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Contents:
Executive
Summary
Origins
of the Savings Tax Directive (STD)
Impact
of the STD
Table
of Jurisdictions
How
To Escape The STD
FAQ
STD
Glossary
Text
Of The Savings Tax Directive
Disclaimer:
The Lowtax Library has taken reasonable care in assembling
this report but accepts no liability for any actions taken
or not taken as a result. In particular, this report does
not constitute investment advice. Anyone contemplating
an investment, or a change to a current investment, needs
to take appropriate professional advice.
Executive Summary
The
European Union Savings Tax Directive (STD), which is due
to go 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 (at
15%) until 2009. 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 will
also take the withholding tax route, as will 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
will be known to their home tax authorities; when tax
is withheld, the identity of the recipient will not be
reported, thus preserving confidentiality.
The Origins of the Savings Tax Directive
The
now notorious European Union Savings Tax Directive, due
to go 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. They certainly didn't expect
their proposals to lead to an 8-year battle involving
Switzerland, the USA and twenty or more offshore financial
centres, only eventually resolved by one of the stickiest
fudges ever cooked up in Europe's capital city.
The
Commission's tax package included two other major elements,
the Code of Conduct Committee's assault on Harmful Tax
Practices, and a proposal for a Council Directive to eliminate
withholding taxes on payments of interest and royalties
made between associated companies of different Member
States. The interest and royalties directive was by far
the least contentious of the three initiatives, and after
being held up for years by the interminable negotiations
over the Savings Tax Directive, it was agreed by the Council
and put into effect in 2003.
This
is not the place to describe the tortuous history of the
Code of Conduct Committee, a kind of 20th Century version
of King Henry VIII's Star Chamber presided over by the
baleful Dawn Primarolo, whose spring-like name brought
only autumnal shadows to the 66 sets of tax incentives
targeted by the Committee. The Primarolo Committee, as
it became known, found its work entangled with the twin
assaults of the OECD and the FATF on 'offshore', but was
partly successful in smoothing the fiscal playing field
for companies in the EU and its 'near abroad' of associated
tax havens. Many of the 66 'harmful tax practices' have
survived in truncated form, but many others have been
abolished, albeit with extended 'grandfather' provisions
for existing beneficiaries.
The
Original Savings Tax Directive
As
originally drafted, the Savings Tax Directive (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, thus removing the possibility
for citizens of the Union to hide the returns on their
savings from their home tax authorities. It's evident
that such a proposal runs headlong into the tradition
of banking secrecy which was well-established in a number
of Member States, notably Austria, Luxembourg and Belgium.
It
was also envisaged from the start that EU Member States
would impose information-sharing regimes on their associated
dependent territories, making up a substantial proportion
of the world's tax havens. Many of these were British,
of course, and two are Dutch, so that from the beginning
the UK's financial sector regarded the STD as a Franco-German
conspiracy against 'les Anglo-Saxons'.
Alongside
the STD, and planned in coordination with it, was the
OECD's 'level playing field' attack on 'unfair tax competition'
which sought to iron out the low tax regimes applying
in offshore financial centres and force the centres to
agree to information-sharing regimes that were equivalent
to the STD.
Opposition
To The STD
Opposition
to the STD focussed initially on the threat to the City
of London's Eurobond business; it was only later that
the offshore dependencies woke up to the threat when they
realised with horror that, far from supporting them against
the dragons of Brussels, the British Government in general,
and Gordon Brown in particular, were going to cooperate
willingly and even enthusiastically with Brussels in imposing
the STD on their fragile economies, so painfully emancipated
(as they would see it) from dependence on slaves, sugar
and bananas.
It
is important to realise that the STD represented just
the European dimension of a world-wide assault by the
high-taxing countries of the OECD on the 'leakage' of
tax represented by 'offshore' in its various manifestations.
This grand vision of a world without low taxes (very Colbertian
in its origins) was defeated partly by the new US Republican
administration which took power in 2001 and partly by
the strenuous efforts of 'offshore' itself, which perhaps
improbably saw an alliance between numerous island financial
centres fighting effectively against the massed tax inspectors
of the OECD.
