Planning ahead

As from July 1, 2005, a new EU directive will come into force, which will be of particular interest to individuals holding savings in foreign bank accounts in the EU. This is Council Directive 2003/48/EC on taxation of savings income in the form of interest payments.

As Article 1 of the directive states, the aim of this piece of legislation is to "enable savings income in the form of interest payments made in one member state to be made subject to effective taxation in accordance with the laws of the latter member state".

What this means in effect is that member states are to be empowered by the EU to tax interest receivable on savings held by their citizens in banks in other EU member states and a few other states.

In other words the directive aims to prevent EU citizens from avoiding tax on savings by keeping their money in foreign bank accounts. It is important to note that the directive only covers interest receivable on savings held abroad, and not the savings themselves.

Some member states already provide for such a form of taxation in their tax code, but these laws were not uniformly developed throughout the EU, as a result of which they could not be adequately enforced.

Hence the need for this new directive with a view to harmonising legislation on the taxation of interest earned from savings.

But the real revelation of this directive, and undoubtedly the most controversial, is the fact that "all member states will ultimately be expected to automatically exchange information on interest payments by paying agents established in their territories to individuals resident in other member states." (1)

The paying agent is the economic operator who pays interest on the savings. The most common example of such a paying agent is a commercial bank. The consequence of this development is that from July 1, banks within the EU will have to transfer information of interest paid on savings held by their EU clients.

This information will have to be transferred to the competent authorities in the various member states. The competent authorities would be the Inland Revenue departments of the member states.

In a nutshell, the Inland Revenue Department in Malta will start receiving information from banks in all other EU member states of interest paid on savings accounts held by Maltese citizens in banks within the EU.

The definition of interest is rather wide and the tax directive presents a long list of various financial units which fall within the parameters of the definition. Briefly, the definition of interest, according to Article 6 of the directive, would include interest paid on debt claims, which would include bonds and deposits but not equities.

The information that has to be transferred is the following: (2)

¤ the identity and residence of the beneficial owner;

¤ the name and address of the paying agents;

¤ the account number of the owner or, where there is none, identification of the debt claim giving rise to the interest; and

¤ information on the interest payment.

So the information that must be handed over to the competent tax authority is pretty vast, even though it is restricted to the interest receivable and not to the savings itself.

This imminent tax directive has been opposed for many years by a number of member states such as Belgium, Luxembourg and Austria, that have refused to transpose the directive into their local law by July 1 of this year, as a result of which these member states will, for the time being, not be exchanging any information with other EU tax authorities.

These countries have managed to negotiate a transitional period during which they will levy a "withholding tax at a rate of 15% for the first three years, 20% for the following three years and 35% thereafter." (3)

They will transfer 75% of the revenue from this withholding tax to the investor's state of residence and retain the other 25%. These three member states will be entitled to receive information from the other member states.

This transitional period for the above-mentioned member states will subsist until the EU will finalise an agreement with countries or territories that, rightly or wrongly, are considered to be tax havens, such as Switzerland, Liechtenstein, San Marino, Monaco and Andorra.

The final objective is that even these countries would be transferring information to the tax authorities of EU member states upon the latter's request.

Such an agreement, if ever achieved, will be quite a milestone in the history of European taxation, especially considering the traditional bank secrecy these countries pride themselves with.

Dependent territories of member states, such as the Isle of Man and Guernsey, that are considered to be tax havens within the EU territory, will also form part of this agreement.

Malta has negotiated a two-year extension for the transposition of this directive, meaning that it will only become part of our law in 2007. This means that Maltese citizens holding savings in banks within other EU member states need to adapt to this new tax directive within the next two years.

Currently, an investment registration scheme is available, and affected parties will most likely be looking at that and other alternatives within this two year period.

Dr Cedric Mifsud is an associate within the GMTD Law Firm - European Legal Consultancy Unit.

References

1. EU Commission - Taxation and Customs Union Website.

2. Article 8.

3. EU Commission - Taxation and Customs Union Website.