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| dossier | SEC(2011)775 - Ad hoc report on the correct and effective application of Council Directive 2003/48/EC on taxation of savings income. |
|---|---|
| document | SEC(2011)775 |
| datum | 14 juni 2011 |
Brussels, 14.6.2011 SEC(2011) 775 final
COMMISSION STAFF WORKING PAPER
Ad hoc report on the correct and effective application of Council Directive 2003/48/EC of 3 June 2003 on taxation of savings income
COMMISSION STAFF WORKING PAPER
Ad hoc report on the correct and effective application of Council Directive 2003/48/EC of 3 June 2003 on taxation of savings income
Introduction
At the ECOFIN Council meeting of 7 December 2010, the European Commission committed itself to presenting an ad hoc report by mid-2011 on the correct and effective application by Member States of the existing Council Directive 2003/48/EC of 3 June 2003 on taxation of savings income (‘the Directive’). The correct and effective functioning of the agreements with third countries providing for measures equivalent to those laid down in the Directive is also subject to review.
The Commission therefore drafted a detailed questionnaire about the measures taken by Member States to ensure the proper functioning of the Directive in their respective territories and about their experience of how the agreements with non-EU countries and territories were working.
All Member States apart from EE replied to the questionnaire. Some Member States provided detailed answers while others gave more summary replies. Follow-up with Member States will therefore be necessary to ensure that some of the answers have been correctly understood and interpreted. This follow-up may be included in the second review of the functioning of the Directive, which, under Article 18, the Commission must conduct by the end of this year, as the Directive is in its sixth year of application.
While the initial assessment of the replies suggests that certain of the Directive’s provisions have been implemented differently by different Member States, it does not suggest that there have been any cases of deliberate incorrect application of the Directive, but rather that the problems relate to the lack of clarity of some points of the current Directive and to the loopholes it has left open. In this context, it should be stressed that the main problems and inconsistencies will be removed once the proposed directive amending the existing Directive (‘the Amending Proposal’) is adopted and implemented.
1. APPLICATION OF THE DIRECTIVE
The Commission based its due diligence examination of Member States’ implementing measures on their answers to 36 questions covering the main articles of the Directive.
1.1. Questions 1–6 on the implementation of Article 1(2) of the Directive
The Directive states that ‘Member States shall take the necessary measures to ensure that the tasks necessary for the implementation of this Directive are carried out by paying agents established within their territory, irrespective of the place of establishment of the debtor of the debt claim producing the interest.’
All Member States apart from EE updated their original notification of the implementing provisions by answering Q1, which requested a detailed list of such provisions. Many of them also provided a correlation table in accordance with Article 17(5).
Q2 asked for the criteria under which the law of each Member State considers a paying agent as being established within the territory of that Member State.
Not all Member States provided sufficient detail on this question. Those answering said a paying agent qualified as ‘established’ according to the general criteria defined by their income tax law for determining their right to tax a business activity performed in their territory. For legal persons, AT, CY, CZ, DE, FR, HU, IT, NL, and PT stated that the place of effective management was partially or exclusively relevant to a paying agent qualifying as ‘established’, while other Member States (EL, LT, LV, RO, and SI) regarded as ‘established’ only those legal persons duly registered in their territory or, in the case of LV, those with a permanent establishment registered in their territory, for legal persons resident abroad. LU and PL consider the place where the business activity is conducted, not only for legal persons but also for individuals. Besides LV, other Member States — BE, BG, CZ, DE, FR, HU, IT, LV, MT, PT, RO, and SE —confirmed (CZ, LV and RO by answering question 4) that persons resident abroad are also treated as paying agents if they have permanent establishments in the territory. ES extends the paying agent obligations to income distributors or authorised agents in Spain (for marketing purposes) of collective investment vehicles established abroad. Most Member States who referred to individuals in their answers (AT, CZ, EL, FR, HU, IT, LT, MT, NL, PT, and RO) identified their residence as their place of establishment. All HU nationals not having double nationality are considered resident in HU. SI answered that to date it had not come across a case where a paying agent was an individual.
Another challenge in this respect is the treatment of trusts. Q3 dealt with conditions under which paying agents obligations are extended to a trustee established in a country. It also asked how these obligations are affected by the existence of other trustees and by the fact that one or more trustees may be resident in a country outside the scope of the savings taxation measures. Many Member States are not familiar with the concept of a trust. Some countries (AT, DK, FR, IE, IT, LU, MT, and UK) reported that a trustee can be a paying agent if acting in a business or professional capacity (this condition is not strictly necessary in IT, where a trust is deemed to be an entity under Article 4(2)) and the beneficiary of the trust is absolutely/immediately entitled to assets/income. BE does not provide in principle for paying agent obligations for resident trustees (these obligations are always put on the upstream economic operator who has to ‘look through’ the trust for a beneficiary who is absolutely/immediately entitled). AT, BE, and FR stated that they consider the trustee to be the beneficial owner if there is no beneficiary absolutely/immediately entitled to assets/income. DK and FR stated that, where there is more than one trustee, the trustee resident in their respective territories only has reporting obligations if that trustee is the person who actually makes the interest payment to the beneficiary. LU and MT seem to have more stringent rules stating that, even if there are several other trustees, those established in their respective territories are not relieved from their
obligations as paying agents. IT stated that it makes reference in such situations to the domestic rules fixing the residence of the trust. UK has specific rules under which the ‘tie-breaker’ element for determining the residence of the trustees as a single body is based on whether or not the settlor is resident in the UK at the time of providing the funds or property. In general, the answers to this question showed many doubts about how trusts should be treated under the Directive and about the legal requirements to be fulfilled to act as a trustee in civil law countries. There seems to be a significant level of inconsistent treatment from one Member State to the other due to the lack of clear provisions in this area in the current Directive.