The
gradual routing of the OECD by 'offshore' in 2001 and
2002 forms the backdrop to the context of the later stages
of the EU's battle to impose the STD in Europe. Had the
OECD been successful in creating a nice, smooth, global
fiscal playing field, there is little chance that the
stand-out EU Member States would have been able to ally
themselves with Switzerland and the US right wing in their
effective rearguard action against the STD.
The
Feira Summit
Early
negotiations over the STD in 1999 and 2000 saw strong
objections voiced by a number of Member States in defence
of their own interests.
Luxembourg
asked for a 'coexistence' model in which it could apply
a withholding tax to interest payments made to citizens
of EU member states until such time as it chose to switch
to exchange of information (possibly never, given its
atachment to the principle of banking secrecy). Austria
(also with a strict banking secrecy law), Belgium (with
its dentists) and Greece (why?) supported Luxembourg in
wanting to be able to choose between applying the tax
and giving out information on depositors and savers from
other member states. At
the other extreme, the UK continued to demand a compulsory
switch from an initial, optional situation to a uniform
regime for exchange of information within a predetermined
period of, say, ten years. Most other countries took up
positions in between the two extremes, although agreeing
that exchange of information was a better model than actual
collection of the tax.
The
UK, with perhaps a more realistic understanding of the
leakiness of Fortress Europe than continental countries,
was also nearly alone in its continued insistence that
other countries such as Switzerland and the US should
conform to the 'exchange of information' model on the
same time-scale as the EU.
At
that stage of the discussions, there was also no agreement
either on what would happen to any tax collected under
a withholding tax option (not included in the original
Directive), or on the rate of tax to be applied.
The disarray
among Member States was finally (well, OK, temporarily)
resolved in June, 2000, by the EU's finance ministers
in Santa Maria da Feira, Portugal. The proposed information
exchange system was made dependent on financial centres
from Switzerland to the Caribbean accepting similar ('equivalent')
measures, while the renegade states, led by Austria, forced
agreement on a 7-year period (to 2009) during which there
would be an option to apply a withholding tax instead
of exchanging information.
Details of
the Feira compromise were filled in at an
Ecofin Council meeting in November. It remained agreed
that a unanimous vote had to take place by the end of
2002, and that there would then be a seven-year transition
period before a full information-sharing regime is installed
in all member states. All EU countries other than Luxembourg
and Austria agreed to begin to share information as from
2003, while the two stand-out countries would apply a
withholding tax of 15% (rising in stages to 35%) until
they finally convert to information-exchange by 2009.
Laurent
Fabius, the French finance minister, who was in charge
of the negotiations, said after the meeting that the directive
would go into force regardless of the attitude of other
countries, but had to agree that there needed to be a
vote. He thought however that no country would dare stand
in the way of the directive, saying: 'It would be difficult
to imagine, after the commitments taken, that some countries
and colleagues would say no and we don't want to go ahead.'
UK
officials emphasized after the meeting that the UK had
obtained a 'grandfather' clause to protect the City's
key eurobond business: the information-sharing rules would
only apply to bonds issued after 1st March 2001 - the
French had wanted this date to be 1st January 2001.
STD
Negotiations Founder In 2001
The apparent agreement reached on the text of an STD in
November, 2000, turned out to be nothing of the kind as
country after country, both inside and outside the EU,
made difficulties during 2001 over the meaning of 'equivalent
measures'. These difficulties were exacerbated when the
victory of George Bush in November's US election removed
the presumption that the US would agree to anything resembling
'equivalent measures'.
Luxembourg and Austria, in particular, insisted that if
they had to make amendments to their banking secrecy rules
then so should other other tax havens such as Monaco,
Lichtenstein and Switzerland.
'Luxembourg's
position is not open to change and will not change,' said
the principality's Prime Minister Jean-Claude Juncker.
