Cross border tax reporting and changes to the European Savings Tax Directive
2005 created a landmark change for the tax status of offshore jurisdictions with the implementation of the EUSTD ( European Savings Tax Directive). It brought in the retention tax (upto 35% on interest) on offshore bank accounts or the exchange of information across European borders. Whilst most bank accounts in these offshore jurisdictions gave customers the option to share information or exchange information, others did not, namely Cyprus and Malta and therefore lost their previously tax efficient status. However, the implementation of this directive left open a loop hole for investors who wanted to continue to benefit from tax efficient investments. This continues to be the Offshore Life Assurance Bond or Personal Portfolio Bond. The wrapper ensures that the assets within the Bond are ‘rolled up’ gross and therefore do not generate any income. In this way and combined with the life assurance element meant that they fall into a loop hole created by the directive….until now. A raft of changes are being made to the directive and are likely to come into force in 2011 whereby any holder of an offshore life assurance bond will no longer be in control of the tax declaration when a chargeable event takes place. Now, it will be the responsibility of the company/life assurance company to report to the relevant authority when a potential tax liability has been made. These will be in the event of the policy coming to an end and the proceeds being paid out, partial surrender, death and where the ultimate beneficiary is resident in a different jurisdiction to that of the insurance company. It is likely that all foundations and trusts will fall under the Directive’s remit as well. So for anyone holding an offshore Bond and hoping to reduce tax liabilities, it might not be the best vehicle to do so when these changes take effect. It it unclear exactly what may happen but certainly some tax planning opportunities would seem to be required for a lot of people. Don’t get caught out and landed with large tax bills for previously undeclared assets.