EU Savings Tax Directive

The EU Savings Tax Directive came into effect July 2005. Find out what it means for the expatriate resident in Cyprus...

The EU savings Directive came into force on 1st July 2005. It affects residents of an EU member state that earn interest income from investments or deposits held in another EU member state, or one of the other jurisdictions that have agreed to apply the Directive.

It aims to stop evasion of tax on savings income by individuals who do not declare their income.

Where an individual has interest from savings in another EU Member State, payment received will in the first instance be taxed in accordance with the position in the country where the investment is. The interest payment will then either be reported to the tax authority where the person resides, or a tax, tax credit or a withholding tax will be applied by the tax authority where the investment is.

Tax Collection and Rates

The tax will be collected in one of two ways:

  1. All full EU member states (except Luxembourg and Austria) will disclose details of the interest/income paid to the individual, to the EU Member State where that individual is resident.
  2. Luxembourg and Austria (until sometime in 2012) and the other non-EU jurisdictions mentioned below have opted to withhold tax rather than disclose client information.

The payer of the income i.e. Bank, will have given you the choice prior to July 1 2005 of opting for disclosure or withholding tax. For those people coming to live in Cyprus after 1st July your bank will give you the choice once you notify them that you have moved to Cyprus. If you do not instruct your bank otherwise the default action will be the imposing of withholding tax.

Jurisdictions outside of the EU that will apply the directive are:

  • UK Crown Dependencies - Channel Islands and Isle of Man
  • UK Overseas Territories - Anguilla, Montserrat, BVI, Turks & Caicos and Cayman Islands
  • Dependent Territories of the Netherlands - Netherlands Antilles and Aruba
  • Third countries - Switzerland, Andorra, Liechtenstein, Monaco and San Marino

The rate of withholding tax will be:

  • 15% from 1/7/2005
  • 20% from 1/7/2008
  • rising to 35% from 1/7/2011

The Directive covers all interest bearing investments such as bank and building society deposits plus interest from gilts, treasury bonds and other fixed interest paper. In addition holders of certain unit trusts should also be aware that the income derived from some unit trusts and collective investment schemes may also be affected by the directive.

Additional income that will come under the scheme are:

  • Distributions made by unit trust or other collective investment schemes, which have invested more than 15% of their assets into fixed interest investment i.e. gilts, corporate bonds etc.
    And
  • Accumulated income that will be paid out when units are sold in certain collective investment funds that have invested more than 40% of their assets in fixed interest investments.

If you are holding unit trusts with names such as money market fund, gilt fund, high-income fund, sterling bond fund, corporate bond fund, then it is highly likely that the income or profit on sale of these funds will fall under the scope of the directive.

For those investors holding 0% coupon bonds there will also be a liability on sale or maturity, even though they do not produce income. In addition another nasty surprise is the inclusion of National Savings Premium Bond winnings.

Cash ISA's & PEP's and those investing in fixed interest as described above are also included in the Directive.

If you are holding any of the assets mentioned, in one of the countries mentioned or an EU member state then this will result in either disclosure to the Cyprus tax authorities by the host country or deduction of withholding tax on the income paid to you.

Exempt or Excluded

Investments that provide returns in the form of dividends and capital gains, notably shares and funds that invest in shares are currently exempt.

In addition, the Directive deals only with investment by individuals, not corporate clients or institutions. There are differing rules for Trusts depending on the type and class of Trustees.

  • Note: Life Insurance policies, pension and annuity contracts are excluded

For those with investments via portfolio bonds and other life insurance products then these investments will not be affected. This provides a legitimate way of mitigating savings tax and providing confidentiality.

Depending on where your asset is situated you will either pay 15% defence levy to the Cyprus tax authorities on the interest income amount - the exchange of information (disclosure) route or you will pay withholding tax (retention tax) of 35% on the interest income earned.

The directive is not easy to understand so if you think you may be affected and are in doubt as to how to proceed please contact a tax professional for clarification on your position. Please don't ignore any letter you may receive from your bank or fund house in regard to your options as failure to reply will most certainly result in withholding tax being applied if assets are held in those jurisdictions that intend to apply it.

FAQ (Frequently Asked Questions)

If I do not respond to the literature received from my bank/ fund house with regards to the EUSD what will happen?

Failure to communicate your wishes to the financial institution concerned will, if in one of the jurisdictions applying it, result in the withholding of a retention tax as detailed earlier in this article.

What if I have not notified my bank of my wishes before 1st July?

The default action of retention tax will be implemented. However you may still inform them that you wish them to exchange information with the Cyprus authorities after this date with the proviso that should any interest have been already applied to your account/s then that amount will be subject to the retention tax.

  • Example: A one month fixed deposit account maturing on 31st July will have the interest applied on that date. If you write to your bank on 5th August they will exchange information on future interest amounts but will have already deducted the 15% retention tax from the interest applied on 31st July.

I have already notified my bank to retain tax but may wish to them to exchange information in later years, can I do this?

Yes, but again interest already applied will have been subject to retention tax.

However the reverse situation would be more difficult. Opting for Exchange of information now and wishing to change to the retention tax route later may be allowed by your bank but may raise questions from the Cyprus Tax Authorities when eventually they do not receive the information that they had previously been receiving.

I am a resident in Cyprus but do not pay income tax because my income is lower than the tax-free band. Do I still have to pay retention tax or exchange information?

Yes. The retention tax liability or the Defence Levy Liability if information is exchanged with the Cyprus authorities, is a separate tax and nothing to do with your income tax situation.

How will the interest earned on joint accounts be treated?

Interest earned on accounts held in two or more names will be treated on the basis that it has been earned equally among the account holders. Each account holder will be able to choose which option they want to apply to their portion of the overall interest.

Action required

You will be given three choices by your bank/financial institution

  1. Exemption - Includes certain Diplomats and High Commissioners,
  2. Pay Retention Tax - No action needed, as this will be the default position
  3. Exchange of Information - Must complete and return the appropriate form and provide certain data, such as date of birth, Tax Identification Number, certified passport copies.

If you have any questions or wish to structure your investments to manage and or mitigate these taxes or contact a tax professional to learn more about how a Life insurance policy "wrapped" around your investments can provide the solution.

Written by Vivian Nagel, Hollingsworth International Financial Services Limited Office 22, Regent House, Bisazza Street, Sliema, Malta SLM 1641 Tel: +356 21 316 298 / Fax: +356 21 316 299 / Mobile: 357 99579149 e-mail / Website Copyright © 2015 Vivian Nagel All Rights Reserved