Switzerland
With the US an unknown quantity, attention focussed on
Switzerland, without whose agreement the STD would be
a dead letter. STD negotiations with Switzerland were
intricately tied up with 'Bilaterals II', a second set
of economic agreements (after a first set had been approved
in 2001) which would bring Switzerland closer to integration
with the EU, although still falling short of full membership.
Switzerland resolutely refused to do more than strengthen
its withholding tax system and agree a beefed-up Mutual
Assistance Treaty with the Union.
The
EU wanted to separate the issues of banking secrecy and
the STD from 'Bilaterals II', while Switzerland held out
for parallel resolution of the two sets of negotiations.
In early 2002 there was a stalemate. 'We have received
encouraging signs from Brussels, but of course the decision
is entirely up to EU ministers,' said Jose Bessard from
the Swiss Integration Office in June.
Luxembourg
As
the 31st December, 2002, deadline approached by which
the European Union was supposed to confirm STD agreement
by Member States and outside countries, it wasn't only
Switzerland that stood in the way. The UK had strong-armed
some of its 'dependent territories' into conditional agreement
with the Directive, including Jersey, Guernsey and the
Isle of Man; but other jurisdictions including the mighty
Cayman Islands said they would fight rather than give
in.
Luxembourg
Prime Minister and Finance Minister Jean-Claude Juncker
said: 'In the forthcoming ECOFIN meeting December 3, in
Brussels, Luxembourg will make use of its veto to block
the current proposal of the EU Commission . . . to impose
an EU-wide withholding tax on investments and to abolish
banking secrecy as it still exists in Luxembourg and Austria.
Luxembourg is of the opinion that the agreement reached
between the EU Commission and Switzerland in matters of
EU tax harmonization is not enough for Luxembourg to abandon
its banking secrecy. Mr. Juncker also informed the press
that he refused to attend a scheduled meeting in Copenhagen
last Friday November 29, of the German, French and UK
Ministers of Finance which would have attempted to put
Luxembourg under pressure to accept Brussels' proposal."
Mr
Juncker made it clear that for Luxembourg, 'equivalent
measures' meant 'identical measures', and that this had
been its position ever since the Directive was first proposed
at the Feira summit in Portugal in 2000. He said that
Luxembourg remained in favour of a 'co-existence' model
for taxation of savings, as had been proposed prior to
the Feira agreement, and that the Commission's compromise
proposal would result in a massive flight of capital from
the EU to surrounding countries. He suggested that the
French and German finance ministers might then like to
explain to their citizens why they are throwing away much-needed
tax revenue just at the moment when they need it most.
The
Fudge Is Cooked
During
2003, the tide slowly turned back in the EU's favour,
largely because of 'Bilaterals II', which were obviously
going to stand or fall with Switzerland's participation
in the Savings Tax Directive. Eventually they stood, after
tense and often bad-tempered negotiations which lasted
into early 2004, accompanied by a Greek chorus made up
of errant EU Member States headed by Luxembourg, with
a Liechtenstein obbligato. Switzerland won the negotiations
in the sense that the EU had to allow it to adopt a withholding
tax, and banking secrecy as such seemingly remained undented.
But as Frits Bolkestein declared menacingly in 2004: 'We
had to start somewhere'. His successor is not likely to
be so liberal.
Finally
the STD was agreed in a monumental fudge in February,
2003
which agreed a 'variable geometry' solution to the impasse,
posited on the application of 'equivalent' measures in
EU Member States' dependent territories, although neither
Switzerland nor the US were explicitly required to apply
them.
Some EU member states were still to be allowed to impose
a withholding tax on savings returns while the majority
of countries apply an information-sharing regime.
In
March, Taxation Commissioner Frits Bolkestein reported
to the Council on the discussions that had taken place
with Switzerland, Liechtenstein, Monaco, Andorra and San
Marino since the Council meeting on 18th February. But
in the same month, the
Caymanian authorities launched legal proceedings in the
EU's Court of First Instance in order to challenge the
European Union's decision not to allow a consultation
process over the STD. Cayman's David and Goliath act didn't
last long, however, and in December Dawn Primarolo delivered
an official ultimatum, warning the jurisdiction's government
once again that if it failed to implement the European
Union's Savings Tax Directive voluntarily, the United
Kingdom would legislate on its behalf.