Comment: The Amending Proposal will provide more clarity on the treatment of trusts.
Q4 dealt with whether economic operators other than legal persons and individuals are covered by paying agent obligations and, if so, according to what criteria they are considered established in a Member State.
Most Member States answered ‘yes’ to this question (AT, CY, BE, BG, CZ, DE, DK, ES, FR, HU, IE, IT, LU, LV, NL, PL, PT, RO, SE, SI, SK, and UK). AT, CY, and FR stated that they directly implemented the criteria set out in Article 4(2). SI stated that although it had implemented the relevant provisions, there are no such entities in SI at present.
In LU, legal personality has no influence on the application of the paying agent’s obligations. As to entities meeting the criteria of Article 4(2), the law provides for them to be treated as a UCITS recognised in accordance with Directive 85/611/EEC. Regardless of legal personality, paying agent obligations are imposed on any economic operator established in LU paying or securing interest for an entity covered by Article 4(2) which is established in another Member State.
FI, LT and MT stated that their implementing rules do not contain specific provisions for economic operators other than legal persons and individuals. For LT there is no need to cover operators who are not legal persons or individuals with paying agent obligations, since only a legal person or an individual can perform an economic activity.
Q5 tackled the issue of routing interests payments through branches established outside the scope of territorial application of the savings taxation mechanism.
This issue is explicitly addressed in LU’s implementing rules, under which, if the interest payment in favour of the beneficial owner is channelled by a paying agent in LU via a non-EU country, the transaction is covered by the law. Moreover, some Member States reported that if interest payments are routed through foreign branches, the head office will still have reporting obligations due to either other general provisions, the AMLD, anti-abuse clauses or interpretation (DK, ES, LV, MT, PT, and UK). No Member State has information available on the actual use of these provisions for the purpose of the savings taxation mechanism.
Foreign branches’ obligations are not covered in AT, BE, BU, CY, CZ, DE, FR, HU, IE, IT, NL, PL, RO, SI, SK or LT since they fall outside the territorial scope of the Directive.
Comment: The treatment of payments routed via foreign branches established outside the scope of the Directive is explicitly addressed under the Amending Proposal.
Q6 examined Member States’ approaches to penalties for breaches of the Directive by paying agents.
Member States are responsible for ensuring that paying agents established in their territory apply the provisions of the Directive correctly. As a complement to clear implementing rules and appropriate monitoring by the competent authorities, penalties would seem to be appropriate to discourage wrong behaviour. All respondents to the questionnaire apart from DK and SE apply penalties for not fulfilling obligations under the Directive. DK declared it would take steps to implement sanctions for paying agents’ failure to supply information. SE reported that it has a long tradition of effective third party reporting obligations on paying agents without the need for penalties.
Three Member States (HU, IT and LU) reported that they had statistical evidence that penalties have already been applied in their territory to paying agents who had not correctly applied the provisions implementing the current Directive.
1.2. Questions 7–11 on the implementation of Article 2 of the Directive (‘beneficial owner’)
Q7 asked what kind of ‘evidence’ is considered satisfactory to establish that an individual has received an interest payment on another’s behalf. It also asked whether any minimum standards are set for the checks that an economic operator must perform before concluding that an individual receiving interest payments has proved to be acting as a paying agent, on behalf of a legal person, taxed entity, authorised UCITS or on behalf of an entity referred to in Article 4(2).
Most Member States outlined principles rather than citing actual kinds of evidence to be provided if an individual claims to have received the interest payment on another’s behalf. The following Member States did not give details of the kind of evidence to be provided or minimum standards for the checks to be performed: BE, BG, CZ, CY, DE, DK, EL, ES, FI, FR, IE, LT, LU, LV, NL, PL, PT, RO, SE, SI, SK, and UK. However, CZ and DK referred to evidence being provided under the Anti-Money-Laundering (AML) Directive.
The following Member States gave details of the kind of evidence used: MT (written statement on headed paper from the relevant authority), HU (deed of foundation, notarised signature sample), IT (self-certification subject to criminal prosecution in case of false declaration), and AT (extracts from a commercial register, association contracts, fiduciary contracts or similar documents proving power of attorney).
Q8 related to the penalties for an economic operator who fails to inform the competent authority of the name and address of an entity referred in Article 4(2)
The following Member States confirmed that they impose penalties on such economic operators: AT, BE, BG, CY, CZ, DE, ES, SL, FI, HU, IE, IT, LT, LU, LV, MT, NL, PL, PT, SK and UK.
LU and HU stated that they had evidence that such penalties had actually been applied.
DK and SE do not impose sanctions in such cases.
SI stated that it had so far not received any data on an entity referred to in Article 4(2).
Q9 relates to the specific disclosure requirement laid down in Article 2(1)(c) and the evidence that any individual receiving interest payments has to provide as proof of the identity and residence of any other individual who is the actual beneficial owner.
The implementing rules of the following Member States specifically prescribe how the actual beneficial owner must be disclosed: AT, BE, CY, CZ, DE, DK, FI, FR, HU, IE, IT, LT, LU, LV, MT, NL, SK, SI and UK. Details were given by CY, HU, IE, IT and SI, which all require the individual receiving the payment to provide the same evidence of the identity and the residence of the second individual to be treated as beneficial owner as would apply to the former. Conversely, LV stated that there is no requirement to establish residence of the other individual under its implementing rules.
