The European Savings Tax Directive is set to come into force on 1 st July 2005. David Anderson, solicitor and chartered tax adviser, Saul Brownstein French tax solicitor and Susanna Heley, trainee solicitor, all of Sykes Anderson LLP discuss the implications of the Directive with a UK resident taxpayer, shortly to emigrate to France.
Please note that taxation is a complex subject and you should not take or refrain from taking any step without full independent advice on the particular facts of your case. The content of this article is of a general nature and no liability is accepted in connection with it. Nothing in this article constitutes financial advice.
Q. I am moving to France shortly and will become French tax resident. Should I be concerned about the Savings Tax Directive?
The Savings Tax Directive will affect any individual who is resident in or, in certain circumstances, a national of an EU member state, and who has savings in another member state or in certain other states including Jersey, Guernsey, Cayman Islands, Liechtenstein, Switzerland and the Netherlands Antilles - most of the traditional offshore jurisdictions. Its effect will be that income (usually interest) from such savings will be subject to increased regulation and may, depending on the country in which the savings are deposited, be subject to a withholding tax of 15% for the first three years, 20 per cent for the following three years and 35% thereafter.
Q. I have bank accounts in the UK and was intending to keep an interest-bearing account open in the UK and Jersey following my move to France. What will this mean?
Nothing will change. You will, as before, be required to declare the income from your UK savings account on your French annual tax return or you will be committing an offence under French law. What's new is that the UK has implemented the Savings Tax Directive so that institutions (such as banks) which are defined as 'paying agents' are required to inform the local tax authorities in your country of residence of the amount of interest paid to you and to provide sufficient information for the authorities to identify you. Whereas before this information might only have been provided on an ad hoc basis, it will now be provided formally. It is worth noting that both France and the UK operate a worldwide income tax base, so any resident of either of these countries should already be paying tax on all of their income, wherever it arises (unless, in the UK case, they are non-domiciled.) The directive is not about creating new tax charges, but rather about ensuring that current tax law is applied effectively.
Q. What information will the bank have to give to the French tax authorities?
This depends on whether your contractual relationship with the bank began before or after 1 st January 2004. If the account was opened before this date, the bank will have to disclose your name, address and country of residence. If the relationship began after this date, the bank will need to report additional details in the form of a Tax Identification Number ('TIN'), which will initially be provided by your new country of residence, or the date and place of your birth. You will therefore need to ensure that you inform your bank of your TIN.
Q. What about the tax position?
The UK has opted for the reporting method rather than applying the withholding tax as mentioned above. The Directive's principal aim is to encourage the exchange of information in order to combat tax evasion and money laundering. However, some offshore jurisdictions as well as Belgium, Luxembourg and Austria object to this in principle and so have opted to apply the withholding tax, to avoid any invasion of your privacy, unless the taxpayer agrees otherwise. Any jurisdiction, which, like the UK, opts for the reporting method, will not have to withhold tax under the Directive.
Q. What about savings income from offshore accounts?
The treatment of income from offshore accounts depends therefore largely on the location of the offshore account. Paying agents within those jurisdictions which have opted for the withholding tax method (including Guernsey, Jersey, the Isle of Man and Switzerland) will deduct tax at an initial rate of 15% from the interest paid and will pay 75% of the tax deducted anonymously in a lump sum to the member state in which you are resident. The member state in receipt will not receive any details of the taxpayers from whose accounts the withholding tax has been withheld. The amount of withholding tax will increase as stated above over time to 35% after six years.
Q. If I do not want to pay the withholding tax, how do I make the nomination?
You must inform the paying agent and provide them with the details that they need to disclose to the local tax authorities. You must remember to disclose the income on your annual tax return and you will have to pay any applicable French tax on it.
Q. How do I disclose the income in my French tax return? You complete form 2047. You should also already be disclosing foreign bank accounts on form 3916. It may be awkward if you now disclose foreign bank accounts, which you have previously not disclosed, for whatever reason.