By
March, 2004, the UK was able to tell the Ecofin Council
that all of its dependent territories had agreed to comply
by the rules of the STD. But Frits Bolkestein had to admit
to the Council that there has been an unacceptable level
of progress made in the EU’s negotiations with Andorra,
Monaco, Luxembourg and Liechtenstein. By May, however,
Bolkestein reported that even the more strident Member
States, France, the Netherlands and Austria were able
to give their approval to a compromise deal worked out
between the EU, Switzerland and Luxembourg allowing these
countries to adopt the directive whilst retaining a degree
of banking secrecy.
The compromise ensured that Switzerland would provide
legal assistance under the terms of the Schengen agreement
in cases relating to indirect taxes such as customs, VAT,
and alcohol and tobacco levies, but will be exempted from
providing such assistance in cases involving direct taxation.
Luxembourg, which had voiced concerns that a separate
deal with the Swiss would harm its own banking industry,
was assured that it would not be required to make any
sacrifices in terms of banking secrecy which Switzerland
and other countries were not also prepared to make.
The Race To The Finish
In
June, 2004,
it was announced that the Council of Finance Ministers
had reached a unanimous agreements on “all matters of
substance” with dependent and associated territories and
certain other third countries in respect of the Savings
Tax Directive. “I
am very pleased to report that the Commission was able
to inform the Council today that not only Switzerland,
but also Andorra, Monaco, San Marino and Liechtenstein
have all agreed to put in place equivalent measures to
those to be applied by the EU’s Member States as regards
the taxation of income from savings,” announced Taxation
Commissioner Fritz Bolkestein.
Mr Bolkestein continued: “In particular, they have all
agreed to impose a withholding tax on the interest income
of EU residents at the same rate as Austria, Belgium and
Luxembourg and to hand over 75 per cent of these revenues
to the Member State of the EU resident concerned. They
have also agreed to exchange information on request in
criminal or civil cases of tax fraud or similar misbehaviour.”
There
were problems over timing, however, and the EU was obliged
to delay STD implementation by six months
to 1st July, 2005. The
Swiss warned the European Commission that even the new
July 1 deadline could only be met "in the absence of a
referendum”. Under
Swiss law, voters have 100 days after a law is published
to collect sufficient signatures in a petition to challenge
the legislation.
The
key elements of the agreement with Switzerland also constituted
the basis for agreements with other third countries, namely,
Andorra, Liechtenstein, Monaco and San Marino. The
Commission also confirmed that “all matters of substance”
with the dependent and associated territories of the Netherlands
and the United Kingdom had been resolved, and model agreements
had been drafted to allow for bilateral savings tax agreements
between member states and each of these territories.
In
November, 2004, the Swiss government indicated that a
referendum on the Savings Tax Agreement was unlikely,
and that the legislative process needed to approve the
adoption of the Directive and the Bilaterals II agreements
was proceeding smoothly. In
comments made after a regular meeting of finance ministers
from countries in the European Free Trade Area, Dutch
Finance Minister Gerrit Zalm revealed: “The Swiss minister
made us happy by informing us that everything was well
underway with the savings (tax) agreement.”
In
December, 2004, the Swiss parliament approved a plan to
distribute some of the proceeds from the EU Savings Tax
to the cantons, in a move which cleared the path towards
a final ratification of the Swiss-EU agreement on the
STD. Both
chambers of parliament were expected to approve the ‘Bilaterals
II’ treaty, which encompasses nine separate agreements
with the EU including the savings tax directive, the Schengen
agreement on freedom of movement and cross border cooperation
on crime, among other measures.
The
agreement will mean that three quarters of the revenues
raised as a result of the savings tax directive will flow
back to EU countries, with the remaining quarter distributed
to the Swiss state and Swiss cantons.
So
the deed is done, and the EU Savings Tax Directive will
come into force in all member states, and all those offshore
jurisdictions beholden in one way or another to the member
states, on 1st July, 2005. Only Bermuda, through an accident
of geography, seems to have been left out.
