If you are a resident of the European Union, and have a bank account in another EU-state, then you should be aware of EU Savings Tax Directive.
What is an EU Savings Tax Directive?
The EU Savings Tax Directive (EU STD) is an agreement between EU Member States that came into effect on July 1st 2005. The aim of the directive is to coordinate a tax exchange regime between EU Member States and ensure recovering tax revenue that may be due from EU residents. The Directive enables interest payments to be made subject to effective taxation in accordance with the laws of the Member State of residence of the individuals concerned.
To Whom Does it Apply?
The Directive applies to individuals who are residents in an EU Member State other than the one where the interest is paid. So, if you are not resident in the EU (including EU nationals) and permanently reside outside of the 28 Member States or you have an account under your company’s name, you will not be affected by the Directive.
Which Countries Adopted STD?
The Savings Tax Directive applies within the EU to all EU Member States. Some jurisdictions that are not EU Members are voluntarily put into place the same measures:
- Andorra, Switzerland, Monaco, Liechtenstein, San Marino;
- UK dependent territories – BVI, Anguilla, Montserrat, Turks & Caicos, Cayman Islands, Isle of Man, Gibraltar, Guernsey, Jersey and Channel Islands;
- Netherlands territories: Aruba and Netherlands Antilles.
What Savings Income Does the Directive Apply to?
The Directive applies to interest earned on bank deposits (e.g. savings accounts), debt claims, bonds and interest on collective investment funds.
Currently other types of income fall outside the scope of the Directive, such as dividends on ordinary or preferred shares, pension payments and salary.
How Does it Work?
The countries which subscribed to EU STD either commit themselves to an automatic information exchange or implement a transitional withholding tax at source.
Those countries that agreed to the exchange of information will report to tax authorities of other Member States about interest on savings paid to a person. This will enable each state to collect its own taxes and avoid the possibility of hiding the returns on savings.
The information exchange of data on interest paid was adopted by 26 Member States except for Austria and Belgium. Recently Luxembourg was introduced to the automatic exchange of information as of 1 January 2015.
The withholding tax option as a temporary measure was chosen by Austria and Belgium and all the non-EU jurisdictions that support the Directive. Under the withholding tax option the banks will automatically deduct tax at source at a rate of 35% (“retention tax”). Then the local tax authority will keep 25% of the total amount collected and remit 75% to the various tax authorities within the Member States.
What Happens if You are an EU Member State Resident and Earn Interest in Another EU Country?
You can choose from two options:
- To ask the bank to exchange information and end up in the hands of the EU tax authorities or
- To have tax deducted at source from the interest, so that the details of the interest paid are not exchanged with their tax authorities in the country of your residence.
Can You Legally Avoid the EU Savings Tax Directive?
Currently yes, you can. And it is easy to do so because under the EU law the beneficial owner is defined as an individual.
- You can choose international jurisdictions that do not support the Directive. It can be Hong Kong, Singapore, Bermuda, Barbados, Dubai and other countries that do not support EU STD.
- The funds can be deposited in the name of a limited company, preferably an international company in zero or low tax jurisdiction.
- You can transfer your funds into a trust of foundation, which are not subject to effective taxation.
- Move your investments into shares.
- Put your investments into insurance bonds (portfolio bond). Such types of investments are offered by many offshore insurance companies.
Important Note: New Rules Applicable from 01.01.2016
The loopholes of EU STD clearly show that some interest-bearing financial instruments are not covered by the Directive, therefore, a new Directive 2014/48/EU has been adopted which will have to be transposed in the EU Member States by 01.01.2016. All Member States are required to have certain legislation in place by 31.12.2015 and the revised Directive is scheduled to come into force on 01.01.2017.
Key changes to the Directive are the following:
- To cover income received within and outside of the EU from debt claims, life insurance contracts, pension or investment funds.
- To cover interest payments from trusts and foundations located in an EU country.
- To reinforce the existing rules regarding the exchange of information on savings income and to demand from the tax authorities to identify the actual beneficial owner of the income.
Governments are aware of large amounts of undisclosed wealth held offshore and it is clear that for individuals it is relatively easy to hold investments through financial institutions outside of their home country and be invisible to their domestic tax authorities. Therefore, international bodies have started to coordinate efforts of obtaining sufficient data from financial institutions worldwide. New rules of EU Savings Tax Directive among many other global measures will eventually coordinate efforts against tax evasion on an international level.