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EC Seeks Closure Of Savings Tax Loopholes

by Ulrika Lomas,, Brussels

19 July 2011

The European Commission has asked the Council for authorization to begin negotiating changes to agreements signed in 2004 by Switzerland, Liechtenstein, Monaco, Andorra and San Marino on the taxation of savings income received by European Union (EU) residents under the Savings Tax Directive.

The revisions in particular will seek to close current loopholes, to expand the application of the withholding tax, or automatic exchange of information, on a wider range of savings instruments such as pensions and life insurance products.

The announcement follows proposals published on November 2008, on extending the scope of the Directive to the following:

  • Securities which are equivalent to debt claims (of which the capital is protected and the return on investment is pre-defined); and,
  • Life insurance contracts whose performance is strictly linked to income from debt claims or equivalent income and have less than 5% risk coverage.

In addition, the Commission seeks to ensure a level playing field between all investment funds or schemes (be it undertakings for collective investment in transferable securities authorized in accordance with the UCITS Directive or not), independent of their legal form. This means that income obtained from those investment funds by individuals resident in the EU will be subject to effective taxation.

These changes aim to prevent the use of intermediate structures not based in the EU to circumvent the requirements of the Directive on payments to an EU resident individual from an EU paying agent. Paying agents will be required to withhold or transmit tax data at the time of the payment if it is known that the beneficial owner of the interest payments from that intermediate structure, under the anti-money laundering provisions, is an individual resident in the European Union.

Concerning payments of interest to certain intermediate structures established within the EU, including some non-charitable trusts and foundations, those structures will be always obliged to act as a “paying agent upon receipt”. This means that the provisions of the Directive (exchange of information or withholding tax) must be applied by these structures upon receipt of any interest payment from any upstream economic operator (bank, financial institution, independent professional), no matter where they are established and regardless of the actual distribution of any sums to the individual beneficial owners. It was proposed that the definition of "paying agent upon receipt" include all entities and legal arrangements (trust, foundations etc.) which are not taxed on their income under the general rules for direct taxation in their member state of residence/establishment.

TAGS: individuals | tax | investment | pensions | European Commission | interest | insurance | investment funds | Liechtenstein | Monaco | agreements | withholding tax | Switzerland | European Union (EU) | Andorra | San Marino | Europe

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