ES and PT stated that although their implementing rules do not contain any specific requirement, the general provisions include rules corresponding to Article 3 of the Directive. In RO, the administration is convinced that, even if there are no specific rules, the same kind of evidence would be required as a matter of course. BG, EL, PL and SE also stated that they do not provide for specific rules in this respect.
Q10 enquired about situations in which implementing rules do not consider a trust to be an entity referred to in Article 4(2) and asked how, in such situations, economic operators are required to treat interest payments made to a trustee of a trust to whose assets or income no beneficiary is absolutely/immediately entitled ('discretionary' trusts).
Under the BG, HU and IT implementing provisions, trusts and other similar legal arrangements fall under Article 4(2) of the Directive.
In the following other Member States, if the beneficiary is not known at the time the interest is paid, the trustee is treated as the beneficial owner: AT, BE, CY, CZ, DE, DK (except where the trust is regarded as equivalent to a DK fund and therefore as a legal person), ES, FR (from the answer to Q3), IE, LU, LV, NL, PT, RO, SE, and SK. Some of these Member States provided further details, given below.
In AT, trustees resident in AT are liable to tax at the domestic rate of 25 %, while those resident in another Member State are liable to withholding tax under the Directive. In BE and DK, income is also taxable for resident trustees while, for trustees resident in another Member State, information is provided under the Directive. In CZ, payments are taxed at a rate of 15 % in internal situations, while if the beneficial owner is non-resident the rate set in the relevant tax treaty applies. In DE, in internal situations, payments are subject to a withholding tax of 25 % plus a 5.5 % ‘solidarity surplus’ on the withholding tax. In LV, resident trustees are taxable as individuals, i.e. their income is taxable when it is received (on a cash basis).
In IE, for trustees resident in another Member State the interest payment is reported to their Member State of residence, while Irish resident trustees are generally taxable at a 20 % rate on interest income when received from the economic operator; where income is subsequently distributed by Irish resident trustees to a resident beneficiary, that beneficiary is then taxable on that income and credit is given for the tax already paid by the trustee for that trust. IE applies a further tax charge on discretionary trusts amounting to 6 % of the value of the trust and a further 1 % annual charge for as long as the trust remains in existence. The Irish source income is subject to this taxation irrespective of the domicile of the Irish individual trustee or the residence status of other trustees of the trust.
In RO, the interest from local sources is either subject to the domestic 16 % withholding tax or, in the case of non-resident trustees, subject to the relevant DTA rate. In SE, the economic operator must report the payment; in internal situations tax must be paid on capital income at a rate of 30 %; no withholding tax is levied on interest payments to non-residents.
MT and UK did not provide explicit confirmation that non-resident individuals who are trustees of discretionary trusts are treated as beneficial owners under the Directive.
MT only confirmed that if the individual trustee is resident in Malta, then the trustee is subject to tax on the interest during the year in which it is received at a rate of 35 %; however, for interest earned from a local bank a final withholding tax of 15 % may apply.
In the UK, where a UK paying agent pays interest to the trustee of a discretionary trust, that payment is not a reportable payment under the Directive if the trustee is an individual who has produced evidence of receiving the payment in the capacity of trustee of a discretionary trust. This is because the trustee, being a person, cannot be a ‘residual entity’: the payment is not made to an individual beneficial owner and is not received for the immediate benefit of another individual beneficial owner. The assets of a discretionary trust are vested in the trustee and therefore the trustee is the beneficial owner of the interest payment. Trustees resident in the UK are subject to income tax on interest income at a rate of 50 %. Non-resident trusts are also subject to tax in respect of UK source interest, subject to the relevant DTA. The rate of tax will either be the rate applicable to trusts, 50 %, or UK basic rate (20 %) where there are no UK resident beneficiaries of the trust. Non-domiciled status has no effect on this.
Q11 also dealt with situations in which the implementing rules do not consider a trust to be an entity referred to in Article 4(2). The question is whether paying agents’ obligations are imposed on economic operators that make interest payments to a trustee which is a legal person, or whether the trustee is obliged to act immediately as a paying agent under Article 4 for the portion of the interest payment pertaining to any beneficiary who is absolutely/immediately entitled to assets/income.
According to BG, HU and IT implementing provisions, trusts and other similar legal arrangements fall under Article 4(2) of the Directive.
The following Member States stated that they do not impose paying agent obligations on economic operators making an interest payment to a trustee which is a legal person: AT, ES, IE, LT, LU, MT, PL, SK, SE, and UK. Of these Member States, AT, IE, LU, and MT stated that such a trustee, if resident, is deemed to be a paying agent for beneficiaries of the trust who are absolutely/immediately entitled to assets/income.
BE and DK impose paying agent obligations on economic operators making an interest payment to a trustee which is a legal person only if the beneficiary of the trust is an individual who is absolutely/immediately entitled to assets/income; in that case the reporting concerns that individual.
1.3. Questions on the implementation of Article 3 of the Directive (‘Identity and residence’)
Q12 and Q13 both dealt with identification and residence of beneficial owners for contractual relations entered into before 1 January 2004.
Q12 asked if any Member States oblige their paying agents also to consider as a beneficial owner, for the purposes of the Directive, an individual who has been identified by those paying agents as the beneficial owner, for AML purposes, of a customer of the paying agents that is a corporate or legal entity or a legal arrangement.
CY, CZ, DK, IE, LT, LU, MT, SK, and UK said yes.
