Should you be worried about changes to the EU Savings Directive?

Fiduciary Wealth Team

At a meeting of the European Council in June 2003, EU member states agreed on the principle that exchange of information on as wide a basis as possible should be the ultimate aim of the European Union. The EU Savings Directive was born out of that decision and came into force in July 2005 with the aim of ensuring EU residents paid tax on savings income in their country of residence regardless of whether they declared income or not and thus avoid the common practice of hiding capital in foreign bank accounts.

However, a review of the Directive in 2008 exposed weaknesses in the drafting of the legislation primarily due to the fact it only covered interest payments to individuals or natural persons omitting companies, trusts and other legal entities which resulted in EU residents holding foreign personal bank accounts transferring their assets into corporate structures. The proposed amendments seek to extend the scope of the Directive to untaxed entities introducing look through facilities for offshore companies, trusts and foundations to ensure full recovery of tax liability.

Secondly only certain types of interest payments were covered by the Directive and alternative investment products escaped its scrutiny. As a result of which many investors changed their pattern of investing with a flight way from debt securities in favour of equities. The Expert Working Group appointed by the EU Council and entrusted with the task of closing existing loopholes to prevent tax evasion are considering applying a much wider definition to the term “interest payments” to increase the number of financial instruments and investments which fall within scope of the Directive.

Thirdly it was limited geographically to the EU and despite the establishment of bilateral agreements with a great number of non EU jurisdictions on exchange of information there was an outflow of capital to jurisdictions beyond the scope of the Directive. The extension of the Directive to untaxed legal entities established outside its territorial scope will be addressed by requiring the paying agent to apply the savings tax provisions on the beneficiaries upon distribution. How effective these new arrangements are on entities outside the EU remains to be seen.

Despite the implementation of these changes and other sources of income being caught by the Mutual Assistance Directive, the EU is now contemplating implementing a further Directive on administrative assistance in tax matters which seeks to strengthen administrative and technical cooperation between countries including the automatic exchange of information under certain circumstances. Its implementation is not expected until 2017.

If you are holding financial assets in an offshore jurisdiction to avoid paying taxes, why not make an appointment to discuss the potential issues and how best these can be resolved?

The future is uncertain but there is still time to take action. Don’t get caught out! Tax avoidance is not an option. There are ways of reducing your overall tax liability in a perfectly legitimate way. If you are worried that your investments might come under review or hold your financial assets in a corporate structure you should consider seeking professional advice from a reputable financial advisory firm on tax led wealth management solutions.

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