BACK
TO TOP
 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 in
the next section, 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 25 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 (as defined below)
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
are not treated as money debts if they
meet certain conditions for the duration of a transitional
period which will end no later than 31 December 2010.
These securities (“grandfathered bonds”)
do not then count as money debts for all purposes of
the regulations: interest, premiums and discounts derived
from these bonds are not savings income; and investment
in these bonds does not count when deciding whether
the thresholds which determine whether income from certain
collective investment funds is savings income have 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
will be 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)
will be required to pass on to the 'competent authorities'
of member states will consist 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 will 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 will then keep 25% of the total amount
collected and remit 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
rate of withholding tax will be 15% from July 2005, 20%
from 1st July 2008, and 35% from July 2011.
However,
those EU Member States which are initially permitted to
apply a withholding tax (Austria, Luxembourg and Belgium)
will be obliged to switch to the information-sharing regime
by 2009. Only third countries (eg Switzerland) and (perhaps)
some dependent territories will be able to continue to
apply the withholding tax option after that date.
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.
The
Effect Of The STD On Offshore
Now
to the $64,000 question: What impact will the directive
have 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 will result
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.
BACK
TO TOP
Table of Jurisdictions
Country/Jurisdiction |
Status
vis-a-vis EU |
Regime
to be applied |
Comments |
Andorra |
Independent |
Withholding
Tax |
Under
the joint control of France and Spain |
Anguilla |
UK
Dependent Territory |
Information
Exchange |
|
Aruba |
Dutch
Dependent Territory |
Information
Exchange |
|
Austria |
Member
State |
Withholding
Tax (15%) |
Information
Exchange by 2009 |
Bahamas |
Independent |
|
Not
covered by STD |
Belgium |
Member
State |
Withholding
Tax (15%) |
Information
Exchange by 2009 |
Bermuda |
UK
Dependent Territory |
Outside
STD regime |
Missed
out by EU by accident |
British
Virgin Islands |
UK
Dependent Territory |
Withholding
Tax (15%) |
|
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 |
Withholding
Tax (15%) |
Known
as a 'Retention Tax'; the client can choose information
exchange as an option. |
Hungary |
Member
State |
Information
Exchange |
|
Ireland |
Member
State |
Information
Exchange |
|
Isle
of Man |
UK
Crown Dependency |
Withholding
Tax (15%) |
Known
as a 'Retention Tax'; the client can choose information
exchange as an option. |
Italy |
Member
State |
Information
Exchange |
|
Jersey |
UK
Crown Dependency |
Withholding
Tax (15%) |
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 (15%) |
|
Lithuania |
Member
State |
Information
Exchange |
|
Luxembourg |
Member
State |
Withholding
Tax (15%) |
Information
Exchange by 2009 |
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 |
|
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 (15%) |
|
Turks
& Caicos Islands |
UK
Dependent Territory |
Withholding
Tax (15%) |
|
United
Kingdom |
Member
State |
Information
Exchange |
|
USA |
Outside
EU |
|
Has
information exchange with Canada; undecided on EU
regime |
How to Escape the Savings
Tax Directive
It's fairly obvious that the most
effective way to escape the effects of the Savings Tax
Directive (STD) is to be a resident of a country which
has not signed up to the STD, or if that is impossible,
to make sure that you don't have investments that will
be caught by the STD.
Here, we will focus on the latter
route, which itself has two main branches: you can either
look for investments which don't attract the STD; or you
can ensure that you invest through an entity which doesn't
fall under the STD. Neither technique will help you to
avoid legitimate taxation, and it is not the purpose of
this report to do that. However, it is permissible to
optimize one's tax situation within the law, and many
people may object to the prescriptive and prying nature
of the STD, preferring to remain in control of the amount
and timing of the information that they give to governments.
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 threshholds),
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.
Investment bank ABN Amro expects to see greater interest
from retail investors in jumbo covered bonds. "On the
back of the directive, we expect retail demand for grandfathered
bonds to increase significantly in the months ahead,"
stated Christoph Anhamm of ABN Amro. 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. According to the ABN Amro report,
the volume of jumbo covered bonds with grandfathered status
maturing in this period is EUR180 billion.