DE, ES, LV, and PT said no.
DK, FI, IT and PL answered that their implementing rules do not provide detailed rules on this. However, DK (like BE) imposes paying agent obligations on economic operators making an interest payment to a trustee where the beneficiary of the trust is an individual who is absolutely/immediately entitled to assets/income; in that case the reporting concerns that individual.
Q13 asked if paying agents are obliged to update the residence information on the beneficial owner for the purposes of the Directive if a change in the permanent address is recorded for AML purposes.
DK, FI, IT, LT, PL, and SI said no, as did UK, but its guidelines contain additional advice on changes of address to the effect that, if an individual’s details change, that change is considered in determining whether reporting under the Savings Directive is necessary. In CY, despite the absence of an obligation, a majority of the paying agents contacted regularly update the residence information on their customers.
AT, BE, BG, CZ, DE, ES, FR, HU, IE, LU, LV, MT, NL, PT, SK, and SE said yes.
Q14, Q15 and Q16 dealt mainly with identification and residence of beneficial owners for contractual relations entered into on or after 1 January 2004.
Q14 asked whether paying agents are obliged to request explicit confirmation in writing that the address, if any, given on their passport or identity card corresponds to their current permanent address.
BG, DK, IE, IT, LT, LV, MT, PL, SI, SK, and SE said no. One of the paying agents consulted by CY stated that it never simply relies on the address stated on the passport or the identity card, but always seeks confirmation by other independent documentary proof of residence. UK guidelines contain advice on what to do if an individual appears to have more than one address. AT stated that almost no Member States state the permanent address on the passport or official identity card, so it generally has to be determined on the basis of probative documents and written confirmation by the beneficial owner fulfils this requirement; in the absence of probative documents, the permanent address is deemed to be in the Member State that issued the passport or the identity card.
ES and LU said yes.
Q15 asked if paying agents are obliged to request updated documentary proof of identity on the expiry date of that originally presented by the beneficial owner.
DK, IE, IT, LT, PL, PT, SI, SE, UK and CY said no.
AT (the update is ‘risk-based’), BE, CZ, DE, ES, FR, LU, LV and SK said yes. BG, MT, NL and SK referred to the obligation to update the proof of identity under AML provisions.
Q16 asked if paying agents are obliged to disregard the address given on the passport or the identity card if a tax residence certificate or other official evidence presented by the beneficial owner proves actual residence for tax purposes to be in a Member State other than that of the address on the passport or identity card.
LU said no, except for EU officials living abroad who can present a certificate proving that they are tax resident in Luxembourg. PL, PT and SE also answered negatively.
BE, BG, CZ, DE, FI, LV, NL, SK, and UK said yes.
1.4. Questions 17–23 on the implementation of Article 4(2), (3) and (4) of the Directive (‘Paying agents upon receipt’)
Article 4 defines the main reporting entity in the Savings Directive — the paying agent. While the situation of an economic operator who pays interest to, or secures the payment of interest for the immediate benefit of the beneficial owner (the classic case of a paying agent) appears to be understood and applied correctly across the board by Member States and economic operators, this may not necessarily be the case for the provisions on the ‘paying agent upon receipt’ (of the income). Therefore, the questions about Article 4 focus primarily on the implementation of those provisions. Note that the proposed amended version of the Directive would substantially overhaul those the provisions and is arguably much clearer on the concept of paying agent upon receipt and how to apply it correctly.
Q17 asked each Member State whether its implementing rules provide for an indicative list of entities that may help upstream economic operators in that Member State to identify potential ‘residual entities’ (paying agents upon receipt). Member States were also asked how any trusts are treated for the purposes of the list.
Most Member States have not drawn up such a list: AT, BE, BG, CY, CZ, DK, FI, HU, IE, LT, MT, NL, PL, PT, RO, SI, SK, SE, and UK.
An LU circular refers to a list published by the European Banking Federation, stressing that it is only an indicative list. DE rules set out examples, which do not include trusts.
Each of the following Member States refers to lists, but these are of entities established in their own Member States, rather than in others: EL, ES, FR, and IT. The IT list includes trusts, set up under Article 10 and 11 of the Hague Convention according to the law of another country, which have their administrative office or their principal purpose within IT territory. The FR, EL and ES lists do not include trusts.
Q18 asked whether trusts can be set up in the respondent Member State and whether any register of such trusts exists. A register would arguably help to identify and audit trusts, and help upstream economic operators from other Member States to identify them.
The domestic laws of the following Member States do not provide for the setting up of trusts: AT, BE, BG, CZ, DE, DK, EL, ES, FR, FI, HU, IT, LT, LU, LV, NL, PL, PT,
RO, SI, SK, and SE. Of these Member States, BE, DK, EL and IT stated explicitly that a trust set up under the law of another country can be managed and hold assets in their respective territories, while PT law only recognises trusts set up on the basis of foreign legislation by legal persons authorised to operate as trustees in the International Business Centre of Madeira; under this legislation, the trust’s assets are treated as an autonomous part of the capital of such legal persons, and these trusts are therefore not considered to be entities for the purposes of the Directive.
The laws of the following Member States provide for setting up trusts, but not a comprehensive register: CY, IE, MT, and UK. However, the UK tax administration must be notified of all trusts that are subject to tax in the UK and it keeps a record of such trusts.
In BE and FR, the law provides for a fiduciary arrangement which has some similarities to a trust, although it is of much narrower scope. Such an arrangement is classed as an entity by FR, where a comprehensive register of fiduciary arrangements set up under FR law has been set up; both the settlor and the ‘fiduciaire’ must be residents either of an EU Member State or of a country that has an agreement with FR providing for the exchange of information in tax matters.
