Explanatory Memorandum to COM(2008)727 - Amendment of Directive 2003/48/EC on taxation of savings income in the form of interest payments - Main contents
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This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2008)727 - Amendment of Directive 2003/48/EC on taxation of savings income in the form of interest payments. |
|---|---|
| source | COM(2008)727  |
| date | 13-11-2008 |
Council Directive 2003/48/EC of 3 June 2003 on taxation of savings income in the form of interest payments (the ‘EUSD’) has been applied in the EU Member States (MS) since 1 July 2005. The ultimate aim of the EUSD, as agreed at the Santa Maria de Feira European Council of 19 and 20 June 2000 and at the ECOFIN Council meeting of 26 and 27 November 2000, is to enable savings income in the form of interest payments made in one MS to beneficial owners who are individuals resident for tax purposes in another MS to be made subject to effective taxation in accordance with the laws of their State of residence.
However, when the EUSD became applicable in 2005, it was apparent that further refinements were advisable to take account of developments in savings products and in investor behaviour. Domestic tax systems have also shifted towards treating income from some types of innovative financial products as equivalent to interest from debt claims. To take account of developments such as these, the EUSD provides that the Commission shall report to the Council every three years on its operation and, where appropriate, propose any amendments necessary in the light of these reports to ensure effective taxation of savings income and to remove undesirable distortions of competition.
Against this background, the Commission presented a first report to the Council on 15 September 2008 (COM (2008)552 final, Council Document 13124/08 FISC 117) on the application of the EUSD following its first three years of operation. The report drew on consultations held with the EU Member States’ tax administrations, data provided by them on the first two tax years of application and the findings of an expert group set up by the Commission in 2007 to seek advice from business sectors concerned or likely to be concerned by the EUSD.
As explained in the report, the EUSD has proven effective within the limits set by its scope. It has also had indirect, non-measurable, positive results in enhancing taxpayers’ compliance. However, the review process has demonstrated that the current coverage of the EUSD does not fully match the general ambitions expressed in the Council conclusions of 26 and 27 November 2000. In particular, the report drew attention to the need for amendments in relation to the definitions of beneficial owner and paying agent, the treatment of financial instruments equivalent to those already explicitly covered, and some procedural aspects.
On the basis of the report, the Commission proposes to amend the EUSD, taking into account the administrative burden involved and the opinions expressed by the tax administrations of the MS and the expert group, in accordance with the principles of subsidiarity and proportionality as set out in Article 5 of the Treaty.
Contents
- 2. Commentary on the proposed amendments to the EUSD
- 2.1. Article 1 of this proposal
- Proposed amendments to Articles 1 and 2 of the EUSD
- Proposed amendments to Art. 3 of the EUSD
- Proposed amendments to Art. 4 of the EUSD
- Proposed amendments to Art. 6 of the EUSD
- Proposed amendments to Art. 8 of the EUSD
- Proposed amendments to Art. 11 of the EUSD
- Proposed amendments to Art. 13 of the EUSD
- Proposed amendment to Art. 15 of the EUSD
- Proposed amendments to Art. 18 of the EUSD
- Proposed new Articles 18a and 18b of the EUSD
- Proposed amendments relating to Annexes to the EUSD
- 2.2. Article 2 of this proposal
The most important proposed amendments refer to the definition of savings income, to accommodate developments in savings products in recent years. The proposed amendments are intended to cover not only savings income in the form of interest payments, but other, substantially equivalent, income from some innovative financial products and from certain life insurance products that are comparable to debt claim products. If more comprehensive solutions ensuring exchange of information between the tax administrations of EU MS on the full range of life insurance contracts were to be implemented, the need to cover benefits from these life insurance products under the EUSD could possibly be reconsidered.
It is also proposed to extend the scope of the Directive to cover, under certain conditions, interest payments obtained by some entities and legal arrangements for the ultimate benefit of individual beneficial owners. Significant refinements are also proposed to the definition of the ‘paying agent upon receipt of an interest payment’, in order to improve the effectiveness of this mechanism and the legal certainty for market operators.
Articles 1 and 2 currently deal only with interest payments made for the immediate benefit of individuals. The amendment proposed to Art. 1 is only to bring it into line with the enlarged definition of interest payment proposed for Art. 6.
