On 1st July, the EU Savings Tax Directive turned three years old – and the withholding tax rate applied under the terms of the Directive jumped from 15%
to 20% - an unwelcome reminder that keeping savings offshore is no longer The rate increases again in July 2011, when 35% of offshore interest income will
The increase from 15% to 20% means that anyone paying withholding tax is now paying 33% more tax than a month ago. When it hits 35%, it will be a 133% increase from the launch rate. Prior to July 2005, no tax was deducted at all. While no tax was deducted, anyone earning interest from an offshore bank
account was still legally obliged to declare them on their Spain tax return. The same rules apply in the UK for UK resident domiciles. So these interest earnings
were never actually tax free… though that did not stop some people ‘forgetting’ to This is precisely why the EU set up the Savings Tax Directive (STD). EU countries lose tens of billions of Euros each year to tax evasion, so the European Commission wanted to ensure that EU residents paid tax on their interest income, regardless of where the interest was generated and of whether they actually declared it or not. The original intention was for a uniform “information exchange” regime to apply across the EU, with all countries agreeing to report interest on savings paid to the citizens of other Member States to those
States’ tax authorities. The plan was also for EU Member States to impose the same rules on their dependent territories, which make up a substantial portion of the world’s tax havens. A long battle followed, however, with various objections raised regarding automatic exchange of information which would effectively end banking secrecy within the EU.
A compromise was reached and under the terms of the STD, the withholding tax is applied by Andorra, Austria, Belgium, British Virgin Islands, Guernsey, Isle of Man, Jersey, Liechtenstein, Luxembourg, Monaco, Switzerland and Turks & Caicos Islands. All other EU Member States, plus Anguilla, Aruba, Gibraltar, Madeira, Montserrat, Netherland Antilles and San Marino apply automatic exchange of information, as will any future EU members. The withholding tax regime is meant to be a “transitional arrangement”. The “ultimate aim” is for all participating jurisdictions to automatically exchange information in future. While there will obviously be strong resistance to this from some countries, the EU will fight to eventually achieve this. In the Isle of Man, Jersey and Guernsey, the withholding tax is referred to as “retention tax” and clients can authorise their banks to automatically exchange of information (and therefore paying tax in Spain) rather than pay withholding tax. Interest income is taxed at a flat rate of 18% in Spain. If your account has withholding tax deducted you are now effectively choosing to pay extra tax (11% more). From July 2011 you’d pay 94% more tax!
Note that even if withholding tax is deducted, you are actually still obliged to declare the interest earnings in Spain since it forms part of worldwide income.
Anyone who has not previously declared this income in Spain should probably seek advice from a financial adviser before switching to the exchange of information system to benefit from the lower Spanish tax rate – your local tax authority may make enquiries as to why you hadn’t previously declared this account – which would have been liable for wealth tax until this year as well as income tax. It’s often worth a chat with a financial adviser in any case, to establish if you can legitimately reduce your tax rate further. While 18% is lower than 20%, you may be able to pay less than this using appropriate
structures.
To keep in touch with the latest developments in the offshore world, check out the latest news on our website www.blevinsfranksinternational.com