Taxation of offshore accounts - 2

Q Your article last week on the implementation of the EU Savings Tax Directive has raised alarm bells with me as I have savings and investments abroad. It is not clear to me, however, exactly what types of investments will be affected. Can you provide a breakdown of what is and what is not affected? As it only affects EU member states, is moving one's money to non-EU member states, such as the Caribbean or Singapore, a feasible option?

A To recap, the EU Savings Tax Directive is due to come into force by July 1. It will mean that interest earned from personal deposits and income-producing investments held in another EU country will be reportable to Malta.

The main offshore centres of the Channel Islands and the Isle of Man, as well as Switzerland, Austria, Belgium and Luxembourg, have agreed to offer investors the option of a withholding tax, starting at 15%, as an alternative to full disclosure.

I also understand that the Cayman Islands and the two Dutch dependencies are likely to follow suit. Bermuda, although a British dependency, is not subject to the directive as it is not in the Caribbean.

Does this therefore suggest that the Cayman Islands, for example, should become a popular home for offshore monies? I would certainly not suggest this, as the level of protection is far from adequate.

Other tax-free havens such as Singapore and Dubai may look more appealing, but interest rates are far from exciting and again one must question your level of protection and how long it will be until the net is widened to include these jurisdictions too.

For these reasons, 'offshore' investors must always treat having a high level of protection as a top priority. Investing in the Channel Islands and the Isle of Man therefore retains its strong appeal.

Examples of income that will be affected by the directive are:

¤ Bank and building society account interest;

¤ Accrued income included in the redemption price of units in a collective investment scheme that have more than 40% if the fund invested in debt claims (bonds)

¤ Accrued interest in bonds;

¤ UK National Savings; and

¤ Premium Bond prizes.

Examples of investments not affected include:

¤ Insurance-based products (even if the product contains bank deposits and/or bonds, the directive interestingly does not apply);

¤ Winnings from betting, including European lotteries;

¤ Ordinary and preference shares and dividends from them.

In summary, I would not recommend investors start considering 'exotic' jurisdictions but instead look to well-established centres where proper protection laws exist.

For example, the Isle of Man has a statutory compensation scheme for offshore life assurance companies. The scheme operates globally, i.e., regardless of where you reside.

The IOM Life Assurance (Compensation of Policyholders) Regulations 1991 protect investors of up to 90% of the value of their policies in the unlikely event that the company became unable to meet liabilities (Source: Royal Skandia).

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.