More significant amendments are proposed to Art. 2. The EUSD does not currently cover payments made to legal entities and arrangements held by individuals. This limitation may provide individuals with opportunities to circumvent the EUSD by using an interposed legal person or arrangement.
Indiscriminate extension to cover all payments to legal entities and arrangements established in other MS or in non-EU jurisdictions would not seem an appropriate solution.
A more efficient solution is to ask paying agents subject to the anti-money laundering (AML) obligations to use the information already available to them under these obligations, insofar as it relates to the actual beneficial owner(s) of a payment made to some legal persons or arrangements (‘look-through’ approach). The EU paying agents should only focus on legal persons and arrangements established in selected jurisdictions outside the EU, where appropriate taxation of interest income paid to these legal persons or arrangements is not ensured. When the beneficial owner identified for AML purposes is an individual resident in another MS of the EU, the payment should be treated by the EU paying agent as made directly to this beneficial owner.
It should be noted that the look-through approach would not be the best option to identify the beneficial owner where economic operators established in the EU make interest payments to other economic operators also established in the EU and therefore falling within the definition of ‘paying agent’. This could lead to multiplying the paying agent’s responsibilities at different layers of a chain of payments. In this case, clarification of the definition and the obligations of paying agents, as proposed in relation to Article 4, seems to be a more reliable and proportionate solution than a look-through approach.
In order to reduce uncertainties and the administrative burden on paying agents, Annex I includes a list of categories of entities and legal arrangements resident in non-EU jurisdictions which do not ensure appropriate and effective taxation of income obtained by such entities and arrangements. The new Art. 18b provides procedures for adapting the Annex.
Three main refinements of Art. 3 are proposed concerning the residence of the beneficial owner.
The first is to ensure regular updating of the information on the permanent address of the beneficial owner by asking paying agents to refer to the ‘best information available to them at a payment date’. This includes information required for anti-money laundering purposes or other evidence to be determined in accordance with the procedures referred to in the new Art. 18b.
Secondly, it is proposed to complement the ‘permanent address’ approach to establish the residence of the beneficial owner with one based on giving prior reference to official proof of tax residence in a specific country where such proof has been voluntarily provided by the beneficial owner to the paying agent. This applies to valid tax residence certificates issued within the last three years. This amendment is in line with the ultimate aim of the EUSD.
Furthermore, it is proposed that when the paying agent has official documentation proving that the residence for tax purposes of the beneficial owner is in a MS different from the one of the permanent address because of diplomatic privileges or other international rules, the residence for the purpose of the EUSD shall be the tax residence according to that official documentation.
The broad concept of paying agent in paragraph 1 has proved to be relatively well understood and does not appear to need major changes apart from clarifying the responsibility of these agents for payments made to their customers through intermediaries established outside the EU. However, the European Banking Federation has raised concerns about exceptional cases of passive receipt or passive payment, where the general principle that the paying agent is the last intermediary in the chain may not be consistently applied by all MS. At present, there is no common guidance regarding concepts of passive receipt or passive payment. This can lead to duplication of tasks or to situations where none of the economic operators involved is considered the paying agent. In order to avoid this, a change is proposed to require MS to take appropriate measures to ensure that paying agents’ responsibilities in respect of the same interest payment do not overlap.
Furthermore, in line with the proposed amendment to Art. 2 in relation to the application of the look-through approach to payments to certain entities and legal arrangements established in countries outside the EU, it is clarified that a payment made or secured for the immediate benefit of an entity or legal arrangement listed in Annex I shall be deemed to be made or secured for the immediate benefit of the beneficial owner, as defined in the Anti- Money Laundering provisions, of the entity or legal arrangement.
The concept of ‘paying agent upon receipt’, contained in the original paragraphs 2 to 5, seems to have generated uncertainty and needs to be developed further.
As explained in relation to the proposed amendments to Art. 2, an extension of the ‘look-through’ approach to all the entities established in the EU MS seems to be disproportionate. However, the lack of alternative mechanisms covering payments to untaxed intermediate structures within the EU could encourage individuals to make extensive use of intermediate structures to circumvent the EUSD. Recent cases show that, where the ‘paying agent upon receipt’ concept is not consistently implemented, room is left for abuse and distortions. Investment funds regulated at EU level, whose income is relevant for the purpose of the EUSD, could face unfair competition from other intermediate investment structures, which are ‘de facto’ excluded from the main definition of paying agent in Art. 4 i since payments made by them, even if generated by investment in debt claims, do not legally qualify as interest payments.
