Global Tax Alert | 12 December 2013

Proposed revisions to EU Savings Directive fail again to be approved

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At the ECOFIN meetings on 15 November and 10 December 2013, the proposal to revise the scope of the European Union Savings Directive (EUSD) failed to be approved.

The changes would have represented material changes in scope to the EUSD as payments to legal entities and payments of interest equivalents would be brought within the regime. The hopes expressed only a few months back that agreement would be reached before year end potentially are in jeopardy.

However, given the current global focus on the automatic exchange of information (AEOI) — as seen in FATCA, the OECD’s plans to develop a multilateral AEOI system and the European Commission’s (EC) interest in this area — the broad political will to do something clearly exists and the EC has indicated their intention to retable the proposals at next week’s meeting of EU leaders. The open question is whether unanimity can be achieved in respect of the EUSD and whether this will happen before year end.

Background

The EUSD came into force on 1 July 2005. It is broadly aimed at countering cross-border tax evasion by creating an information exchange system to report individuals that receive savings income (broadly interest) in a Member State other than their own. Currently two Member States, Austria and Luxembourg, are allowed to apply a withholding tax instead of collecting and reporting information. In parallel to the EUSD, the EU has savings tax agreements with five third-party countries: Switzerland, Andorra, Monaco, Lichtenstein and San Marino.

In 2008 the EC reviewed the effectiveness of the EUSD. This review led to a proposal to revise the EUSD to rectify several identified flaws.

However, the proposed revisions did not receive unanimous approval in 2008 and therefore stalled, with Austria and Luxembourg both reportedly rejecting any amendments.

However, the world has clearly moved on since 2008 and led to a refocus of effort by the EC to resolve the impasse. This resulted in EU leaders, including Austria and Luxembourg, at the meeting of the European Council in May 2013 calling for the adoption of the revised EUSD by the end of 2013. The EC issued a revised version of the proposal for an amending Directive on 3 May 2013. In addition the statement noted that the EC had received a mandate to improve the EU’s agreements with the third-party countries noted above so that that those countries would continue to apply measures equivalent to those in the EU.

The proposals have three key aims:

1. To cover payments made to legal entities and certain arrangements (such as certain foundations or trusts) held by individuals

As the EUSD does not currently cover payments made to legal entities and arrangements, this limitation currently provides individuals with opportunities to circumvent the EUSD.

The proposal is to twofold:

  • For interest payments made by EU-paying agents to certain intermediate structures outside the EU (these are listed in Annex I of the proposal and includes widely used structures such as Delaware LLCs and Cayman Exempt Companies), the revisions would require that paying agents use information gathered for anti-money laundering purposes to apply the provisions of the EUSD where the (ultimate) beneficial owner of the payment is an EU resident individual, i.e., treat the payment as if it was made directly to that individual. This requirement has some potential challenges as it will require paying agents to make judgments and may therefore be difficult to apply in certain circumstances — for example, where the paying agent has no direct relationship with the payee.
  • For payments of savings income to certain intermediate structures established within the EU (an indicative list is provided at Annex III of the proposal but Member States will also need to include any entity or legal arrangement established on its territory, regardless of its inclusion in the list of Annex III, when this entity or legal arrangement is not subject to taxation on its income within its territory, including on income arising to its nonresident participants and beneficial owners) those structures will be required to act as a “paying agent on receipt.” This broadly means that the EUSD must be applied upon receipt of a savings income payment regardless of the actual distribution of any sum to the underlying beneficial owner.

2. Extending the scope to include income equivalent to interest payments

As the work performed as part of the Commission Staff Working Document at the time of the second review of the EUSD (see http://tinyurl.com/lfe87mt noted “[the] rapid growth of the structured products market in general and in particular the products with capital protection and interest-based underlying, as well as the development of particular European markets that are primarily serving foreign investors, means that the inclusion of those types of instruments in the amendments to the Directive and the Savings Agreements is both justified and necessary.” In practice this is therefore designed to cover financial instruments that, with reference to the level of risk, flexibility and agreed return, are equivalent to debt claims.