Q19 referred to the conditions under which an entity would not be considered a paying agent upon receipt. An entity that does not ‘pass’ certain tests is considered a paying agent upon receipt (also referred to as a ‘residual’ entity). Q19 asked about the evidence to be gathered by paying agents to prove that the conditions have actually been met.
The following Member States answered that they do not provide specific instructions on the issue: AT (reference to the documentation on legal persons obtained for AML purposes), BG, CZ, DK, FI, FR, HU, IT, LT, LU (specific liability to administrative and even criminal penalties for economic operators in the wrong), MT, NL, PL, PT, RO, SK, SI (apart form the certificate under Article 4(3) of the Directive), and SE. Among these Member States, BG and FI have, nevertheless, expressed a preference for the condition of effective taxation to be confirmed by a certificate issued by the tax authority of the Member State of establishment of the entity.
The following Member States declared that they provide guidance of a variously detailed and binding nature: BE (notably the certificate from the tax authority for the condition of effective taxation), CY, DE (proof from excerpts from registers and documents issued by a tax administration), IE, LV (certificates of legal personality, effective taxation and UCITS status for local entities, and upstream economic operators established there request similar proof from entities established in other Member States), and UK (indications about the kind of evidence that is considered as suitable official evidence).
Q20 requested further interpretative information on the second residual entity test — whether the entity’s profits are taxed under the general arrangements for business taxation (‘subject-to-tax test’).
There are two possible interpretations of this test.
In the first interpretation the test is passed (i.e. the entity is not a residual entity) even if the entity’s profits are not taxed at entity level but at beneficial owner level. While full taxation would arguably be ensured if all the entity’s beneficial owners were residents in the Member State where the entity’s is established (with that Member State treating the entity as transparent and taxing its beneficial owners directly), it may not always be ensured if the beneficial owners are resident elsewhere (e.g. the other Member State treats the non-resident entity as opaque or is unable to ensure taxation for other reasons).
Under the second interpretation the entity whose profits are not taxed through the entity itself but via its beneficial owners would not pass the subject-to-tax test and would have to be treated as a ‘paying agent upon receipt/residual entity’ by the upstream economic operator making an interest payment to it.
Member States were asked which of the two interpretations they follow and, for those Member States following the first interpretation, how that interpretation would be applied to cases where the beneficial owners are resident in a Member State different from the Member State of establishment of the entity and no actual taxation at beneficial owner level has been proved to the upstream economic operator who makes an interest payment to the entity and is responsible for performing the Article 4(2) test, because that economic operator in turn is established in a Member State other than that in which the entity is established.
The following Member States follow the first interpretation (i.e. the subject-to-tax test is passed even if the entity is not taxed itself, only its beneficial owners) and will consider the test passed even if there is no actual proof of taxation of the beneficial owners: AT (non-resident partners of a partnership are deemed to be taxed in the country of the partnership as if they had a permanent establishment), CY, IT (for partnerships established in Italy; conversely, the IT position is unclear as far as entities established in other Member States are concerned, which is the issue at stake in this question), LU, and UK.
The following Member States apply the second interpretation (i.e. the subject-to-tax test is not passed if the entity is not taxed in its own right): BE, DK, ES, FR, HU, IE, LV, MT, NL, PL, PT, RO, SK, and SE.
The following Member States have instructed their economic operators that they prefer to rely on a certificate from the tax authority of the Member State of establishment of the entity and on the judgment of such authority as regards the tax status of the entity: BG, and FI.
Comment: Note that the first interpretation would no longer be acceptable if the text of the Directive were amended in accordance with the Commission proposal of 2008.
Q21 asked whether a domestic economic operator would be allowed to consider an entity as falling under the exception listed in Article 4(2)(b), i.e. as being subject to tax under the general arrangements for business taxation, if that taxation is at a zero or very low rate.
The following Member States confirmed this possibility: AT, CY, CZ, DE, FR, IE, IT, LV, NL, PL, and SK.
BE, DK (would accept the exception only if zero or low rate was the standard rate in the Member State of establishment of the entity1), LU (anti-abuse rules would apply), MT, and PT.
The following Member States instruct their economic operators to rely preferably on a certificate from the tax authority of the Member State of establishment of the entity and on the judgment of that authority as regards the tax status of the entity: BG, FI, and UK.
Q22 asked if there are restrictions concerning the kinds of entities allowed to opt for treatment as a UCITS and whether there are effective controls to check that entities exercising the option either comply with paying agent obligations or inform the downstream paying agent who makes the interest payment to the beneficial owner about their status.
The following Member States answered that there are no restrictions: AT, BE, BG, DK, ES, FI, FR, IE, IT, LT, LU (potential paying agents upon receipt established on its territory are always automatically treated as UCITS), MT, PT, RO, SI, SE, and UK. Of these Member States, AT and BE stated that they provide for tax audits or controls on the entities that have obtained the certificate for making use of the option; IT can revoke the certificate if there is evidence of false declarations; FI and LU referred to the normal audit programmes for paying agents; DK, LT, MT, PT, SI, SE and UK stated that they have never received any application from entities established on their respective territories.
The following Member States answered that they restrict the use of the option either by law or in practice: DE restricts the option to entities which have an economic activity and which are similar to UCITS; LV provides the certificate only to those entities that can be treated as UCITS; NL requires that the entity fulfils the requirements of the UCITS Directive; SK requires that the entity fulfils the conditions set by domestic rules on collective investments.
