The European Savings Tax Directive

We have briefly touched on the fact that EU domiciled individuals who are resident within another European Union member state are now forced to choose between 20% tax deducted or exchange of information. But that only applies to bank accounts and fixed interest coupons such as Government Bonds. There are solutions and it is therefore essential that we completely outline the terms of the EU Savings Tax Directive before discussing expatriate tax, and moving on to explore further options available to expats seeking to maximise their offshore advantage and reduce any tax liability.

Essentially the European Savings Tax Directive, (ESD), is an agreement to automatically exchange information about customers who earn savings income in one EU nation but who reside in another. It has been in force in all EU member states, dependent territories and a number of additional nations known as ‘third countries’ since the 1st of July 2005. Simply put, for many expatriates gone are the days of holding money in an offshore bank receiving interest tax free and no one being privy to this information. But there are solutions by looking outside of the banks! You just need to know where to look.

The full list of nations affected by the Directive is: –

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, Antilles, Poland, Portugal, San Marino, Slovakia, Slovenia, Spain, Sweden, Switzerland, Turks & Caicos, United Kingdom.

Automatic exchange of information is of course the ultimate objective of the Directive, but a number of the above nations have instead adopted a policy of automatically withholding tax from the customer’s gross interest earned instead. The level of tax withheld on a customer’s account initially started at 15% in 2005, but quickly rose to 20% in the summer of 2008. We should all be aware however that it doesn’t stop there; by 2011 the tax automatically withheld will have risen to a shocking 35%. There is increased pressure from the EU to push the savings directive global, but again remember that there are solutions if you look outside of the banks. Please contact us if you think you might be affected by the Directive and you would like to learn more about it and the solutions to it. Some people think it is bureaucracy gone mad that you pay tax as you earn your money; save then pay tax on your savings income; then pay tax on your death. The good news is it doesn´t have to be this way. It is still not too late to structure your affairs legitimately, correctly and secure your personal wealth.

Are You Affected?

If you reside in one of the above nations and you have a fixed interest bearing bank account, saving or investment vehicle in another of the above list of nations, it is highly likely that you will be affected by the EU Savings Tax Directive unless you have already taken appropriate measures. This either means an automatic exchange of information, or that you will ultimately lose up to 35% of your gross interest annually in order to keep your monies confidential.

All onshore and offshore bank accounts are affected, as are the vast majority of deposit accounts, savings certificates and term deposits. In simple terms, where a savings or investment policy generates fixed interest direct to the client it is affected, and the word ‘direct’ is the key here. If interest is paid directly then the investment or account comes within the remit of the EU Savings Tax Directive, and you will have to choose between either paying the withholding tax or being subject to the automatic exchange of information on the monies being held in your name. However, offshore personal portfolio bonds do not receive the interest directly which can have massive fiscal advantages for the owners of such attractive structures.

The European Savings Tax Directive was brought into being in an effort to prevent cross border tax evasion. Instead it has resulted in thousands of individuals losing their right to privacy of account activity and personal information. Individuals are finding that their identity, the level of savings income received and the period over which it has been received will be passed automatically to the tax authority in the country in which the money is housed. This information is then automatically passed back to the tax authority in the country in which the individual resides. Those affected residing in a nation that has agreed to the automatic retention of withholding tax at source, will find themselves up to 35% down on annual returns by 2011, unless they explore other options. Leave your monies in a bank account and with interest rates tipped to fall below 2%, deduct 3%, and deduct inflation and what you are going to live on? In these times expats can benefit massively if they get expert advice and structure their savings and investments correctly.

The Future of the EU Savings Tax Directive

Even if you’re not resident in, or holding interest earning financial assets in one of the nations listed above, you need to be aware that there is global pressure being placed on non-compliant countries to sign up to the Directive or a similar policy by the likes of the Organisation for Economic Co-operation and Development, (OECD). What’s more, Germany is putting pressure on the EU to force those nations that are withholding tax to stop doing so, and to instead start exchanging information.

It is therefore deemed only a matter of time before loss of privacy or loss of the right to freedom of investment could become a reality for more and more of us.

There are those in the financial industry who actually believe that the loss of freedom will ultimately be felt on a global scale, but remember that there are solutions available to you. Contact us to find out who you should speak to for advice and how you personally can best structure your assets as an expatriate.

Legitimately Beating the EU Savings Tax Directive

The good news in all of this is that there are effective and legitimate solutions and structures available to the majority of expatriates whose nest egg and savings are being affected by the European Savings Tax Directive.

Some of the solutions that you may be able to explore include offshore or EU approved portfolio bonds or other investment wrapper type vehicles that can protect your personal privacy and can protect the performance of your savings and investments as well, (see chapter ten for more information about these options).

Every individual’s circumstances are unique, and you may or may not be eligible to structure your investments in order to either avoid the automatic exchange of information or the loss of up to 35% of your gross interest. It is simply essential for you to get a personalised review of your situation. It is no good thinking that an investment vehicle that your friend has would be suitable for you, because your own personal situation is unique. Expatriates should always seek tailored advice, and if you require further information, contact us at Expat Money Guide and we will put you in touch with an adviser who can review your status and advise you accordingly as soon as possible.




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