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Expat Briefing Editorial Team
06 November, 2015
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.
Why Is the Savings Directive In The News?
The EU STD went into effect over 10 years ago, on July 1, 2005. However, the European Commission and the member states have spent a number of years trying to tighten up the legislation and reach new information exchange agreements with third countries. On October 27, 2015, members of the European Parliament approved a new savings tax agreement with Switzerland, and one day later the EU struck a similar deal with Liechtenstein. What’s more, changes to the directive itself are due to be introduced on January 1, 2016. These changes are explained below.
What Is The Savings Tax Directive?
As originally drafted, the directive 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. Many of the UK's offshore financial centres have been forced to join the STD, along with the former territory of the Netherlands Antilles, Aruba and some European centres (Andorra, Monaco, Liechtenstein, San Marino and Switzerland). Most of these places took the withholding tax route, as did Switzerland.
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 first applied in 39 jurisdictions since July 1, 2005, including 25 member states (a figure which excludes Bulgaria and Romania, which joined in the EU in 2007, and Croatia, which joined in 2013), the five non-EU "third countries" 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). The directive has applied in Bulgaria and Romania since January 1, 2007 and in Croatia since July 1, 2013.
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:
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.
You are paid the interest on your savings gross, i.e. 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 institution - 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 ID 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.
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 percent of the total amount collected and remits 75 percent 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 percent from July 2005, 20 percent from July 2008, and 35 percent 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 initial timetable was vague. Automatic exchange of information has in any event been bundled together with amendments to the STD which were approved in March 2014 and which are summarised below. Indeed, some jurisdictions covered by the STD have already dropped the withholding tax option for bank clients and have switched to an information sharing regime in anticipation of these changes. These include the Isle of Man, Guernsey and Jersey. Luxembourg has committed to exchange information under the directive after holding out for a number of years against EU pressure after signing up to the expanded STD in March 2014, as has Austria.
Proposed Changes To The Directive
Indications are that the directive is a paper tiger, largely because its provisions are so easy to circumvent, a fact confirmed by weaker-than-expected withholding tax collections in many member states. Thus, the European Commission drew up proposals to widen its remit in 2008 following the first three-yearly review of the legislation. These proposals were finally accepted by member states in March 2014 after resistance to the proposals from Austria and Luxembourg finally caved in. According to the Commission, they are due to be adopted by the European Council in November 2015.
Under the agreed changes, the Savings Directive will be progressively replaced by the snappily-titled Council Directive 2014/107/EU on administrative cooperation in the field of direct taxation (we’ll call it the administrative cooperation directive from now on). This provides for automatic exchange of financial account information between member states, including income categories contained in the savings directive. The administrative cooperation directive will apply from January 1, 2016, except in Austria, which has been allowed to start applying the new legislation up to one year later than other member states; special transitional arrangements applying to Austria have been drawn up taking account of this derogation. Provided the proposal to repeal the savings directive is adopted by the Council, the new legislation will not have to be transposed by member states.
On May 27, 2015 the European Union and Switzerland signed a Protocol amending their existing Savings agreement and transforming it into an agreement on automatic exchange of financial account information. The revised agreement takes into account the provisions of the aforementioned administrative cooperation directive and provides that the parties will receive, on an annual basis, the names, addresses, tax identification numbers, and date of birth of their residents with accounts, along with other financial and account balance information.
The existing EU-Switzerland savings agreement will continue to be operational until December 31, 2016. From January 1, 2017, financial institutions in the EU and Switzerland will commence the due diligence procedures envisaged under the new agreement to identify customers who are reportable persons, i.e. for Switzerland, residents of any EU member state. By September 2018, the national authorities will report the financial information to each other.
On October 28, 2015, the EU and Liechtenstein also reached an agreement that will see them automatically exchange information on their residents' financial accounts from 2017. In a similar vein to the EU/Swiss agreement, the arrangement upgrades the 2004 savings agreement under which Liechtenstein is required to apply measures equivalent to those in the EU savings directive.
Assessing The Proposed Changes
The European Commission has invested a lot of time and energy in ramming through its proposals, and it wouldn't have done so if it thought it wasn't worthwhile. However, it is debatable whether the expanded STD will produce the sorts of sums of extra tax revenue that Brussels and many member states are hoping for. Studies suggest that the STD has been expensive for revenue authorities and banks to implement, and that information exchange is a cumbersome tool to enforce tax law in practice. The same studies conclude that in cases where withholding tax has been applied extra revenue was raised for EU governments much more efficiently. Savers also retain the option of course, to shift their money to other parts of the world that the directive cannot reach, although this is getting harder as automatic exchange of financial account information gradually becomes the norm under the new Common Reporting Standard.
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