HAVING EXPLORED what the Savings Directive is, why it is here and what it is meant to do, we need to examine what your choices are. More importantly, we need to examine what the consequences of each are. Before clarifying these crucial points, it is important to look at the Directive from one’s personal financial planning perspective.
Each of us, for better or for worse, has a plan that typically consists of three pillars. The first is your everyday cash flow – the money you use to pay the bills, buy groceries and put petrol in the car. Most of us get only a bit of interest on this money and this is not important, since we keep a relatively small outstanding balance in such accounts.
Skipping forward to the third pillar, most of us have some form of long term investments. These usually include our home, perhaps an investment portfolio and so on. Here, one of our criteria is to make changes only when the timing is right: adding an addition to an existing home or downsizing to smaller accommodation, making trades in a share portfolio when markets are right, and so forth.
Back to the second pillar is where the Directive has more relevance. This might best be referred to as emergency or rainy day money. It is in this domain that the Savings Directive is hitting many foreign residents hard. For many years, offshore banks and building societies have offered high interest accounts that paid interest gross.
In the past, because of the absence of information sharing in confidential offshore environments, this form of income was rarely reported on resident country tax returns. Savers were happy – they had high yields and paid no tax, with relatively easy access to their money when the need arose. The only problem with this scheme is that it was quite illegal and constituted tax evasion. To combat this situation, as well as other purposes, the EU conceived, and has now instituted, the Savings Directive.
The Savings Directive and you
Paying tax on the money that you hold in a current account is not a problem: there is little interest in the first place, usually the rates are low and, finally, the purpose of this account was never to save but rather to spend. Investments in the third pillar don’t belong in your bank or building society in the first place.
The second pillar – rainy day money – is entirely different. In the early years of the Directive, whether you either withhold or elect to share information, the difference will not be substantive because the divergence between 15-20 per cent withholding in one jurisdiction or the other is not appreciative. However, when offshore taxation at source reaches 35 per cent in seven years, the pain will be far deeper.
If you wish to side step the Directive all together, some of the international insurance companies have devised a product range that allows you to roll up, legally, interest earnings tax-free. These policies normally have no entry or exit fees, allow easy access to capital and have penalty free withdrawals after one year. They are stripped down Portfolio Insurance Bonds that invest in institutional money market funds.
Another similar option comes from international financial institutions that also offer MultiCurrency Money Market Funds. These investment instruments are, basically, Unit Trust Funds that work on the principle of capital growth rather than distributing interest, allowing foreign residents in Portugal to take advantage of favourable Portuguese legislation regarding Capital Gains Tax (CGT). Rates are competitive within each currency and offer the same cost free entry and exit foundation.
It is still early days on alternatives. Surely, financial ingenuity will continue to develop choices that will respond to diverse needs. Because the early years of the Directive will only take a modest bite out of the apple, most savers should allow themselves to be stampeded into a panic solution.
Taking advantage of current legislation that offers favourable treatment to certain structures with similar risk and yields as bank deposits is no crime. It is our obligation as citizens to be compliant and our right to pay the legal minimum under the legislation.
It is also important to take into consideration that the first year or two of the Savings Directive will be somewhat tumultuous. It will be interesting to see how the dust settles. Past experience has always shown that theory and practice are a world apart.
Dennis Swing Greene
International fiscal consultant,