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 below,
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.
BACK
TO TOP
Savings Tax Directive FAQ
When
does the Savings Tax Directive come into force?
As
of now the STD will come into effect on 1st July, 2005,
provided that all necessary legislative steps have been
taken in the countries and territories affected. By now,
only Switzerland has yet to complete its legislative process,
and is expected to be ready on time. So 1st July, 2005
is the date.
What
types of income are covered by the STD?
Savings income is covered, which means 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). See above
for a fuller definition.
Which
countries are covered by the STD?
All
Member States of the EU, and a number of third countries
and dependent territories. There is a full list of these
countries and territories in the Table
above.
How
will the Directive affect my income?
If
your income is covered by the Directive, the entity paying
you (bank, fund etc) will either deduct tax from it (15%
at first) or will report the income to your home tax authority.
If
I receive income in the country where I reside, is it
going to be affected?
No.
The Directive applies only to income you receive in affected
countries or territories which are outside your country
of residence.
I
live in the USA. Will I be affected by the Directive?
No.
The US has not accepted the Directive. However, if you
have investments in any of the affected countries (see
, you may need to prove to the bank or fund concerned
that you are a US resident, in order to avoid taxation.
What
information will I have to give to my bank?
This
depends slightly on where you live, and they will ask
you for the information if you need to give it. The minimum
amount of information that 'paying agents' will be required
to pass on to the 'competent authorities' of member states
under information-sharing will consist 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. See above
for more information.
How
much tax will I have to pay under the withholding tax
regime?
If
the country or territory where you receive income is operating
the withholding tax regime (see Table
above), it will deduct 15% between 2005 and 2008, when
the rate rises to 20%. From 2011 the rate will rise to
35%.
What
happens to the tax I pay?
If
the financial institution which is paying you is using
the 'withholding tax' option, it will pay the tax to the
authorities in its own country. They will keep 25% of
the money and send on the remaining 75% to your home country
(where you are resident).
Will
my tax authority know I have paid the tax?
No,
because the withholding tax is paid on in 'bundles' and
individual payments are not identified. However, if you
want to claim the tax payment against your home tax assessment,
you will need to obtain a certificate from the institution
which paid you.
I have an offshore bank account; will I have to
pay tax on the interest?
Only
if the country or territory in which you have your bank
account is applying the Directive (see the Table
above).
I have an offshore trust. Will I have to pay tax
on its income?
The
trust will only be 'caught' by the Directive if it is
in an offshore financial centre in the Table
above. If so, it then depends on the legal position of
trusts in the jurisdiction concerned. In many jurisdictions
trusts have no separate legal personality, so that payments
to a trust are made to the trustees. If a professional
trustee receives savings income and if under the terms
of the settlement you as the beneficiary have an absolute
entitlement to that savings income (for example, through
a life interest trust), it is probable that th eincome
will be subject to the Directive. If on the other hand
the trust is discretionary (ie you don't have an absolute
right to the income) then you will not be a 'payee' under
the Directive, but the Trustee may be, unless of course
as often happens the trust is operated by a trust management
company. In that case, the Directive does not apply.
What
is the position with joint accounts?
If
one of the holders is resident in an EU Member State,
then it may be that the income would be divided between
the holders. This is a situation you need to discuss with
your bank.
What
is the position with companies?
The
Directive applies only to individuals; companies and other
corporate bodies (eg foundations and many trusts) are
not covered by the Directive.
Which countries will be applying the withholding
tax?
See
the Table above. Inside the EU, only
Belgium, Austria and Luxembourg will be applying the withholding
tax. Outside countries to do so will include Switzerland,
Liechtenstein, the Turks and Caicos Islands, Jersey, the
BVI, Guernsey, and the Isle of Man.
Can
I choose to provide information instead of paying the
withholding tax?
This
depends on the country concerned. All countries have the
option of offering information-sharing rather than the
withholding tax, but even i | 