Rather than abandoning the ‘paying agent upon receipt’ concept, the concept has to be clarified to ensure consistent application. The proposed amendment aims at moving from the present approach, where the main focus is on the upstream economic operator paying interest to the entities concerned, to an approach based on a ‘positive’ definition of the intermediate structures obliged to act as a ‘paying agent upon receipt’.
This would mean that the EUSD shall be applied by these structures — including legal arrangements such as certain kinds of trusts and partnerships — upon receipt of interest payments from any upstream economic operator, regardless of where this operator is established (inside or outside the EU), as long as the beneficial owner is an individual resident in another EU MS.
In order to avoid market distortions, the new definition of the structures acting as ‘paying agent upon receipt’ is based on substantive elements rather than on their legal form. The proposed amendment favours a definition including all entities and legal arrangements which are not taxed, at least on that part of their income arising to their non-resident participants, under the general rules for direct taxation applicable in the MS where the entity or legal arrangement has its place of effective management and can be considered to be established/ resident. Only the following entities and legal arrangements are excluded:
1. Investment funds covered by Art. 6 of the EUSD;
2. Pension funds and assets relating to life insurance contracts;
3. Entities and arrangements set up exclusively for charitable purposes;
4. Cases of shared beneficial ownership to which interest payments are made by an economic operator that has identified all the beneficial owners.
A ‘positive’ list, including entities and arrangements to be considered as ‘paying agents upon receipt’ in each MS, is introduced as Annex III. The proposed new Art. 18b provides a procedure for amending the Annex.
The option in Art. 4 i of the EUSD, of being treated as an investment fund under Art. 6, is maintained only for those entities and legal arrangements to whose assets or income no beneficial owner is immediately entitled at the moment of receipt of the payment. If they do not exercise this option, they will be obliged to act as ‘paying agent upon receipt’ and to consider as beneficial owners those individuals who contributed to their assets.
The current obligations on ‘upstream’ economic operators under Art. 4 i, last sentence (and Art. 11(5)), of the EUSD is maintained only for interest payments made to those entities and legal arrangements in other MS that, having regard to the MS where the place of effective management is situated (which, for legal arrangements, will be the State of the permanent address of the person who primarily holds legal title and primarily manages their property and income), are listed in the proposed Annex III. However, the list is not exhaustive for the MS. MS should take the necessary measures to ensure that all entities and legal arrangements other than those listed under (a), (b), (c) and (d) above, which are not taxed under the general rules for direct taxation and have the place of effective management on their territory act as ‘paying agent upon receipt’, regardless of whether these entities and legal arrangements are included in the list of Annex III or of the information actually received from foreign upstream economic operators.
The EUSD is essentially aimed at ensuring taxation of savings income in the form of interest, which is taxable according to fairly similar criteria in all MS. Through the adoption of the Council conclusions of 26 and 27 November 2000 on the essential content of the EUSD, it was nevertheless acknowledged that sticking to a formal definition of interest would not be effective and could lead to undesirable distortions of competition between direct and indirect investment in debt claims. Therefore it was decided to include in the definition not only income from debt claims (as in Art. 11 of the OECD Model Tax Convention on income and capital), but also interest income obtained through certain investment vehicles.
The original decision to exclude all innovative financial products from the scope of the EUSD (Council conclusions of 25 May 1999 and 26-27 November 2000) was for the same reasons accompanied by an express statement that the issue should be re-examined during the first review of the EUSD.
At present, the EUSD can be circumvented by rearranging financial affairs in such a way that income, whilst benefiting from limitations of risk, flexibility and an agreed return on investment equivalent to debt claims, remains outside the formal definition of interest. Therefore, as explained above in relation to Articles 1 and 2, it is proposed to redefine the scope of the EUSD to cover interest and substantially equivalent income deriving from securities that, from an investor’s viewpoint, can be regarded as equivalent to debt claims, because the risk is known and is not higher than that of debt claims.
