The Savings Tax Directive was last amended in March 2014 to reflect changes to savings products and developments in investor behaviour. It is has now been repealed in favour of the new, more global, Common Reporting Standard.
We have been following the evolution of the EU Savings Tax Directive since the EU began negotiations on the then ground breaking legislation back in 2000. After much debate, Council Directive 2003/48/EC of 3 June 2003 on taxation of savings income in the form of interest payments was approved in June 2003, and came into force in July 2005.
As the EU explains, the directive “required the automatic exchange of information between member states on private savings income. This enabled interest payments made in one member state to residents of other member states to be taxed in accordance with the laws of the state of tax residence”.
The Directive was last amended in March 2014 to reflect changes to savings products and developments in investor behaviour; however it is has now been repealed in favour of the new, more global, Common Reporting Standard.
This new reporting standard is a clear strengthening of measures to prevent tax evasion, not only within the EU, but globally too. The new legislation for advanced automatic exchange of information created a significant overlap with the Savings Tax Directive; repealing it eliminates this overlap.
In December 2014, the Council of the European Union adopted a new directive (Directive 2014/107/EU) which amended provisions on the mandatory automatic exchange of information between tax administrations, to cover a much wider range of income as well as balances.
2005 Savings Tax Directive
The earlier Directive 2003/48/EC only covered “savings income”, i.e. interest earned from bank deposits, interest and sale proceeds from certain bonds and income from certain types of investment funds. Other types of income fell outside the scope of the directive and so were not reported.
Dependant and associated territories of the EU, such as the Isle of Man, Guernsey, Jersey, Aruba, British Virgin Islands, Cayman Islands and Turks and Caicos were also obliged to apply the Savings Tax Directive. Switzerland, Liechtenstein, Monaco, Andorra and San Marino also imposed equivalent measures.
While most EU member states had to apply automatic exchange of information as the standard, Austria, Belgium, Luxembourg, the third countries and offshore centres were allowed to deduct a withholding tax instead. In this case the identity of the recipient of the savings income tax was not reported.
However, some of these territories, including the Channel Islands and Isle of Man, moved to automatic exchange of information over recent years, thus ending banking secrecy.
Until recently, many may have expected Switzerland to fight to retain its prized banking secrecy, but even that is about to be abolished.
Administrative Co-operation Directive from 2016
The new EU directive extends the scope of the data to be exchanged. It covers interest, dividends, gross proceeds from the sale of financial assets and other income. Account balances will also be exchanged.
Names, addresses, tax identification numbers and date of birth of account holders will also be exchanged.
The December 2014 press release explained that “the dual aim is to prevent taxpayers from hiding capital abroad or assets on which tax is due, whilst also improving the efficiency of tax collection”.
It implements the global Common Reporting Standard developed by the Organisation for Economic Co-operation and Development (OECD) for the automatic exchange of information.
It will enter into force on 1st January 2016 (Austria has been granted an extra year).
Switzerland and other third countries
On 27th October, the European parliament approved the new savings tax agreement with Switzerland, under which the parties will automatically exchange information on the financial accounts of each other’s residents.
The EU and Switzerland signed a protocol amending their existing savings agreement in May 2015. It complies with the Common Reporting Standard’s automatic exchange of information regime.
The agreement includes provisions to limit the opportunities for taxpayers to avoid being reported on by moving assets or investing in products that are outside the scope of the agreement.
The existing agreement remains operational until 31st December 2016. Switzerland will then begin applying the new due diligence procedures from January 2017 and make the first reports on EU residents by September 2018.
The EU reached agreement with Liechtenstein on 28th October that will see it automatically exchange information from 2017. Negotiations are being finalised with Andorra, San Marino and Monaco.
Neither the EU’s Administrative Co-operation Directive nor the Common Reporting Standard impose new tax treatments or reporting obligations on EU residents. Everyone should already be declaring offshore income and assets, and paying tax on them, according to existing tax law in their country of residence.
While there is nothing to be done in advance of the new regime, there has never been a better time to consider your tax planning and, more importantly, the use of a fully tax compliant structure in your country of residence, to ensure peace of mind and, in the future, a relatively trouble-free interaction with the ‘taxman’.
