Jersey Denies FT Story On EU Savings Tax Directive 'Loophole'

by Amanda Banks, Tax-News.com, London

29 September 2003

Senior Jersey finance officials have objected strongly to a Financial Times report last week which suggested that the jurisdiction had found a loophole in the European Savings Tax Directive that will allow investors to bypass the exchange of information and withholding tax requirements through the use of discretionary trusts.

The newspaper said that Jersey government officials had pointed out that investors can escape the clutches of the directive quite easily, as it only applies to individuals' interest income, not payments made to companies, or dividend payments. Trustees can establish firms in Jersey which in turn would open bank accounts. The banks would then not be required to report interest to member states, or apply a withholding tax, as the income is received by a company. However, the firm can then issue a dividend payment to the trustee to be passed on to the investor.

Richard Hay, co-chairman of the UK Society of Trust and Estate Practitioners' international committee confirmed to the business daily that the Directive does not generally apply to discretionary trusts or companies, and observed that "an individual who receives interest through such structures would not generally be exposed to information exchange or withholding tax."

However, Jersey Finance Chief Executive, Phil Austin, said that the newspaper report gave a completely wrong impression: "Most City professionals will be aware that the EU Savings Directive was always directed only at individuals resident in the European Union and it has been reported many times that the Directive would not apply to companies or trusts."

Mr Austin says that Jersey's Government worked closely with HM Treasury in advance of the passage of the Directive, and continues to do so. In addition, Jersey has already started detailed bilateral discussions with several Member States about how to implement the measures sought by the Directive.

Phil Austin continued:

"It is a fact that trusts fall outside the remit of the Directive. This is not a new development. Professionals engaged in legitimate tax planning in all the leading financial centres both onshore and offshore have understood since an early stage in the negotiating process that the Directive applied to the savings belonging to EU resident individuals only."

Phil Austin also pointed out that the suggestion in the same edition of the Financial Times that the UK Treasury was "angry" with the decision by the British Crown Dependencies for opting for a withholding tax, rather than adopting exchange of information, was at variance with Jersey's understanding of the relationship with the Treasury which was described by Jersey Government officials as "cordial and constructive."

"Whilst it is generally recognised that the UK Treasury would have preferred Jersey and others to adopt exchange of information, the UK understood that once other EU countries had been given permission to adopt the withholding tax regime, Jersey needed to protect its competitive position and follow this route also."

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