EU member states have formally adopted the revised Savings Tax Directive. Tax Commissioner Algirdas Šemeta described this 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 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 for a transitional period. It started at 15% but is now 35%. The Isle of Man and Guernsey have already abolished the withholding tax and moved to automatic exchange of information. Jersey and Luxembourg have committed to do so from 2015. Austria is expected to follow suit.
The 35% withholding tax rate means that many people are now paying more tax in what they previously perceived to be a tax haven than they would be expected to pay under local tax rules – in Portugal the standard rate for interest is 28%. However, Portugal does apply a punitive tax rate of 35% on income generated in ‘blacklisted’ or ‘fiscally favoured’ jurisdictions, such as Isle of Man and Guernsey, so these are not tax efficient locations for your capital.
‘Third countries’ Switzerland, Andorra, Monaco, Liechtenstein and San Marino participate in the directive by applying the withholding tax, unless the individual consents to exchange of information.
The EU Commission has been pushing for reforms to the directive, to close loopholes that allow individuals to circumvent the regulations. This has been resisted by Austria and Luxembourg, who argued that it would put their banking industries at competitive disadvantage to countries like Switzerland. 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 version at the European Council of Ministers meeting on March 21. Formal adoption followed on March 24.
In a speech on March 24, Mr Šemeta observed: “This is proof of the widespread acceptance that the days of bank secrecy and tax nontransparency 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. 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 automatically. 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 payments.
Member states have until January 1, 2016 to adopt the legislation necessary to comply with the directive. Application will start from January 1, 2017.
Administrative Cooperation Directive
In his speech on March 24, 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 Portuguese tax legislation. 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.
By Gavin Scott
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Gavin Scott, Senior Partner of Blevins Franks, has been advising expatriates on all aspects of their financial planning for more than 20 years. He has represented Blevins Franks in the Algarve since 2000. Gavin holds the Diploma for Financial Advisers. | www.blevinsfranks.com