1st July this year will introduce two significant changes to the EU Savings Tax Directive. While many expatriates will not be affected, for many others the changes could have a significant impact
1st July this year will introduce two significant changes to the EU Savings Tax Directive. While many expatriates will not be affected, for many others the changes could have a significant impact. It depends on whether you have offshore bank accounts and how they are set up. With less than a month to go, there is limited time to take action should you need and wish to.
The Savings Tax Directive (STD), or ?Council Directive 2003/48/EC on taxation of savings income in the form of interest payments? to use its full name, was adopted on 3rd June 2003 and came into effect on 1st July 2005.
To quote the Directive, its ?ultimate aim? is to enable savings income in the form of interest payments made in one Member State to beneficial owners who are individuals resident in another Member State to be made subject to effective taxation in accordance with the laws of the latter Member State.?
Or to put it in simpler language, it was established to ensure that everyone living in the EU pays tax on their interest earnings to their country of residence regardless of whether they declare the income or not, thus ending the common practice of ?hiding? capital in foreign bank accounts to receive tax free interest.
To this end the EU developed the automatic exchange of information system, which is implemented by all EU Member States (including some dependent territories) but with the exception of Luxembourg, Belgium and Austria. These three States were temporarily allowed to levy a withholding tax instead, thus allowing them to maintain banking secrecy for the time being.
Various non-EU countries agreed to participate in the Directive. The Isle of Man, Guernsey, Jersey, Switzerland, Monaco, Andorra, Liechtenstein, San Marino, British Virgin Islands and Turks & Caicos Islands have also been imposing the withholding tax. The Channel Islands and Isle of Man have been offering clients a choice of automatic exchange of information and the withholding tax. Until now.
With effect from 1st July, both the Isle of Man and Guernsey (home to many expatriates? bank accounts) will no longer offer the withholding tax option and will instead apply automatic exchange of information on all bank accounts owned by individuals who are resident in an EU Member State. To put it another way, there is no longer any banking secrecy in these jurisdictions.
So, to give an example, if you live in Spain and have a deposit account in the Isle of Man, your bank will pass details about you and your interest earnings to the Spanish tax authorities. This is done automatically each year regardless of whether or not the Spanish authorities have requested information. Your local tax authority will most likely compare the information received with that provided by you on your tax return. If you have not been declaring the interest, they will probably look for payment of the outstanding tax plus interest and penalties. In the case of France the capital in the account will also be looked at since it could affect your wealth tax liability.
The information your bank sends to your local tax authority includes your name, address, tax information number, full bank details, the capital in the account (usually as at 31st December) and interest credited in the past 12 months.
The definition of ?interest? in the STD is a broad one and not restricted to bank interest. It covers interest from debt claims of every kind including corporate and government bonds and similar negotiable debt securities. It extends to cases of accrued and capitalised interest.
Wages, pension payments, annuities, insurance policy payouts, life assurance contracts, dividends etc are not covered by the STD.
The second change to come into effect on 1st July is an increase in the withholding tax rate for those jurisdictions still applying it. The rate was originally 15%. It increased to 20% in 2008 and will now jump to 35% – you will be paying 133% more tax than at the start of the Directive. While interest rates have been low, when they improve the amount of tax will be even more noticeable.
It is also worth noting that 35% tax is higher than most countries? tax rates on interest income ? 19% in Spain (21% on savings income over ?6,000); 21% in Portugal, 10% in Cyprus and 19% plus 12.3% social charges in France.
In actual fact, since in countries like Spain, France, Portugal and Cyprus you are obliged to declare and pay tax on your worldwide income, anyone living in these countries should have opted for exchange of information rather than the withholding tax and declared the income each year in their country of residence. If you have done so, then neither of these changes affect you. In practice however, some people opted to pay the withholding tax so their details are not passed to their local authority. They are now faced with either a much higher tax rate, or the risk that once their tax authority receives information on their bank account it will check to see if the account was previously declared or not.
While the authorities are keen to prevent tax evasion, there are still legitimate opportunities available in many EU countries to reduce taxation on savings and investments as well as on your estate for inheritance tax purposes. In this day and age though it is increasingly important to take professional advice from a firm like Blevins Franks to ensure you get your tax planning right and that it is effective as possible.
By Bill Blevins, Managing Director, Blevins Franks
29th April 2011, updated 31st May 2011
The 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; an individual must take personalised advice.