EU directive cannot reach such as Hong Kong and Singapore, while in August 2005 alone, shortly after the directive entered into force, nearly EUR7 billion poured out of Swiss accounts into Luxembourg Sicav II bonds, which are outside the scope of the Directive.

While opinions in the matter vary, it is generally thought that Hong Kong, Singapore and Dubai have benefited significantly from increased inflows of cash from European investors since the introduction of the directive.

AnchorTable of Jurisdictions

Country/Jurisdiction
Status vis-a-vis EU
Regime to be applied
Comments
Andorra
Independent
Withholding Tax (35%)
Under the joint control of France and Spain
Anguilla
UK Dependent Territory
Information Exchange

Aruba
Dutch Dependent Territory
Information Exchange

Austria
Member State
Information Exchange
Withholding Tax until December 31, 2009
Bahamas
Independent

Not covered by STD
Belgium
Member State
Information Exchange
Withholding Tax until December 31, 2009
Bermuda
UK Dependent Territory
Outside STD regime
Missed out by EU accident
British Virgin Islands
UK Dependent Territory
Withholding Tax (35%)

Lithuania
Member State
Information Exchange

Cayman Islands
UK Dependent Territory
Information Exchange

Cyprus
Member State
Information Exchange

Czech Republic
Member State
Information Exchange

Denmark
Member State
Information Exchange

Estonia
Member State
Information Exchange

Finland
Member State
Information Exchange

France
Member State
Information Exchange

Germany
Member State
Information Exchange

Gibraltar
UK Crown Colony
Information Exchange

Greece
Member State
Information Exchange

Guernsey
UK Crown Dependency
Information Exchange
Until information exchange became mandatory in 2011, clients could choose either withholding tax (known as a 'Retention Tax') or information exchange.
Hungary
Member State
Information Exchange

Ireland
Member State
Information Exchange

Isle of Man
UK Crown Dependency
Information Exchange
Until information exchange became mandatory in 2011, clients could choose either withholding tax (known as a 'Retention Tax') or information exchange.
Italy
Member State
Information Exchange

Jersey
UK Crown Dependency
Withholding Tax (35%)
Known as a 'Retention Tax'; the client can choose information exchange as an option.
Latvia
Member State
Information Exchange

Liechtenstein
Independent but follows Switzerland
Withholding Tax (35%)

Lithuania
Member State
Information Exchange

Luxembourg
Member State
Withholding Tax (35%) or Information Exchange
In principle, Luxembourg has to give up the withholding tax option by 2014.
Madeira
Part of Portugal
Information Exchange

Malta
Member State
Information Exchange

Monaco
'Independent' but under France
Information Exchange

Monstserrat
UK Dependent Territory
Information Exchange

Netherlands
Member State
Information Exchange

Netherlands Antilles
Dutch Dependent Territory
Information Exchange

Poland
Member State
Information Exchange

Portugal
Member State
Information Exchange

Romania
Member State
Information Exchange

San Marino
Independent
Information Exchange

Slovakia
Member State
Information Exchange

Slovenia
Member State
Information Exchange

Spain
Member State
Information Exchange

Sweden
Member State
Information Exchange

Switzerland
Affiliated to EU but not Member State
Withholding Tax (35%)

Turks & Caicos Islands
UK Dependent Territory
Withholding Tax (35%)

United Kingdom
Member State
Information Exchange

USA
Outside EU

Has information exchange with Canada; undecided on EU regime

Investments Which Don't Attract The STD

A brief list of some of the main categories of excluded investment was given above. The most obvious target investments for EU residents, just sticking to the traditional financial sector, are 'grandfathered bonds', excluded investment funds (ie not caught by the 15% or 40% debt thresholds), various types of offshore life assurance-based product, and equities or their derivatives. Real estate remains attractive, naturally, but is not often a popular target for long-term saving, outside the family home. The STD may of course lead to changes in the structure of European investment markets, and REITs (announced in Germany and France already) may assume a higher profile for savers.

Another type of investment that may benefit from the STD is the 'alternative' sector: investment in such targets as forests, films, venture capital funds and private equity funds may come to have greater attractions, since in all these cases returns are completely or predominantly free of a 'debt-claim' element. Not for widows and orphans, though.

