EU Savings Tax Directive to be tightened up

Some might say, about time too. I know I do. Others will be concerned as to the impact this will have on offshore tax planning. Given how long it took to put the Directive in place in 2005 I somehow doubt that very much will change in the near future. And I think that's a shame.

Since 2005 the Directive has effectively required EU citizens to make a choice. They could either choose to invest in banking institutions that levy a witholding tax or agree to their interest income being reported so as to ensure that they pay the full tax that is due thereon. At least that was the theory.

The regime was intended to limit the opportunities for investors to avoid paying tax on interest income when investing 'offshore'. Many of the most popular offshore tax havens (whether inside or outside of the EU) had agreed to abide by the directive - either to comply with the information exchange (reporting) or the witholding tax option.

However, even before the Directive was adopted commentators and advisers recognised that it was full of loopholes. This effectively gave investors a further option. To invest offshore through trusts and corporate vehicles that were not covered by the Directive. The simple reason being that it currently only imposes an obligation to 'withold or report' where funds are deposited by individuals.

At its meeting on 2nd December, the European Council of Finance Ministers (Ecofin) expressed support for proposals by the European Commission (EC) to widen the scope of the legislation "with a view to closing existing loopholes and eliminating tax evasion."

The proposed amendment seeks to tighten the directive, so member states can tax more interest payments channelled through intermediate tax-exempted structures. The amendment would also extend the scope of the directive to forms of income obtained through investments in some "innovative financial products" as well as investments in certain life insurances products.

It is quite clear that the EU intends to close all of the obvious gaps in this Directive (and some less obvious ones). Once implemented the amended Directive will have far more teeth.

How long will it be before the amended Directive becomes operational and effective? I don't know but when that happens offshore tax planning will never be the same again.