EU Savings Directive - all you need to know but were afraid to ask

Much has been said about the oncoming EU Savings Tax directive. We have tried to compile a list of commonly asked questions with a view to helping individuals understand the implications of this new directive and how best to minimise the tax impact on their savings.

What is the European Union Savings Tax Directive?

This is an agreement primarily between member states of the European Union to exchange information on individuals, where that individual is earning interest in one EU member state and is living in another. It therefore impacts all Maltese residents who hold bank accounts and other investments in the EU.

What is the aim of the directive?

"The ultimate aim of the Directive is to enable savings income in the form of interest payments made in one member state to beneficial owners who are individuals resident in another member state to be made subject to effective taxation in accordance with the laws of the latter member state" - Council Directive 2003/48/EC.

Who does the Directive apply to?

The Directive applies to individuals who receive interest payments. The beneficial owner must be an individual resident in an EU member state who is receiving interest in another EU member state. It does not apply to companies.

When does the EU directive come into force?

On July 1, 2005. This also means that tax calculation becomes effective on this date. Therefore, if a one-year deposit account matures on December 1, 2005, interest will be credited after deducting tax for the period July 1, 2005, to December 1, 2005.

On what do I pay tax?

This tax only applies to individuals who receive interest income in the form of interest on bank accounts and debt claims, i.e. fixed interest securities such as bonds.

It does not apply to income received from shares and certain insurance/pension-related products. Additionally, there are certain bonds (grandfather bonds) that are also exempt from tax. It also applies to certain redemption proceeds where these are coming from bond funds.

How much tax will I pay?

This depends on how your assets are held. The directive states that tax is to be retained on the following basis: 15% from July 1, 2005, to June 30, 2008; 20% from July 1, 2008 to June 30, 2011, and 35% from July 1, 2011, onwards.

Paying tax overseas does not however exempt you from paying local tax. Consequently, those people paying EU savings tax should also pay local tax. This may be in the form of a 15% withholding tax or, if the income is reported in your annual tax return tax is paid in accordance with your marginal (read top) rate of income tax.

It is only if you pay local tax through the declaration on your tax return that you get a tax credit for the tax paid overseas.

If my assets are registered, does it pay me to pay the EU savings tax?

No. As this will mean that you are paying both the EU savings tax as well as local tax. In years to come this could mean paying tax of 30% (15% EU +15% local FWT) rising to 55% in July 2008 (20%+15%) and finally reaching 50% in July 2011 (35%+15%).

Given the local FWT structure the highest tax that any individual is expected to pay should be no more than the said 15%.

If my assets are registered, can I not claim back any tax I paid overseas?

This may only be done if you gross up the income you earn from your overseas assets and declare it in your income tax return. This means however paying your marginal(top) rate of tax, which is likely to be 35%.

It would be much better to hold your assets in a way that you pay the local FWT of 15% only. For taxpayers who fall below the minimum tax threshold the tax paid overseas can be reclaimed back.

But do I have a guarantee that the local 15% Final Withholding Tax (FWT) will remain at 15% or will it rise in a similar manner to the overseas savings tax?

There is no guarantee but the local government has given its strong commitment to ensuring that the 15% FWT will remain as is. This is a big advantage since it ensures that a maximum 15% FWT is paid and that this is done confidentially.

Under what circumstances will my name be disclosed?

All EU member states except for Austria, Belgium, Luxembourg, Jersey, Guernsey, Isle of Man, Switzerland, Monaco, Liechtenstein and San Marino are required to exchange information with the competent authority in Malta, which is the Inland Revenue Department, when interest payments are made.

The information given to the member state will be, at least, the following information: identity and residence of the beneficial owner, account number of the beneficial owner, amount of interest earned and in certain cases the redemption proceeds of certain investments. Communication of this information is expected to take place at least once a year within six months from the end of the tax year. Consequently, if you hold any interest-bearing asset in any country other than those shown above your name will be disclosed to the local Inland Revenue Department.

After July 1, 2005, banks in all EU member states, except for those mentioned above, will not have the option to deduct tax but will have to disclose. The countries shown above can deduct tax instead of disclosing information.

If I receive interest from a country outside the EU, do I still have to pay the EU Savings Tax?

No certainly not, but you are still obliged to pay your local tax. You can do this by going to an authorised financial intermediary who will then deduct and pay your 15% FWT on a confidential basis for you. Alternatively, you may include the interest in your income tax return.

What are the advantages of using a local financial intermediary?

These are numerous: 1) tax is deducted at source at a maximum of 15%; 2) this tax is deducted on a confidential basis and no personal information is disclosed to the inland revenue authority; 3) tax is then on a final basis and no further tax is payable; 4) local financial intermediaries are easily accessible and more cost effective; 5) the government in Malta will get the full 15% tax whereas it only gets 75% of the EU tax; and 6) registering your assets has the big advantage that it allows you to use your assets at will here in Malta. After all, this is where you live and hard earned savings should be used to improve/maintain your standard of living.

It is important that each individual assess his/her needs carefully so that assets are not only held in the best format from an investment perspective but that they are also held in a tax efficient manner.

For more information or to discuss the matter confidentially we may be contacted on tel: 2134-7331 or e-mail dcurmi@curmiandpartners.com.

Mr Curmi is a partner at Curmi & Partners Ltd, who are licensed to conduct financial services business by the MFSA. The above information is aimed at giving an overview of the oncoming EU Savings Tax Directive. Individuals should seek personal advice to ascertain how precisely this new directive will impact them.