Comment: Note that the latest compromise text on the amending Directive would restrict the use of the option to entities which are similar to an undertaking for collective investment or collective investment fund or scheme.
This is not a theoretical case if the analysis is extended to the functioning of the agreements on the same measures as those of the Directive which have been concluded by Member States with dependent or
Q23 asked how paying agents upon receipt are made to comply with their obligations under the Directive if both they and the upstream economic operator making an interest payment are established in the same Member State.
The following Member States have a reporting obligation for paying agents upon receipt either under a specific rule or because the law covers all entities whether or not they are established in the country: AT, BE, BG; CY, CZ, DE, ES, FR, IE, IT, LT, LV, MT, and NL. Of these Member States, AT stated that it provides for tax audits on entities and MT that it obliges paying agents upon receipt established on its territory to notify their status to the tax authorities, which give them a code.
No guidance was established by FI, SK, SE, and UK.
All potential paying agents upon receipt established in LU are always automatically treated as UCITS, so that they do not have withholding or reporting obligations when an interest payment is received but may have them when it is made, depending on whether the payment is made directly to a beneficial owner or if it comes to the latter through a downstream paying agent.
1.5. Questions 24–26 on the implementation of Article 6 of the Directive (‘Definition of interest payment’)
Article 6 defines the product scope of the Savings Directive, which covers interest from debt claims of every kind whether obtained directly (including on the sale, refund or redemption of such debt claims) or as a result of indirect investment via most collective investment undertakings and via other residual entities (paying agents upon receipt). The Directive also covers income realised on the sale, refund or redemption of shares or units in such collective investment undertakings or entities, if the undertakings and entities have invested more than 25 % (as from 1 January 2011, previously 40 %) of their assets in debt claims.
Q24 relates to the optional de minimis provision for paying agents upon receipt/residual entities under the second sentence of Article 6(6) according to which a Member State can choose to make the income of entities established on its territory non-reportable or to withhold no tax if the investment in debt claims by the residual entity is below 15 %. It primarily asks whether the residual entity (in Member States exercising this option) is obliged to notify the tax authorities of its existence as a potential paying agent upon receipt. There may be a risk that if such entities are not identified for general tax purposes their investment pattern2 may not be properly audited.
The following Member States confirmed that they have not exercised this option: CY, DK, ES, FR, HU, IT, MT, NL, PL, SE, and SK.
2
The following Member States explicitly state that there is no obligation of prior notification: AT, BE, LV, PT, and SI.
The following Member States exercising the option indicate that such entities are subject to (regular) tax audits, but do not comment on the issue of whether the entities in question would be identifiable in order to conduct audits: FI, IE, and UK.
All potential paying agents upon receipt established in LU are always automatically treated as UCITS, so the de minimis provision is applied by LU according to the same criteria for both UCITS and entities treated as UCITS.
Q25 asked about the application of the concepts of substance over form and abuse of law with regard to the definition of interest in the application of double taxation treaties and whether the same concepts are applied when implementing Article 6 of the Directive. It also asked whether there is a list of products that could potentially be re-classified as interest-producing debt claims.
The question refers in the first place to the application of those principles with regard to double taxation treaties because the definition of interest under Article 6(1)(a) of the Directive is identical to the definition of interest under Article 11 of the OECD Model Tax Convention (and paragraph 21.1 of the Commentary to Article 11 might therefore be invoked3).
No Member State has a list of products or examples that could potentially be re-classified as interest-producing debt claims.
The following Member States apply the concepts of substance over form or abuse of law in their domestic tax law and/or their tax treaties and also confirmed their application in respect of Article 6 of the Directive: AT, BE, CZ, DE, DK, EL, ES, FI, FR, IT, LU, MT, NL, PL, and SK.
The following Member States apply the concepts of substance over form or abuse of law in their domestic tax law and/or their tax treaties but either do not indicate whether they apply those concepts in respect of Article 6 of the Directive or have no experience in applying it in this context or state that they would have difficulties in applying it: BG, HU, IE (no substance over form, only anti-abuse rules), LT, PT (anti-abuse rules), and RO.
The following Member States state that they do not apply the concepts of substance over form or abuse of law in defining interest, either domestically or in the context of double taxation treaties: CY, LV, and SI.
‘21.1 The definition of interest in the first sentence of paragraph 3 does not normally apply to payments made under certain kinds of non-traditional financial instruments where there is no underlying debt (for example, interest rate swaps). However, the definition will apply to the extent that a loan is considered
3
Q26 asked about evidence of marketing of products explicitly promoted by economic operators as being outside the current scope of the Directive.
No Member State other than BE has such evidence.
BE referred to insurance products with a guaranteed return.
Comment: The amendments proposed in the latest compromise text for amending the Directive would substantially broaden the product scope of Article 6 of the Directive.
1.6. Questions 27–29 on the implementation of Article 8 of the Directive (‘Information reporting by the paying agent’) to be answered by all Member States other than Austria
Article 8 lays down the minimum information to be reported by the paying agents on the beneficial owner, the savings income and the related debt claim. For the Directive to be correctly applied, the information must be of appropriate quality, which depends on both the paying agent and the paying agent’s Member State of establishment.
Q27 asked whether any audits were performed because of the poor quality of the information reported by the paying agents.
The following Member States state that they performed such audits: DK, FI (incorrect detection of the State of residence of the beneficial owner), IT (60 specific audits made on IT paying agents, more frequent checks on intermediaries established close to the borders), LU, and UK.
