EU Savings Tax Directive, part 3

EU Savings Tax Directive, part 3

The EU has a policy of subsidising the poorer member states. Ireland is not poor having reduced tax rates & lowered the burden of government. Yet the EU continues to pay money to Ireland even though it is now the 2nd richest nation in the EU. 4 countries [Ireland, Portugal, Greece and Spain] were revealed to receive more money from the EU than they pay in.

UK burden...

OECD endorses higher taxes in the UK which really needs to lower taxes and reduce the burden of government but the Paris-based OECD recently warned that the UK will need to raise taxes to counter rising levels of public borrowing. The government deficit is likely to be above 3% of GDP in 2004, and in the absence of a rise in taxes, additional action may be needed to achieve a reduction. Despite rising corporate tax receipts brought about by increased company profitability, and higher revenues from fuel tax as a result of fast-increasing oil prices, the OECD warned that these sources of additional taxes will not be enough to make up the expected fiscal shortfall. The OECD concluded that a further period of fiscal retrenchment was almost certainly needed if Brown is to meet his self-imposed Golden Rule of borrowing only to invest over the economic cycle.

Dubai law

Dubai passes law, DIFC established. His Highness Sheikh Maktoum bin Rashid Al Maktoum, Prime Minister of the United Arab Emirates and Ruler of Dubai has signed a decree formally establishing the Dubai International Finance Centre.

The Government of the British Virgin Islands is considering changes for the Tax Code of the country. In particular, a maximum increase of 20% over the current fees paid to the government for BVI IBC renewal is proposed e.g. fees for a company with authorized capital under US$50,000 could be $360 instead of the present $300.

Cyprus - Tax Amnesty

Tax Office says highly successful. The Cypriot tax amnesty under which undeclared bank deposits could be revealed at a tax charge of only 5% has generated CYP90m for the government, says the tax office.

As with the French and Belgians, the Germans propose a tax amnesty in order to lure back money from offshore centres, but without changing tax laws regarding penalties that encouraged the money to leave in the first place. German finance minister Hans Eichel said that the government has been disappointed by the lack of response to the tax amnesty on undeclared foreign assets. Eichel had hoped the scheme would bring in some EUR 5 billion in tax revenues to help the country's budget deficit, but it yielded a mere EUR 378 million since it began on 1st January.

EU Savings Tax Directive

What are the implications now?

Update - Liechtenstein's planned implementation - The system of EU taxation on interest payments will be a retention [with-holding savings tax rate] as follows:

  • 15%, for interest payments from 1 July 2005 to 30 June 2008
  • 20%, for interest payments from 1 July 2008 to 30 June 2011
  • 35%, for interest payments from 1 July 2011 onwards

Persons coming under the Agreement

Individual beneficial owners [physical persons] who are residents of a EU member state and who receive interest payments from a paying agent [bank] resident or established on the territory of Liechtenstein are subject to the taxation.

Beneficial owner is a person who receives or secures an interest payment for his or her own benefit. The following conditions apply:

  • it must be a physical person
  • the person must be resident in a EU member state
  • the payment must be qualified as an interest payment in the meaning of the agreement
  • the person must receive or secure the interest payment for his or her own benefit

If one of the criteria is missing, the payment to the physical person is not subject to the agreement. The identity and residence of the beneficial owner is taken from the data which a paying agent has recorded. Further investigation is not needed by the paying agent. A material investigation on the living address on the basis of documents is not necessary. For example the mailing address is not necessarily the residence in the meaning of the agreement. However a physical person showing an EU passport and indicating that he or she does not live in the EU might be required to supply further confirmation on his or her private living address.

Other paying agents for the purposes of the agreement can also be fund administrations, insurance companies, asset managers, trustees, lawyers and notary publics and companies or permanent establishments of foreign companies which regularly or occasionally pay or secure for beneficial owners with EU residence interest earning values or interest on debts, where these paying agents are not debtors.

What obligations do EU Member States have?

Any country that decides to apply this with-holding tax option has to offer at least one of two other alternatives to individuals who will be affected

If you are resident in one of the above countries, and you have savings or investments that generate you interest or savings income, and these savings or investments are in one of the other above listed countries, it is very likely that you will be affected by the EU Savings Tax Directive 2005.

An opinion released recently by an advocate general at the European Court of Justice (ECJ) is expected to have favourable implications for EU taxpayers allowing them to look around for the most favourable tax deals. Commenting on the case of a German taxpayer who had asked to be taxed in Holland as a Dutch taxpayer, referring to a tax treaty between Holland and Belgium which entitles Belgian non-resident taxpayers to the same tax reductions as Dutch residents, the ECJ ruled that individuals and firms can examine a European country's international tax arrangements and demand to be treated in line with the most favourable.

Britain's Caribbean tax havens

Likely to come under further pressure from Brussels to lift their banking secrecy. In a corporate and financial malpractice document, the European Commission has called time on the opaque financial laws of BVI, Cayman Islands and others. Banking transparency is suggested together with existing EU trade and aid deals with African, Caribbean and Pacific countries and territories. Brussels would then have the power to use such things as banana quotas and development grants as leverage to access financial information. Brussels is also offering economic support to help co-operative territories that open up their financial sectors to scrutiny.

Guernsey - Channel Islands [Jersey, Guernsey, Isle of Man]

Jersey, together with Guernsey and the Isle of Man, has agreed to implement a with-holding tax system [option to exchange information] on payments of savings income that fall within the scope of the Directive. Locally the legislation has been put forward and agreed in principle by the States, and it is now up to the tax authorities to finalise guidance notes and address any remaining grey areas.

The Directive will apply to all payments of interest to EU residents and the person or entity responsible for the payment [typically a bank] will need to comply with the necessary with-holding / reporting requirements. The provision in respect of remitted income is ultimately aimed at UK non-domiciles who rely on remittance protection of foreign income. If interest received by UK resident non-domiciles is not to be remitted to the UK and therefore not subject to UK income tax, then in accordance with the draft guidance notes, the Directive need not be applied on the payment of interest to that individual. This is going to be difficult to implement where there are other variables like individuals that have more than one passport and/or a lack of information in respect of tax residency forcing reliance on the individual's passport.

Isle of Man - Global IT Disaster Recovery Hub?

The Isle of Man government has been actively pursuing measures that could move the Island towards becoming the world’s IT disaster recovery hub in the field of financial services.

Conclusion

Main residence outside the EU, second passports and other domicile / residency issues, and obtaining EU non-residence is going to be increasingly important for those with substantial savings income, also changing the type of investments to those falling outside the scope of the Savings Tax Directive where possible.

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