What is the European Union Savings Tax Directive (EUSD)?
The aim of the EUSD is to ensure the effective taxation of cross-border savings income (the scope of the EUSD currently excludes life assurance and capital redemption contracts) which is achieved by introducing an exchange of information between Member States of the European Union (EU). In simple terms, it is cross-border tax reporting. In some jurisdictions it is possible to withhold tax. The rate of witholding tax since 30 June 2011 is 35%.
Who does the EUSD apply to?
The EUSD is mandatory for all EU Member States. It also applies to independent territories of EU Member States (such as the Isle of Man (IOM) and the Channel Islands) and any other countries who agree to it. Other countries currently include Andorra, Monaco, San Marino, Liechtenstein and Switzerland. In this document, we will refer to these countries collectively as the ‘relevant jurisdictions’.
Why is the EUSD being reviewed and what is the purpose of the review?
The European Commission must report on the operation of the EUSD every three years and, if necessary, propose any amendments that may be required in order to better ensure effective taxation of savings income, and to remove any undesirable distortions of competition.
The review of the EUSD is likely to close what are seen as existing loopholes with a view to preventing fraud and tax evasion linked to cross-border financial services, such as the highly publicised fraud cases involving EU residents and foundations in Liechtenstein.
The full impact of the proposed amendments will not be known until the amendment is approved by the Council of Ministers, and incorporated into national legislation. The suggested changes to the EUSD do not have a direct effect on intermediaries or their clients.
The proposals directly affect insurers by imposing reporting obligations on them, as at 2 February 2012 no political agreement has been reached and so deliberations will continue to be made on this and other tax related issues. However, it is envisaged that the amendments will be finalised before June 2012.
The proposal is to extend the definition of ‘savings income’. Several definitions have been proposed. However, it is clear that all of these revised definitions would include investment-linked life insurance policies and capital redemption contracts. This means all life insurance companies resident in relevant jurisdictions to include EU and dependant territories will have an obligation to report to the ‘competent authority’, expected to be the tax authority. For example, in the UK this could be HM Revenue & Customs (HMRC), when:
(i) the contract comes to an end*; and where
(ii) the ultimate beneficiary** is resident in a different relevant jurisdiction to that of the life insurance company.
It appears that all financial planning structures such as trusts and foundations will fall within the remit of the EUSD.
The obligation for tax reporting lies with the ‘paying agent’. For life insurance and capital redemption contracts which are not subject to trusts, the paying agent will be the life insurance company.
The inclusion of trustee held investments for all types of trust (which are common in life insurance contracts from common law jurisdictions such as the United Kingdom and the IOM) means that further consideration needs to be given to who the paying agent would be for such business.
This is unclear in the current proposals and may not be resolved until the Directive is implemented.
*For life insurance and capital redemption contracts, a contract comes to an end on full surrender, maturity or death of the relevant life assured.
**For life insurance contracts and capital redemption contracts, the ultimate beneficiary will usually be the policyholder. However this may not be the case where trusts/foundations or nominations have been used.
Are Old Mutual or Skandia affected by the proposals?
Based on the location of our life insurance companies and branches, the following companies/branches are affected where they are regarded as the paying agent and the policyholder or beneficiary, if different, resides in another relevant jurisdiction, unless the business is otherwise exempted. For example, Skandia Leben (Liechtenstein), which was a closed book of business before the effective date of the EUSD:
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OMI Guernsey (Guernsey)
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Royal Skandia Life Assurance Limited (IOM)
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Royal Skandia Trust Company (IOM)
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Skandia Life Assurance Company Limited (UK and the Finland branch)
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Skandia Life Ireland Limited (Dublin)
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Skandia MultiFUNDS Assurance Limited
For example, if a policyholder took out a Royal Skandia or Skandia Life life assurance policy while resident in the UK, but was resident in France when it was fully surrendered, then this would need to be reported under EUSD.
Who or what is excluded from tax reporting under the proposals?
It is important to remember that the Directive only applies cross-border however life offices may not have to report where there is an existing reporting mechanism in place with the relevant jurisdiction and where the ultimate beneficiary is resident. For example, Royal Skandia has an obligation to report some chargeable events to HMRC in the UK where the policyholder is UK resident. Royal Skandia, in this situation, would not be obligated to report under the EUSD.
The exemption would only apply if the various relevant jurisdictions implement them into their local laws, in the above example, the IOM
It appears that life assurance policies and redemption contracts to be caught within the new proposals except where the contract is:
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pension of fixed annuity for at least five years; or
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benefits paid solely in respect of death or disability or illness: or
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where the ultimate beneficiary is not an individual or is not an EU resident; or
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where contracts started before the effective date of the EUSD.
The exemptions would only apply if the various relevant jurisdictions implement them into their local laws.
What is the impact on Old Mutual, Skandia and its policyholders?
The EUSD has no impact on the current reporting requirements of policyholders or beneficiaries, where the beneficiary is different from the policyholder. The proceeds from the life assurance or capital redemption contract may be subject to tax in their country of residence. Any tax due will result from the termination of the contract and not because of the provisions implemented as a result of the EUSD.
Because the EUSD is being implemented into national law in countries such as the IOM and Guernsey, life assurance companies established in those jurisdictions will have an obligation to report, where necessary.
Who will life insurance companies report to, and what do they need to report?
All life insurance companies will have to report to their competent authority. This authority is responsible for forwarding all reports to the competent authority where the ultimate beneficiary is resident.
For example, Mr Jones is resident in Cyprus and has a policy with Skandia Life Ireland (SLIL). SLIL would forward its report to the Irish Revenue, who in turn would send the report to the Inland Revenue department of the Cypriot Government.
When will the amended directive become law and when does it take effect?
The amendments were due to be adopted during 2010 with implementation into local law scheduled by 1 January 2011. However, because Member States have been unable to agree on the proposed changes it is unclear when the changes will be adopted, if at all.
The information provided in this article is not intended to offer advice.
It is based on Skandia's interpretation of the relevant law and is correct at 2 February 2012. While we believe this interpretation to be correct, we cannot guarantee it. Skandia cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained in this article.