BE has not yet started performing such audits but intends to do so in the future.
SE stated that it has not performed specific audits for the Savings Directive but that it performs occasional audits on paying agents to certify that their third party reporting is correct.
The following Member States state that they have not yet performed such audits but that they systematically check the quality of information: BG, CZ, DE, FR, LV, MT, NL, and SK.
The following Member States state that they have not yet performed specific audits, because the quality of the information reported was considered sufficient: IE, SI (plans preventive controls on a limited number of paying agents for 2011 — taken from answer to Q29).
The following Member States simply stated that they have not performed such audits: CY, ES (ready to perform checks at the request of other administrations), HU, LT, PL, and PT.
Q28 asks about the methods to ensure proper treatment of income under Article 6 in the information reported by paying agents under Article 8.
The following Member States stressed that they have issued detailed guidelines (taking a pre-emptive approach): CZ, DE, ES, IT, and MT.
The following Member States stressed that they provide for penalties in case of problems detected during audits: BG, CY, FI (systematic monitoring of information quality), FR (systematic monitoring of information quality), HU, IE (as part of ordinary ongoing audit programmes), LT, LU (specific office audits correct the classification of securities by means of access to relevant data bases), LV, NL, PT, SI (systematic monitoring of information quality), and UK.
BE has not yet started performing checks/audits but intends to do so in the future.
The following Member States stated that they had not taken any specific initiatives: DK and SE.
Q29 asked about any monitoring measures taken by Member States to prevent their paying agents from actively helping beneficial owners to circumvent the Directive’s territorial or legal scope.
The following Member States stated that no specific monitoring is yet in place: BG, CZ, DK, DE, FR, HU, IE, IT, LT, LV, MT (MT finds it difficult to envisage how one can formally exclude the possibility of paying agents giving such advice), PL, PT, SI, SE, and UK. BE has not yet started performing checks/audits but intends to do so in the future. UK stressed that any evidence of such behaviour discovered during an audit inspection would be considered very seriously by its tax administration.
CZ and FI stated that this monitoring is part of tax control or on-the-spot visits.
CY stated that it prevents such circumvention through specific controls.
LU stated that this behaviour is systematically checked and may give rise to specific action depending on how inspections conducted at the paying agent’s place of business evolve.
NL has set up an expert group specialised in detecting financial products that are mainly aimed at circumventing taxation.
Comment: Some Member States oblige ‘promoters’ of tax avoidance schemes to disclose such schemes to the relevant authority. Such an approach, if extended to third party payments, might potentially benefit Member States’ application of the Directive.
1.7. Questions 30–36 on the implementation of Article 11 of the Directive (‘Withholding tax’) to be answered only by Belgium (interest payments up to 2009), Luxembourg and Austria
Q30 asked about methods of verifying that the amount of withholding taxes corresponds to the interest income actually paid to beneficial owners from other Member States.
All three Member States ensure correct application through tax audits.
During tax audits of paying agents, AT checks the correct allocation of the interest income according to three possible categories (subject to EU savings withholding tax, liable to domestic tax and non-taxable).
LU stated that its audits involve the use of appropriate indicators to evaluate whether the amount of interest payments matches the amount of withholding tax levied.
Q31 aimed to compare the methods of tax checks on correct withholding for EU savings taxation with those applied to any domestic withholding tax on similar income of resident individuals.
In all three Member States, tax audits cover both types of withholding taxes.
AT and BE stated that they conduct the same monitoring for EU savings withholding tax and domestic withholding tax. LU has charged the same special office with the task of performing the audits on both withholding taxes, as the domestic withholding tax (recently introduced) has rules which are similar to those of the EU savings withholding tax.
Q32 asked whether any audits have been performed due to a mismatch between the amount of EU savings tax withheld and the total amount of assets managed by the paying agent.
AT and BE stated that no specific audits had been conducted on that basis and that a review of the EU withholding tax is a standard part of an audit of a paying agent.
Conversely, LU stated that it had effectively applied that approach in its tax audits.
Q33 asked about methods of ensuring that EU savings withholding tax is levied correctly on all products within the current scope of the Directive.
All three Member States ensure correct application through tax audits.
AT checks the correct calculation of the withholding tax by means of IT-system analysis: during tax audits, software is used to analyse the mathematical and
systematic plausibility of the relation between amount of income, kind of financial product, State of residence, tax status and tax rates.
LU audits paying agents’ reporting systems specifically for that purpose.
BE intends to create a working group to improve the methodology and adapt audits the performed on paying agents.
Q34, like Q29, asked about any monitoring measures taken by the three Member States to prevent their paying agents from actively helping beneficial owners to circumvent the Directive’s territorial or legal scope.
AT referred to several supervisory bodies, both internal and external to the paying agents (internal auditors. external auditors, the Austrian National Bank).
LU and BE referred to their replies to Q29. BE may draw the issue to the attention of the working group referred to in the answer to Q33.
Q35 referred to the increase in the EU savings withholding tax rate and asks about the measures taken to ensure implementation and about its impact — increased withholding revenues or increased circumvention.
AT referred to the IT checks described in the answer to Q33, but was not able to assess the impact of the increase in the rate in 2008 separately from the impact of the financial crisis on the composition of the investors’ portfolios.
BE reported increased revenues.
LU sent a copy of a letter of 15 January 2008 to all paying agents notifying them that, from 1 July 2008, the increased rate of 20 % would apply to the total amount of interest paid, including interest accrued before that date.
