EU Agrees New Savings Tax Directive

18.04.14

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EU Member States have formally adopted the revised Savings Tax Directive, in a move described as a major step forward in the fight against tax evasion.


EU Member States have formally adopted the revised Savings Tax Directive. Tax Commissioner Algirdas Šemeta described this breakthrough as a major step forward in the fight against tax evasion.

The agreement came after Austria and Luxembourg dropped their opposition to the reforms; a sign they believe that countries like Switzerland will also extend their tax transparency under the Directive.

The Savings Tax Directive came into operation in 2005, and was designed to tackle cross-border tax evasion by creating an automatic information exchange system for tax authorities. Savings income earned by an EU resident individual in another EU Member State or dependent territory is reported to the authorities in the individual’s country of residence, so that it can be compared against their declared income.

Luxembourg and Austria, as well as dependent territories of EU States, were allowed to impose a withholding tax instead, for a transitional period. It started at 15% but is now 35%. The Isle of Man and Guernsey have already abolished the withholding tax option and moved to automatic exchange of information. Jersey and Luxembourg have committed to do so from 2015. Austria is expected to follow suit now that it has agreed to the expanded Directive.

“Third countries” Switzerland, Andorra, Monaco, Liechtenstein and San Marino also participate in the Directive by applying the withholding tax, unless the individual consents to automatic exchange of information.

The EU Commission has been pushing for reforms to the Directive, to close loopholes that allow individuals to circumvent the regulations, since 2008.

This has been resisted by Austria and Luxembourg, who argued that it would put their banking industries at competitive disadvantage to countries like Switzerland and Monaco. They would only consider extending the scope of the Directive if a “level playing field” was maintained in Europe.

After being assured that the EU’s automatic reporting agreements with these countries would be amended in parallel with the Directive, they finally agreed to the revised Directive at the European Council of Ministers meeting on 21st March. Formal adoption followed on 24th March.

In a speech on 24th March Mr Šemeta observed:

An important anti-evasion file has been unblocked, after years of deadlock. This is proof of the widespread acceptance that the days of bank secrecy and tax untransparency are over.

He went on to state that:

Switzerland and the four other countries now accept that the automatic exchange of information must be at the core of their relations with the EU in taxation.

This would have been inconceivable even a year ago, and it shows how far we’ve come in changing mind-sets globally.

Under the current Savings Tax Directive, the scope is limited to the taxation of “savings income”. This covers interest from cash deposits and debt claims of every kind, such as corporate and government bonds.

It does not cover interest from investment funds, pensions, innovative financial instruments and payments made through trusts and foundations.

The new Directive will close these loopholes, so that such income will also be exchanged on an automatic basis within the EU. It will cover all types of savings income and products that generate interest or equivalent income. Tax authorities will be required to take steps to identify who is benefitting from interest payments.

Member States have until 1st January 2016 to adopt the legislation necessary to comply with the Directive. Application will start from 1 January 2017. 42 jurisdictions currently apply the Savings Tax Directive.

Administrative Cooperation Directive

In his speech on 24th March, Mr Šemeta said that while the adoption of the new Savings Tax Directive was a milestone, it is not the last one. He expects “swift agreement on the Administrative Cooperation Directive to cement the widest scope of automatic exchange between our Member States”.

This Directive will apply automatic exchange of information to other forms of income, planned to be from January 2015. The original proposal was to cover income from employment, director’s fees, life insurance, pensions and property. In June 2013 this was extended to include dividends, capital gains and other financial income and account balances.

In summary, the key aim of the European Commission is to ensure that all Member States have sufficient information to tax payments made to their residents, in accordance with local rules, even if these payments are received abroad. This is the same aim of the G20 and Organisation for Economic Cooperation and Development (OECD) under the new Common Reporting Standard. Over 40 jurisdictions have signed up so far.

You need to ensure that you only use tax mitigation structures arrangements which comply with tax legislation in your country of residence. Seek specialist advice to ensure you get your tax planning right, and establish what legitimate opportunities are available here to lower tax on your investment income and assets, and how they work for you.

14 April 2014

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.

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