In order to allow paying agents to identify instruments falling within this scope, leaving aside sophisticated solutions based on particulars frequently not known by the paying agents (such as the composition of the instrument or the link between its performance and income from debt claims), the proposed new point (aa) in Art. 6 extends the scope of the EUSD to those securities which are equivalent to debt claims because the investor receives a return on capital whose conditions are defined at the issuing date, and also receives, at the end of the term of the securities, at least 95% of the capital invested , regardless of whether the underlying assets behind those securities include debt claims.
At the same time, other refinements are proposed in relation to investment funds.
As regards investment funds established in the EU, Art. 6 at present only covers income obtained through undertakings for collective investment in transferable securities authorised in accordance with Directive 85/611/EEC (‘UCITS’), whose parts can be marketed in MS other than that of establishment. However, income obtained through undertakings and other collective investment funds or schemes lacking this authorisation (‘non-UCITS’) are in principle beyond the scope of the Directive, even if the non-UCITS have to be registered with and are subject to monitoring by the authorities of a MS. This income becomes relevant only when non-UCITS are entities without legal personality and therefore are ‘paying agents upon receipt’. In practice most of these non-UCITS without legal personality opt to be treated as UCITS. Their income then falls under Art. 6, unlike income from non-UCITS with legal personality.
The result is an asymmetry in treatment among ‘non-UCITS’. This is neither in the interest of the internal market, nor was it intended under the Council conclusions of November 2000. Therefore, it appears necessary to amend Art. 6(1)(c) and (d), replacing the reference to Directive 85/611/EEC with a reference to the registration of the undertaking or investment fund or scheme in accordance with the rules of any of the MS. This would result in the application of the same rules not only to all UCITS, but also to all non-UCITS, irrespective of their legal form.
As regards funds established outside the EU, it is at present not clear whether the term ‘undertakings for collective investment established outside the territory’ encompasses all investment funds irrespective of the regulation applicable and of how they are marketed to investors. Therefore, the EUSD should be amended to refine this definition according to the existing OECD definition of ‘collective investment fund or scheme’. This definition can be shared with countries outside the EU and can ensure that interest income channelled through these vehicles is treated appropriately.
It is also proposed to supplement Art. 6 i in order to clarify that both direct and indirect investment made by collective vehicles in debt claims and in securities must be considered when calculating the percentage mentioned in other paragraphs of this Article, in line with the Council conclusions of 12 April 2005.
In relation to the current EUSD definition of interest payment, some MS have called for a radical extension to cover any kind of investment income, but those views are currently not widely shared. As explained in the review report, the EUSD may not be the most suitable framework for improving cooperation between tax authorities on dividends or on capital gains from speculative financial instruments which do not provide substantial capital protection. Solutions based exclusively on exchange of information would also seem more appropriate for ensuring that neither double taxation nor avoidance of any taxation arise in relation to life insurance contracts and pensions, given the existing differences in the national tax regimes of contributions made to these instruments and of benefits arising from them. However, until such purely information-exchange-based solutions become fully operational under Council Directive 77/799/EEC of 19 December 1977 concerning mutual assistance by the competent authorities of the MS in the field of direct taxation i, it seems necessary to extend the scope of the EUSD to benefits from those life insurance contracts which can be directly compared to undertakings for collective investment, since their actual positive performance from which the benefits arise is fully linked to income from debt claims or equivalent income under the EUSD and since they provide no significant biometric risk coverage (lower than 5% of capital invested, expressed as an average over the duration of the contract).
Furthermore, the second subparagraph of Art. 6 i and Art. 6 i are amended to create conditions for reliable application of the home country rule . This is necessary to allow paying agents to correctly apply the EUSD to income arising from undertakings for collective investment established in other countries. Any options exercised by a given MS for its undertakings, together with the calculation of the percentages referred to in paragraphs 1(d) and 6 according to the implementing rules of that MS, are made binding on all the other MS.
The new paragraphs 9 and 10 of Art. 6 provide for ‘grandfathering’ provisions in two cases: First, income under Art. 6(1)(aa) will be included provided that the securities were first issued on or after the 1 December 2008. Second, benefits from life insurance contracts under Art. 6(1)(e) will be included provided that the contract were first subscribed on or after the same date. These provisions are needed to ensure that the securities and insurance contracts concerned are appropriately tracked by their issuers and by the insurance companies for correct treatment by the downstream paying agents.