3. Ensuring a level playing field between all investment funds or schemes independent of their legal form

This would now broadly capture all types of collective investment whereas under the current Directive, investment funds with UCITS status and certain non-UCITS funds are in scope, but corporate non-UCITS such as Luxembourg SICAV Part II funds are out of scope.

ECOFIN meeting 15 November 2013

Commissioner Šemeta spoke at the meeting and urged the participants to adopt the proposals to amend the EUSD. He acknowledged, although not by name, the other automatic exchange of information initiatives in this area and said:

“The EU is no longer making the first move. The world is already moving. And the EU must not be left behind. It is time to adopt the revised Savings Directive. It is time to send a clear signal to our market operators and negotiating partners. It is time for a show of unity in building a new and coherent EU legal framework within which our Member States can operate.”

However the day before the meeting, Luxembourg issued a press statement that expressed surprise that the EUSD would be on the agenda given the EC had not updated Member States on the progress of their negotiations with the third-party countries. As the press release stated, “Luxembourg wishes to emphasise once more the importance of ensuring that the same standard is applied by all the major financial centres in order to avoid a flight of capital out of the EU and preserve the EU’s capacity to invest in order to bolster the economy and growth. Luxembourg calls upon the Commission to speed up its negotiations with the third-party countries so as to be able to progress with the revision of the ‘taxation of income from savings’ directive.”

As such, the proposals to agree to the revisions to the EUSD failed to receive unanimous support.

ECOFIN meeting 10 December 2013

Despite the failure at the November meeting, the proposal was resubmitted by the presidency for the ECOFIN meeting on 10 December 2013. Again the proposals failed to achieve unanimous support. In response to this Commissioner Šemeta said “Today, we heard many Member States profess a willingness to lead the way in implementing this new global standard. They want to keep Europe at the international forefront when it comes to good governance. Therefore, it is not just disappointing that we could not agree on the Savings Directive today — it is incomprehensible.”

Despite this set back, the proposals are not going to go away and will be part of the agenda for the EU leaders’ meeting next week.

Implications

Given the broad political pressure and will to agree revisions to the EUSD, it seems on balance that it is only a matter of time before the revisions are agreed.

Financial intermediaries may be concerned that the proposed revisions will have a business impact and require changes to existing process, policies and procedures. Given the amount of change in the tax reporting arena through the requirements introduced through FATCA and the drive towards a potential global AEOI system, financial institutions will also be concerned with the potential for duplicative reporting obligations and requirements to contact clients for information.

Although at this point it seems premature to begin any fundamental EUSD change program. Financial institutions may want to run an initial impact analysis to determine what the changes could mean for their existing products and customers.

It has also become clear that some tax authorities are taking a closer look at information that is currently reported for purposes of the EUSD and that there are some concerns with regards to the veracity and quality of the information.

Given the closer scrutiny and the heightened interest by tax authorities in this area, financial institutions should review current processes to determine whether they are fully compliant with their obligations. They should also monitor the proposed revisions and consider potential opportunities for bringing future changes within any existing FATCA programs and transforming these into a wider AEOI program.

For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP (United Kingdom), London
  • Paul Radcliffe
    +44 20 7951 5816
    pradcliffe@uk.ey.com
  • Stuart Chalcraft
    +44 20 7951 1190
    schalcraft@uk.ey.com
  • James Guthrie
    +44 20 7951 4366
    jguthrie@uk.ey.com
  • Nigel Nelkon
    +44 20 7951 6011
    nnelkon@uk.ey.com
  • Jeff Soar
    +44 20 7951 6421
    jsoar@uk.ey.com
  • Julian Skingley
    +44 20 7951 7911
    jskingley@uk.ey.com
Ernst & Young LLP, UK/EMEIA Financial Services Desk, New York
  • Miles Humphrey
    +1 212 773 1425
    miles.humphrey@ey.com
  • Amy Smith
    +1 212 773 8467
    amy.smith1@ey.com

EYG no. CM4036