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The Savings Tax Directive

Expat Briefing Editorial Team
17 September, 2013


If you are a resident of the European Union, and have a bank account or certain other financial interests in another Member State or certain other "third countries" or territories, then the EU Savings Tax Directive is something you should know about. In this week's briefing, we explain how the directive works, and look at proposals that will make it easier for the EU's tax authorities to access and share savers' and investors' information.

 

Introduction

The European Union Savings Tax Directive (STD), went into effect on 1st July, 2005. 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, 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.

The savings tax directive has applied in 42 jurisdictions since 1 July, 2005. These include 27 member states (a figures which excludes Croatia, which joined the EU in 2013), five 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).

 

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 directive, then it is likely that you will be affected by the STD.

 

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.

 

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. 

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 you 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 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 include Austria, Luxembourg and Belgium. It was intended that all jurisdictions would eventually switch to information exchange, but the timetable is vague. It was thought that third countries (eg Switzerland) and (perhaps) some dependent territories would be able to continue to apply the withholding tax option after the switch, but with the EU leading moves for blanket automatic exchange of information for tax purposes, it appears that the goal posts may have changed.

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 is 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 STD has been withdrawn.

Guernsey followed suit in 2011, while Jersey is planning to switch to automatic information exchange under the STD by 2015. Luxembourg has also announced plans to adopt automatic exchange of information. As of 1 January 2010, Belgium no longer applies the withholding tax and instead exchanges information.

 

What's Changing?

Indications are that the directive is a paper tiger, largely because its provisions are so easy to circumvent, a fact largely confirmed by weaker-than-expected withholding tax collections. The European Union knows this, which is why the European Commission has spent almost the entire time since the directive's introduction in 2005 drawing up proposals to widen its remit and convince some reluctant members of the EU (i.e. those which retain banking secrecy laws, namely Austria and Luxembourg) to sign up to an amended law.

Under Article 18 of the STD, the Commission must report to the European Council (the body representing the 28 Member States) on the operation of the directive every three years and to propose any amendments that may be required in order to ensure that the legislation works more effectively in the future.

Following the first review of the Directive, the Commission adopted on 13 November 2008 an amending proposal to the STD. The Commission proposal seeks to improve the Directive, so as to better ensure the taxation of interest payments which are channelled through intermediate tax-exempted structures. It is also proposed to extend the scope of the Directive to income equivalent to interest obtained through investments in some innovative financial products as well as in certain life insurance products.

The Commission proposes extending the scope of the Directive to income from:

  • securities which are equivalent to debt claims (of which the capital is protected and the return on investment is pre-defined),
  • life insurance contracts whose performance is strictly linked to income from debt claims or equivalent income and have less than 5% risk coverage.

In addition, the Commission proposal seeks to ensure a level playing field between all investment funds or schemes (be it undertakings for collective investment in transferable securities authorised in accordance with the UCITS Directive or not), 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.

Just like the first time around, it has been a long, hard slog for the Commission, however. A breakthrough occurred in May 2013 when the European Council finally reached an agreement on a mandate to allow the Commission to negotiate amendments to agreements under the STD following two years of discussions. This gave the go-ahead for Brussels to proceed with negotiations with Switzerland, San Marino, Andorra, Lichtenstein and Monaco.

In June 2013, Liechtenstein's Prime Minister and Finance Minister Adrian Hasler held a first round of talks with European Tax Commissioner Algirdas Å emeta on amending the savings tax agreement, with discussions between Å emeta and Andorran Prime Minister Antoni Marti held shortly afterwards.

While we don't know exactly what was discussed at these meetings, it is a good start for the European Commission after May's Council agreement allowed it to set about its attempt to make the savings tax directive a more potent anti-tax avoidance/evasion weapon with renewed vigour.

However, there is still a long way to go before the proposed amendments to the STD can become law. All member states will need to agree to the proposals before they can be adopted in the Council, and although Luxembourg appears to have climbed down from its opposing stance, Austria looks like it's going to be a tougher nut to crack. In April, Austria confirmed its willingness to "participate constructively"Â



 

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