EU tax rules now start to bite and legitimate tax planning for expats moving to Spain is more important than ever before.
By Blevins Franks International
The European Union Savings Tax Directive (STD) came into force on 1st July 2005. Its aim is to retrieve the billions of Euros lost in tax due to undisclosed income, much of it previously ‘hidden’ in offshore bank accounts.
In essence, the STD is an agreement between EU Member States to automatically exchange information about interest yielding bank accounts and certain other investments held in one EU country where the investor is resident in another. This exchange of information is known as ‘reporting’.
For a transitional period only, Austria, Belgium and Luxembourg have an arrangement to deduct tax at source from the interest. This is known as a ‘withholding tax’ or ‘retention tax’.
As well as these three Member States, Jersey, Guernsey, Isle of Man, Switzerland, Andorra, Liechtenstein, Monaco and San Marino will also apply this withholding tax to EU citizens instead of automatic exchange of information.
The rate of the withholding tax is 15% until 1st July 2008. From that day until 30th June 2011 it will be 20% and from 1st July 2011 onwards it will rise to a punitive 35%.
If you bank in the Channel Islands or Isle of Man you can avoid the withholding tax by opting for automatic exchange of information instead. You need to authorize your bank to disclose your interest payments to the tax authorities of the country you are tax resident in, be it Spain, the UK or any other EU country.
The Channel Islands and Isle of Man, and all the other jurisdictions applying the withholding tax, will supply information on request in criminal and civil cases of tax fraud. In any case, the withholding tax concession is only for a “transitional period” and it is expected that these jurisdictions will eventually comply and exchange information automatically after 2011.
The information included in the ‘automatic exchange’ is name and address of the account holder (beneficial holder); full bank details (payment agent); the capital in the account usually as at 31st December; and the interest credited in the previous twelve months.
Note that whether you are subject to reporting or withholding tax, you are still obliged to declare the details of any interest earned on your tax return in your country of residence. Failure to do so is tax evasion.
The STD affects anyone who is resident with a permanent address in an EU country and who has savings and investments in another EU country or a Member State’s dependency. You may be excluded from the STD if you are a charity, a company or partnership, or if your affairs are held in a suitable trust structure which meets certain rules.
The definition of ‘interest’ in the Directive is a broad one. Apart from bank and building society account interest it includes income arising from corporate and government bonds, PEPs, ISAs and premium bonds. If you live in Spain and hold any of these you should report the income on your Spanish tax return.
Among interest or income that is excluded from the withholding tax or reporting requirements are dividends received from ordinary or preference shares of a company, occupational and personal pension payments, insurance payments and life assurance, other purchased life annuities and receipts from discretionary trusts.
It doesn’t all stop between EU countries either. Individual EU Member States have signed agreements with Anguilla, Aruba, the British Virgins Islands, Cayman Islands, Montserrat, the Netherlands Antilles and Turks and Caicos Islands. The US has also agreed to supply information on request.
Don’t ignore this. The EU is determined to expand the number of countries with which it has agreements for the exchange of tax information. Indeed, the G20 countries have pledged their support to the international clampdown on tax evasion and money laundering. Soon nowhere will be safe from the taxman’s demands and banking secrecy will be extinct.
If any of the facts in this article concerns you and you also wish to avoid the punitive 35% withholding tax on your savings then you need to take action. There are legitimate, carefully structured financial planning arrangements available to reduce, mitigate or eliminate entirely tax levies on your capital. It is in your interest to find out more about them without delay. Contact Blevins Franks for more information.