I have dealt with a client that had to send the local Czech tax office the grand sum of 180kc as a result of interest earned from a UK bank account. The UK interest was taxed at source and so there is no further tax to pay, but to prove it would cost more than the 180kc the local Financial Office are claiming and so he paid the 180 kc again.
This got me thinking that it might be useful to talk about the EU Savings Directive, what it means and who it affects.
The European Union Savings Directive ( EUSD) was agreed under an EU Council Directive in 2003. The aim was to counter cross-border tax evasion by collecting and exchanging information about foreign resident individuals receiving savings income outside their resident state. The Directive generally applied to those resident in an EUSD affected country and that benefitted from savings income paid in another country covered by EUSD.
The directive came into force on 1 July 2005 and has since been amended in 2008 and 2011.
What income does the Directive cover?
- Interest earned on bank deposits, such as savings accounts
- Interest from bonds and proceeds on their sale or redemption
- Income from certain types of investment funds
How does it work?
Someone who is deemed to be a Czech tax resident, but has a bank account in France, would have all details of interest earned passed to the French tax authorities and then onto the Czech tax authorities. The Czech authorities would then look at the amount of interest declared by the Czech tax resident and compare it with the amount of interest actually paid.
The EUSD is supposed to be based on the idea of automatic information exchange but some jurisdictions have opted out of this and apply the principles of a withholding tax.
Sometimes referred to as Retention Tax, the banks withhold tax from the individuals’ interest on accounts at 35%. Personal information regarding account holders is not passed onto the local tax authorities or the tax authority of residency. The banks, in this case, will pay the withholding tax on the individual’s account holder’s behalf.
It is possible, in these cases, to opt for information exchange which would mean that that individuals’ identity, tax residence, interest and account details will be sent to the relevant tax authorities.
Non EU residents
Residents outside of the EU are exempt from the EUSD, though evidence of residency can be requested by the local tax authority in such cases.
Countries covered by EUSD
All 27 EU states and; Andorra, Anguilla, Aruba, British Virgin Islands, Cayman Islands, Curacao, Isle of Man, Jersey, Liechenstien, Monaco, Montserrat, San Marino, St Martin, Switzerland, and the Turk and Caicos Islands.
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Certain types of investments do not fall under the EUSD rules and individuals affected by the EUSD can take professional tax and investment advice to structure, and in some cases delay paying, their tax payments.
About the Author: Christopher Lean is a consultant at Square Mile Financial Services (http://www.squaremilefs.com ) and an Associate of the Personal Finance Society (Chartered Insurance Institute).