In most EU countries, offshore life assurance bonds offer the following benefits:

  • interest can roll up gross with no tax levied by the insurer;
  • the policyholder has no annual tax liability;
  • the benefits are, in certain circumstances, treated favourably, with attractive tax relief available;
  • in a low interest rate environment, the deferral of income tax until a time when benefits will be taxed at a lower rate can mean the difference between the investment value keeping up with inflation or not.

Bonds issued before March 1, 2001 and not increased in volume after February 28, 2002 will remain unaffected by the STD. As the transition period lasts for seven years, only bonds maturing before July 2012 will be exempt. These issues are otherwise known as grandfather bonds.

Income from Islamic investments under Sharia'a law, an increasingly important sector, also fall outside the Directive by definition, since the payment of interest is forbidden. It is interesting that the UK government has announced its intention of setting up London as a centre for Islamic financing, presumably without any direct intention of subverting the Directive.

It's also worth remembering that by no means all offshore financial centres fall within the ambit of the STD; apart from Bermuda and the Bahamas, which are mentioned in the table above, there are a number of other low-tax territories, many of which are covered in www.lowtax.net. Some of these have significant banking sectors, and some again are the home of investment funds. Almost all of them have trust regimes which can be combined with International Business Companies or other forms to create robust asset protection structures which will incidentally often be very tax-efficient into the bargain.

Entities Outside The Scope Of The STD

Legal entities whose profits are taxed under the general arrangements for business taxation and similar entities (e.g. companies, partnerships and limited partnerships) are not relevant payees and payments to such persons fall outside the scope of the Directive, which only applies to individuals. Trusts and foundations are equally exempt in most territories.

This is possibly not that interesting for investments in the mainstream high tax countries, since the profits of companies are taxed just as highly as personal income, or are magically transformed into personal income by a wave of the Finance Minister's wand. Everyone has to retire sometime, and there is not much point having capital if you can't spend it. But many of the countries and territories caught by the STD don't have penal corporate tax regimes; many don't have corporate tax at all.

Thus, International Business Companies in the UK's dependent territories and their equivalents in the Dutch dependent territories, not to mention trusts and other tax-efficient vehicles, take on a new interest in the light of the STD. Controlled Foreign Company (CFC) legislation still lurks waiting for the unwary, and in many high-taxing jurisdictions the income of beneficially-owned offshore entities is imputed to the investor. Still, with good advice it is usually possible to form a legitimate structure which will at least defer and minimize taxation, and the STD will surely cause an upswell in investor interest in such vehicles.

Even in affluent European countries such as Switzerland, Luxembourg and Liechtenstein, which have fairly high rates of domestic taxation, there are many corporate forms which can be used to hold assets and investments - all of these will escape the STD, and for an investor with more than token amounts of money to play with, they will definitely bear investigating.

The Future

The EU will probably be unsuccessful in its attempts to bring further countries under the Directive, but has prepared a revised version of the Directive, which might eventually include some or all of the following:

  • A change in the definition of a Paying Agent to include foreign branches of banks who have headquarters within jurisdictions covered by the Directive, eg the Singapore branch of a UK bank.
  • A change in the definition of beneficial owner to catch private companies if their ultimate owners are individuals resident in the EU, and the settlors of many types of discretionary trust if they are EU-resident.
  • Inclusion of individuals who receive income through partnerships. All types of partnership will be covered - the partners will be treated as the owners.
  • The definition of interest (returns on savings) to be broadened to include non-UCITS funds, unregulated funds, derivatives comprising or based on interest e.g. structured products, baskets, certificates and interest swaps.
  • The inclusion of insurance companies as paying agents, and application of the Directive to interest received whether or not it is paid out to policy-holders.

While this may seem a scary list, it must be remembered that the EU had a torrid time of it trying to get agreement on the original Directive, and it is a certainty that countries such as Switzerland and Liechtenstein would resist many of these proposals to the death.

The EU will try, however. It hasn't yet understood that there is a law of diminishing returns in the world of taxation.



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