THE EU’S revolutionary Savings Tax Directive begins today, July 1, and will change the way expatriates handle their financial affairs. All EU Member States, plus dependent territories and key third parties, will now either automatically exchange information about your finances or deduct a withholding tax at source. This article contains some frequently asked questions on this new regime for taxing our savings.
What is the aim of the Directive?
To ensure individuals resident in the EU are taxed on their savings income in accordance with domestic law. Every EU citizen will have no choice but to pay tax on interest earned in the EU and the jurisdictions listed above, regardless of where it is earned and whether it is declared or not.
What sort of information will
This includes your name and residence, details of the paying agent (banks etc), account number, amount of interest earned and the period to which it relates. All this will be given to the Portuguese tax authority.
How often will this information
Information will be swapped at least once a year, within six months of the end of the tax year. It will happen automatically; not just in cases where evasion is suspected.Information about your affairs will be exchanged, even if they are fully legal and you have paid all your taxes.
What will my tax authority do
with this information?
They will compare it with details provided by you on your income tax return. If they suspect tax evasion, they are likely to start investigations. They may include looking back over past years. Considering that the Portuguese government has announced ‘austerity measures’ to reign in the country’s burgeoning deficit, and that these include a number of tax increases, alongside a crackdown on tax evasion and banking secrecy – they will no doubt put this new information to good use.
Is there anything I can do to maintain financial confidentiality?
It is more important than ever that your tax planning follows the letter of the law. You can legally lower your tax bill by setting up an offshore insurance bond like a Personal Portfolio Bond. Insurance policies are outside the scope of the Directive – they will not be reported on and no withholding tax will be deducted. You can hold your choice of investment assets within the bond and the tax benefits are stunning.
How does the withholding
tax option work?
Jersey, Guernsey, Isle of Man, Austria, Belgium and Luxemburg have been granted a ‘transitional provision’ whereby they can deduct a withholding tax instead of automatically exchanging information. This tax will be deducted at source and starts at 15 per cent, rises to 20 per cent in July 2008 and to 35 per cent in 2011. No actual details about you will be exchanged. Non-EU countries, Switzerland, Andorra, Liechtenstein, Monaco and San Marino have agreed to do the same. Note that the EU’s aim is for all jurisdictions to automatically exchange information by 2011.
What about Gibraltar?
Gibraltar will automatically exchange information.
My bank in Jersey has mentioned
a “retention tax”. What is this?
It is just another name for the withholding tax – the terms are interchangeable.
I declare all my interest earnings and pay tax accordingly. Will I now pay tax twice on my Guernsey account?
No, your bank should have written to offer you a choice of withholding tax or exchange of information. If you chose the latter, tax will not be deducted at source and instead all your details will be forwarded to the Portuguese tax authority.
The Directive refers to ‘savings
income’. Can you clarify what
In simple terms, it means interest earnings’ and this is what will be reported on or taxed. It includes:
1) Interest paid or credited to an account, such as interest earned from bank deposit accounts and income from government securities; bonds and debentures, including premiums and prizes attached to such securities.
2) Interest rolled up and paid out at the sale or redemption of a debt claim. This will include any interest rolled up in an accumulating bank deposit account.
3) Income deriving from interest payments from certain unit trusts and investment funds which have invested more than 15 per cent of their investment in debt claims, for example, Bond Funds.
4) Income realised upon the sale or redemption of investment funds with at least 40 per cent of the underlying investments in interest bearing instruments.
Is there anything that is
Information will not be exchanged, nor tax deducted, on the following:
•Stocks and shares
•Life assurance policies, including the assets held within such a “wrapper”
•Income payments to companies
With careful planning and the right advice you can use these structures to legally mitigate your tax bill.
Does all this mean there is no
way to avoid tax any more?
You are not bound by law to choose the financial planning method that pays the most tax; you are simply obliged to declare all your earnings and wealth as per the regulations of the country you live in, which is not the same thing. Some financial structures either do not need to be reported, or the income generated is not taxable. It is, therefore, well worth investigating ways of legally lowering your tax bill. Under the current climate, expert advice is essential if you want to both save tax and keep on the right side of the law.
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