Savings Tax Directive and exchange of information

Contributed by BILL BLEVINS

Financial Correspondent

Blevins Franks Trustees

THE EU’s revolutionary Savings Tax Directive comes into full force at the beginning of July 2005. These new regulations will change the way expatriates handle their financial affairs and anyone whose affairs are not set up in full compliance with the law. That is, anyone who does not declare all they should to the Finanças (the Portuguese tax authority) or Inland Revenue needs to make changes to their financial planning now, before it is too late.

The aim of the Directive is to ensure that every EU citizen pays all the tax due to the tax authority of his or her country of residence. This is regardless of where their interest earnings are generated – remember that you are liable to income tax on your worldwide income. You will no longer be able to ‘choose’ which earnings to declare.

Under the terms of the Directive, almost all EU Member States (including Gibraltar) will exchange information about the tax and interest earning affairs of EU citizens. A withholding tax option will be implemented by Luxembourg, Austria and Belgium, as well as Jersey, Guernsey, Isle of Man, the UK, Dutch Caribbean islands, Switzerland, Andorra, Liechtenstein, San Marino and Monaco.

Q. How exactly will exchange of information work?

A. The most important aspect to understand is that it will be automatic. In other words, tax authorities will exchange information about you once a year, and not only when tax evasion is suspected. All paying agents (banks, etc) will collect information about interest payments and the amount of tax paid to EU residents and pass it on to their tax authority, who, in turn, will forward the information to the tax authority of the account or investment holder’s country of residence. Your local tax authority will then check your tax returns to ensure you have declared these earnings and, if not, will tax you on them. It is also very likely to want to know why you haven’t declared the money and look into your past affairs to see if you have been evading tax.

Q. What information

will be exchanged?

A. The Directive seeks the implementation of exchange of information and the taxation of individuals on various forms of interest bearing financial instruments. Interest income (e.g. from deposit accounts), interest bearing debt claims, such as bonds issued after March 1 2001, and Zero Coupons and Investment Funds with at least 40 per cent of the underlying investments in interest bearing instruments (bond funds, for example) are all reportable. Note also that investments that are tax free in the UK (PEPs, TESSAs, Premium bonds, etc) are not necessarily tax free in Portugal and could be included. Information about your identity and account details will also be reported on.

Q. Will any types of investments not be included

in the new regulations?

A. Information on stocks and shares (including the dividends payable), currency trading and derivative instruments will not be included. Life assurance policies, including guaranteed investment bonds (provided that these are issued as a life assurance contract) and pension plans are specifically excluded from the reporting requirements of the Directive. If you invest your capital within an ‘insurance wrapper’ (an offshore bond), it would then be outside the scope of the Directive. This is legal tax planning and will help keep the taxman away. Interest paid to companies and trusts will also be excluded.

Q. How much withholding tax will I have to pay on my account in the Isle of Man?

A. It will start at 15 per cent, rise to 20 per cent after three years and then to a hefty 35 per cent in 2011. Note that this option is for a ‘transitional period’ only and the EU aims to have all jurisdictions exchanging information in future.

Q. I would prefer to pay tax

in Portugal rather than in my account in Jersey.

Is this possible?

A. Yes. Banks in those jurisdictions, granted the withholding tax concession, will offer their clients a choice of either withholding tax or exchange of information. If you have savings in Jersey, but have declared the income for tax in Portugal or would prefer this option, you can instruct your bank to inform the Portuguese authorities about the interest you have earned instead of the bank deducting tax at source. If you bank in Jersey, your bank should be writing to offer you this choice.

Q. I understand that

the Savings Tax Directive

has been postponed

a few times in the past.

What are the chances that

it will be postponed again?

A. This is very unlikely as all the previous problems have been ironed out, and the Directive looks well on track to start on July 1 as planned. The Swiss parliament has agreed the Directive, and Andorra, Liechtenstein, San Marino, Monaco, Jersey, Guernsey and the Isle of Man have also signed their agreements.

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