The first day of July is the date that banks and other interest payers will have to implement the pr...
The first day of July is the date that banks and other interest payers will have to implement the provisions of the EU Savings Directive, so it is timely to remind ourselves of what that means.
Almost 18 years since the idea was first mooted, EU member states will finally begin exchanging information on savings income payments from institutions resident in one EU state to individuals resident in another. The provisions will also be adhered to by certain non-EU states such as Switzerland, the Isle of Man and the Channel Islands.
The non-EU jurisdictions, along with Austria, Belgium and Luxembourg, have opted for a withholding tax regime. The withholding tax will be levied at a rate of 15% for the first three years, and 20% for the following four years. After the seven-year period, the tax will rise to 35%. This will be the default position but clients will be allowed to opt for exchange of information if they wish.
The Directive covers all interest payments - this is widely defined to include debt interest, including capitalised interest from zero coupon bonds - beneficially owned by individuals. The directive does not cover non-interest payments, such as dividends and life policy benefits.
Interest distributed by collective investments is also covered but there is an option to ignore such distributions if the fund holds less than 15% of its assets in debt instruments. The redemption proceeds of funds are also included where 40% or more if the fund's assets are in other income producing funds. This threshold reduces to 25% in 2011.
For those institutions affected by the Directive, there are minimum requirements for establishing the identity and residence of the beneficial owner, which differ depending on when the contractual relations were entered into. Perhaps the most onerous of those is where relations commence after 1 January 2004. In these cases, where an EU passport holder claims residence in a non-EU country, the paying agent must establish proof by requesting a certificate of residence or tax identification number from the tax authorities of the country in which the client claims to be resident. Not many people seem to appreciate that this will catch, for example, a British passport holder resident in Hong Kong who has a bank account or fund in a jurisdiction affected by the Directive.
It may not be easy to get the certificate from the tax authorities so these clients could find that withholding tax is deducted from their interest. It might even be impossible, for example if a client resides in a jurisdiction where there are no personal taxes - Dubai, for example. Advisers should therefore be reviewing their clients to ensure that they are aware of these provisions and to take action before it is too late.
Longer term, perhaps the Directive will encourage more individuals to think twice about not disclosing their wealth - particularly when withholding tax rates rise to 35%. It will also encourage individuals to structure their wealth in the most tax efficient way possible using legitimate planning techniques, so will provide good opportunities for financial advisers.
The STD will be implemented on 1 July.
Countries can choose to exchange information about EU citizens' interest payments or instead allow them to pay a withholding tax instead.
Withholding tax will be 15% for the first three years, 20% for the following four and 35% from then on.
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