Q. How will this income be taxed?French residents have a choice. You can opt to be taxed on all income arising from within the EU at a flat rate of 16%. You then do not have to pay any higher rates of tax. If you do not exercise this option your bank interest is added to your other income and taxed at your marginal rate like any other income. If you are French resident and liable to make social contributions you must also pay national insurance (whether you opt for the fixed rate or not) at an additional 11% (approx.) bringing the effective fixed rate up to 27%. Although the withholding tax rate may be lower than the effective French rate, giving you a continued incentive not to disclose your offshore bank account, you will still be evading French tax if you fail to do so.
Q. What happens if I 'forget' to disclose the bank account and interest arising in it?
You may well be committing an offence. If you fail to disclose in the UK, you will usually be given the opportunity to explain and, provided that HMRC is satisfied that the failure was not dishonest or fraudulent, they will usually amend your tax return but you will have to pay any additional tax due together with any applicable penalties and interest. If HMRC suspects fraudulent activity, you could face criminal proceedings. In a recent case, an accountant was sent to prison for 15 months for failure to disclose interest from offshore accounts where the court found fraud and dishonesty.
Q. What about my ISAs - can I keep these, as they are tax-free anyway?
ISAs are not recognised as tax-free in France so the position will be the same as for any other type of bank account. You should seek expert tax advice before your move to France on effective tax planning prior to and following your move.
Q. What about other investments - does this directive only apply to bank accounts?
The directive applies to interest payments arising from debt claims of any kind including loans, debentures, government and corporate bonds and similar securities.
Q. What if I have an account in the Caymans?
This will still fall under the directive as the Caymans have individual agreements in place with each member state of the EU reflecting the provisions of the directive. They have selected the reporting method of implementation and interest payments will therefore be automatically disclosed but not subject to a withholding tax.
Q. What if my accounts do not bear any interest - will they still be disclosable?
The obligation of disclosure only applies to 'paying agents'; if there is no payment made, there is no obligation to disclose.
Q. What about trusts?
In some circumstances, trustees of fixed trusts or trusts known as an interest in possession will be paying agents for the purposes of the savings tax directive and the same rules will apply as above. However, this type of trust is very rarely used in offshore tax planning. More importantly, the Directive imposes no obligations on trustees of discretionary trusts, as there is no paying agent, although cross-border interest payments made to discretionary trusts may be disclosable if the trustee is an individual rather than a corporate trustee.
Q. Do the trustees of a Jersey discretionary trust receiving income from deposits in Jersey have to disclose this to either the French or UK authorities if I am one of the potential beneficiaries and am resident in France?
Q. So should I consider a Jersey or other offshore discretionary trust if moving to France?
Yes. Offshore discretionary trusts are very useful if you are moving to France provided they are set up before you become French tax resident. The point is that for French purposes you do not own the underlying assets so cannot be taxed on the assets themselves or income accruing to them. The costs of running the trusts may be an issue but if they enable you to side step the requirements of the Directive this may prove an expense well worth paying. With proper planning you should have no liability to French income tax.
Q. When will an offshore trust become cost effective?
Assume you are French tax resident and over 60. You would pay say £1,000 per annum for the trust administration and the bank interest rate you receive is 5 % gross. This means that you are better off on interest alone on even a modest trust fund worth over £125,000. On say a trust fund worth £500,000 the interest is £25,000 and the French tax is @ 16% equal to £4,000. This rises to £6,750 if French national insurance is payable.
Q. Where is the best jurisdiction?
There is a choice in Jersey and Guernsey to opt for the retention tax rather than disclosure and this offers greater flexibility together with a discretionary trust which in the case of France should legally avoid the impact of the directive.
Q. What other advantages are there with an offshore trust?
Provided they are set up properly you can also legitimately avoid French wealth tax and other French taxes as well as side step France's forced heirship rules. You also have complete flexibility over what you invest in € you are not restricted to specified French tax-free products. All fees are clear and you do not end up paying commissions (which may be opaque) to financial intermediaries. You can also keep information out of the hands of the French Revenue.
David Anderson firstname.lastname@example.org
Susanna Heley email@example.com
Saul Brownstein firstname.lastname@example.org
© http://www.sykesanderson.com May 2005
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The European Savings Tax Directive is set to come into force on 1 st July 2005. David Anderson, solicitor and chartered tax adviser, Saul Brownstein French tax solicitor and Susanna...