Mark on Money

Is it true that bank accounts and investments held in Jersey and the Isle of Man shall be taxed at 15% from July this year? I have accrued savings of more than ten years and I am very unhappy that tax will be deducted from my interest all of a sudden as no warning has been given by my bank regarding this. In fact, my bank has offered no information to date and the changes are due to come into force in six months.

You are correct that significant changes are due to be implemented in July 2005 on offshore savings accounts and other 'income producing' investments. This is widely referred to as the EU Savings Tax Directive.

The purpose of the directive is to allow for a full exchange of information on interest payments received on savings and investment income of non-resident private individuals. This applies to all EU member states.

It will allow for individuals to be taxed at the appropriate rates in their home country, i.e. in Malta in our case. The exchange of information will mean that every bank across the EU will openly disclose details of the interest earned from a personal bank deposit to the Maltese authorities.

Tax will then of course have to be paid in Malta at the normal rate of tax. Those individuals who have elected not to declare income/interest on overseas accounts in the past are left with a serious problem, namely the previous non-disclosure of income earned.

Although not part of the EU, the Isle of Man and the Channel Islands will also be adopting the implementation of the directive. The very important difference however is that instead of a full disclosure of information, they will also be offering the alternative of a withholding tax option on the interest earned.

The withholding tax starts at 15%. This rate will however rise to 20% in 2008 and 35% in 2011. The Channel Islands/IOM government will retain 25% of the tax revenue and 75% is passed to the home country of the account holder, i.e. Malta.

Such tax revenue will be passed in bulk, i.e. no naming of individuals will be made. This is a very important point as these countries rely on client confidentiality. You will be given the option of whether you wish a full disclosure of information or to adopt the withholding tax option.

The directive is, not surprisingly, having a major impact on offshore savings and, although the implementation date of July is not set in stone, it must happen sooner rather than later and one must seriously review how one is invested and where.

Any bank deposits that pay interest, as well as investment income that generates from fixed interest securities (government and corporate bonds for example) will be affected if held by an individual that is resident in an EU state, such as Malta.

There are, however, legitimate investment schemes that will continue to allow the payment of gross income, i.e. without deduction of tax that will continue to give the option to the investor as to when and if to declare the income for tax purposes.

I must stress that such schemes are not 'tax evasion' schemes but ones that simply do not exchange information, or deduct tax. They leave any reporting/declaration to the individual investor.

Such schemes have been widely used for many decades and not surprisingly are becoming very popular with those with investments/deposits overseas - both in the EU and the Channel Islands and Isle of Man.

Mark Hollingsworth is the director of Hollingsworth International Financial Services - licensed by the MFSA to provide investment services under the Investment Services Act 1994 (IS/32457). Address any financial questions to: Mark Hollingsworth, c/o The Sunday Times, PO Box 328, Valletta CMR 01. Alternatively, he can be contacted on 2131-6298/9984-2614 (office hours) or e-mail mh@hollingsworth-int.com

Past performance is no guide to the future and, except where amounts are guaranteed, the price of your investments (and the currency in which it is denominated) may fall as well as rise. Your personal tax situation will depend on residence. Always consult a professional adviser. This article does not intend to give investment advice and its contents should not be construed as such. Readers are encouraged to seek professional advice on their personal financial situation.