Offshore Investor Alert: EU Savings Tax Directive Update

Summary: An essential update for offshore investors on the progress of changes to make the EU Savings Tax Directive more effective

The EU Savings Tax Directive that was introduced back in July 2005 to prevent cross-border tax evasion has been less successful than the EU Tax Commissioner Laszlo Kovacs would have hoped according to recent reports which suggest that he is now looking to tighten up the terms of the Directive and to broaden its scope.

This is an offshore investor alert and an EU Savings Tax Directive update to ensure that any of our readers who are saving and investing offshore are doing so as tax effectively and legitimately as possible, and so that you are all aware of the scope of the Directive as well as any potential changes that could impact on your personal status.

When it was introduced in July 2005, the general scope of the Directive was to ensure that EU taxpayers paid taxation in their home country on earnings derived from interest earned from qualifying savings and investment policies held in third countries. 

The nations that signed up to the Directive were Andorra, Anguilla, Aruba, Austria, Belgium, British Virgin Islands, Cayman Islands, Channel Islands, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Isle of Man, Italy, Latvia, Lichtenstein, Lithuania, Luxembourg, Malta, Monaco, Montserrat, Netherlands, Netherlands Antilles, Poland, Portugal, San Marino, Slovakia, Slovenia, Spain, Sweden, Switzerland, Turks and Caicos and the UK.

The majority of nations agreed to the sharing of personal and pertinent financial information of all non-resident savers and investors likely to be affected by the Directive; other countries such as Switzerland, Luxembourg and Lichtenstein agreed to withhold tax at source rather than exchange information - and when the Directive came into force it was expected that tax evaders would be caught out, significant extra taxation revenue would be collected and cross border taxation evasion would cease.

However, Switzerland raised only EUR 100 million as a result of the Directive during the first six months following its introduction and it was one of the most successful in terms of retrieving ‘lost’ revenue.  To Laszlo Kovacs’ mind this means the Directive has not been as successful as it should have been and he is focused on havens such as Singapore and Hong Kong where many savers and investors are believed to have moved their funds prior to the introduction of the Directive.  These particular jurisdictions have not signed up to the Directive and now pressure is being placed upon them to join…

Offshore investor alert – please be advised that if you have offshore savings and investment policies and you’re not declaring interest earned or paying taxation due on your earnings, you could be inadvertently breaking the law and you need to take advice from a tax adviser as soon as possible to make sure your affairs are not only tax efficiently organized but that they are legally and legitimately organized too.

It’s highly likely that an EU Savings Tax Directive update is just around the corner.  Laszlo Kovacs is currently taking advice from industry experts and collating his own findings relating to the inclusion of additional financial instruments and policies within the scope of the directive such as structured products and derivatives.  Furthermore the EU Tax Commissioner is considering imposing a new requirement on EU based banks to either report or withhold interest payments made to qualifying customers via non-EU branches.  As and when new changes are likely we will update you.

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