A number of amendments are introduced in Art. 8 to improve the quality of the information reported.
First, in order to solve current uncertainties concerning the treatment of income from joint accounts and other cases of shared beneficial ownership, the paying agents would be explicitly requested to provide not only the identity and residence of all the beneficial owners concerned, but also details on whether the amount reported for each beneficial owner is the full amount, the actual share due to the beneficial owner, or an equal share.
A second amendment is aimed at reducing the administrative burden of the State of residence of the beneficial owner by overcoming the current limits of Art. 8 i, which do not ask the paying agent and the reporting MS to distinguish between amounts referring to the interest component of a payment and those referring to the full proceeds from a sale, redemption or refund of a security. It will also make it easier to measure the effectiveness of the EUSD.
Finally, the information to be provided by paying agents is adapted in accordance with the proposed amendments to Art. 2 and 6 of the EUSD.
The procedures for applying withholding tax during the transitional period are amended in accordance with the proposed amendments to Articles 4, 6, and 8 of the EUSD.
Art. 13 currently provides for two procedures for exception to the withholding tax: certificate and voluntary disclosure. The procedure allowing the beneficial owner to submit a certificate does not provide any directly usable detail to the State of residence of the beneficial owner and is less practical for him/her than the voluntary disclosure procedure. The additional burden put on the tax administration of the State of the paying agent by the application of the voluntary disclosure procedure is offset by the reduced burden on the State of residence of the beneficial owner. Moreover, the application of the certificate procedure can raise questions of compatibility with the free movement of capital, e.g. because it makes it difficult for an EU citizen who is tax resident outside the EU to avoid a withholding tax for which he cannot obtain a credit or reimbursement. It is therefore proposed to amend Art. 13 to only allow only the voluntary disclosure procedure.
The reference to the Annex with the list of related entities acting as a public authority or whose role is recognised by an international treaty has to be changed because of the introduction of new annexes .
The competent authorities of the MS are invited to provide the Commission with relevant statistics on the application of the EUSD, in order to improve the quality of the information for the Commission report to be presented to the Council every three years.
New Articles 18a and 18b are introduced to provide for procedures to adapt the lists included in the Annexes with the assistance of a committee. This committee on administrative cooperation for taxation will also assist in establishing the information to be contained in any central register of the identity and residence of beneficial owners which may be maintained by a paying agent having activities in different Member States (the possibility of having such register has been requested by some categories of market operators), lists of documents identifying the beneficial owners and a list of agreed data providers of the information necessary for appropriate treatment by paying agents of income deriving from collective investment vehicles or specific securities. Common formats and procedures for the exchange of information and common forms for certificates and other documents useful for the application of the Directive may also be established with the assistance of the committee. Reference is made in Art. 18b to the Council Decision of 28 June 1999 laying down the procedures for the exercise of implementing powers conferred on the Commission with the assistance of the committee.
The Annex in the current Directive becomes Annex IV and the following new Annexes have been introduced mainly in order to provide clarity to paying agents and to limit their administrative burden (Annex V is a list of statistics that will have to be made available by MS to the Commission in line with Council conclusions adopted on 26 May 2008):
5. Annex I: ‘List of legal forms of entities and legal arrangements to which Article 2 i applies if they are resident, because of the presence there of their place of effective management, within the territory of specific countries or jurisdictions’;
6. Annex II: ‘List of Member States attributing a tax identification number, at least on request, to any of the individuals who are resident for tax purposes within their territory, regardless of his or her nationality’;
7. Annex III: ‘Indicative list of ‘paying agents on receipt’ under the provisions of Article 4(2)’, and
8. Annex V: ‘List of items for statistical purposes’.
This Article lays down the timetable and the requirements for transposing the amending Directive into national law. The amendments will have to be applied within Member States’ territory from the first day of the third calendar year following the calendar year in which the Directive enters into force. National implementing rules should be adopted and publish sufficiently in advance to allow paying agents and the other market operators concerned to adapt their procedures by should be adopted and publish sufficiently in advance to allow paying agents and the other market operators concerned to adapt their procedures by the date of entry into application of the amendments.