Q36 referred to the certificate exemption procedure for the EU savings withholding tax, and asked what penalties are available for the falsification of certificates and whether these have been applied in practice. A particularity of that situation is that it concerns fraudulent behaviour by non-residents.
In all three Member States, falsification would lead to penalties under criminal tax law. No information is given on actual penalties imposed.
2. AGREEMENTS WITH NON-EU TERRITORIES AND COUNTRIES
Q37 asked about any complaints that Member States have about the application of the EU agreements with each of the five non-EU Western European countries and the bilateral agreements between the Member States and each of the 10 dependent and associated territories.
The following Member States declared that they had no specific complaints: AT, BE, BG, CY, CZ, DE, DK, FI, LT, LU, LV, NL, PL, RO, SE, SI, and SK.
IT complained about the format in which information was exchanged.
MT complained in addition about the inconsistency of the methods of transmitting information.
ES expressed the same complaint about the format used by jurisdictions other than Switzerland and the Dutch dependencies. In addition, it observed that it receives very little information from the Caribbean territories and that Andorra, Liechtenstein, Monaco and San Marino hardly provide any information to ES authorities.
IE commented that the means of transferring the information could be improved to ensure more secure transmission.
HU suggested updating and publishing (on CIRCA) the contact points of those states which have no CCN-mail.
FR stated that Swiss banks have established mechanisms or ‘vehicles’ to ensure that certain savings income is not subject to the EU-Switzerland Savings Taxation Agreement.
In addition to complaining about the format for exchange of information used by Guernsey, the Isle of Man and Gibraltar (‘a file for each paying agent using different formats inclusive within the same file’), PT stated that when exchanging information Switzerland does not comply with the rules on identifying beneficial owners, since it provides neither their tax identification number nor their date of birth.
EL has never received any information from the Anguilla or Montserrat authorities nor any confirmation from them of whether or not any information exists to be transmitted to the EL authorities under the respective agreements.
UK has an issue with some non-EU jurisdictions still disregarding payments to non-domiciled UK tax residents.
Q38 asked whether any consultations had been held between the Member State in question and any of the five non-EU Western European countries on any disagreements about the interpretation or application of the relevant agreement. The consultation provision requires the European Commission and the competent authorities of the other Member States to be notified immediately of the results of any consultations.
Only EL reported having been involved in such consultations with Switzerland with regard to Article 15 of the Swiss agreement.
3. INTERIM CONCLUSIONS
As stated in the introduction, given the difference in detail and clarity of the answers provided by Member States there is a need for follow-up with certain Member States to clarify their answers. However, some interim conclusions can already be drawn from the replies to date.
(1) The Commission monitored the implementation of the Directive and the agreements from 2005 and opened a number of infringement procedures against individual Member States, which were closed only after confirmation that their domestic implementing rules had been brought into line with the Directive. The report, however, reveals a clear need for continuous and enhanced monitoring to ensure that all parties apply the savings taxation measures effectively, consistently and uniformly.
(2) This ad hoc report should therefore be viewed as part of an ongoing monitoring process to ensure effective implementation and application of the Directive and to identify and address any shortcomings in Member States and non-EU countries. There should in fact be continuous ‘due diligence’, the results of which should be reflected not only in the formal review of the Directive to be presented by the end of the year, but also in reports in the coming years based on the statistics that Member States are due to provide to the Commission on the operation of the Directive. If this exercise reveals infringements, the Commission, in its role of guardian of the Treaties, will take the necessary steps to ensure that the Directive is applied correctly.
(3) The Commission has had regular dialogue with non-EU cooperating jurisdictions, including the dependent and associated territories. As a result of this dialogue, Switzerland (as a major supplier of records based on voluntary disclosure) decided to adopt the format for exchange of information used by the Member States and a list of contact points was drawn up for the Member States, non-EU countries and the dependent and associated territories. However, these efforts could be enhanced, and the arrangements for direct consultations between Member States and non-EU countries and territories provided for in the relevant agreements should be used more extensively.
(4) Since the entry into application of the Directive, an expert group (the Working Group on Administrative Cooperation in the field of taxation) has been assisting Member States with ensuring smooth exchange of information, by overseeing the introduction of a common format, gathering statistics and contributing to the continuous improvement of the quality of data exchanged. However, more needs to be done to ensure the consistent and effective application of the Directive. Discussions within the Committee referred to in the latest compromise text for the amending Directive may assist Member States in further improving the sharing of best practices with
regard to identifying beneficial owners and monitoring paying agents and economic operators. This could help foster a climate of mutual trust.
(5) The answers received from Member States suggest that the lack of a specific obligation in the Directive to provide for and apply sanctions for non-compliant economic operators has not prevented most of them from extending their domestic system for sanctions to such economic operators. However, this issue will be examined more closely in order to explore whether including a specific provision in the Directive could ensure that Member States were more consistent in applying sanctions.
(6) The answers to the questionnaire also suggest that Member States have followed different approaches to determining whether paying agents should be considered ‘established’ in their territories. This is likely to be remedied by the new Article 1a in the latest compromise text for the amending Directive, which contains a set of useful criteria for establishing the place of effective management of entities and trusts and other legal arrangements.
(7) Member States’ different approaches to applying the ‘paying agent upon receipt’ mechanism and to the treatment of trusts are clearly linked to the shortcomings of the current text of Article 4(2) of the Directive. The extensive amendments included in the latest compromise text for the amending Directive and the addition of an indicative list in Annex III should provide more clarity on this issue.
(8) Member States are invited to comment on the report and to provide any further information that may assist the Commission in preparing its second review on the functioning of the Directive by the end of 2011.