A method of tax avoidance that was very common prior to the ESD was that cash was simply held abroad to accumulate in foreign bank accounts. However it is more than likely that this income from interest was not being declared in EU citizen's home countries so was actually tax evasion rather than tax avoidance. The ESD has changed this but in most cases just caused cash to be moved rather than taxed. The European Savings Tax Directive (ESD) was a "body blow" to some EU residents that had offshore bank accounts earning interest in other EU countries. This directive was issued on the 1st July 2005 and was an agreement for EU member states to automatically exchange financial information on the citizens from one member state who had bank accounts in their country with the tax authorities of the home state of the citizen with the account. This was previously confidential information and could not have been foreseen by EU citizens when those opening foreign bank accounts. If an EU citizen had been earning interest abroad and not declaring his or her tax return, at the very least the HMRC was going to be asking for the tax on the interest plus penalties. The other perhaps more serious issue that this brought up was how and where had the income been initially derived and had that original income been taxed in the first place? At the time, 3 member states decided to use an alternative system that did not give the account holder's name but just deducted the withholding tax at source and transferred this to the Country where the account holder lived. This meant that anonymity was preserved for those EU citizens to whom this applied to but the tax avoidance benefits of having foreign bank accounts was devalued. This withholding tax has risen in 2005 from 15% to 35%, which is a substantial amount of the earnings on interest. The breakdown of countries that have opted for each method as follows: Withholding Tax Option Channel Islands Isle of Man Belgium Luxembourg Austria British Virgin Islands Turks and Caicos Switzerland Andorra Monaco Liechtenstein San Marino Exchange of Information Option UK Ireland France Germany Italy Spain Portugal Greece Sweden Finland Denmark Cyprus Czech Republic Estonia Hungary Latvia Lithuania Malta Poland Slovakia and Slovenia Anguilla Cayman Islands Montserrat Avoiding the ESD With some informed tax planning it has proved to not be too difficult to avoid the ESD and some of the methods of achieving this are listed here. UK Non Domiciles If you were not born in the UK but now live there, you are classified as a "Non Dom". You may be a citizen of the UK or resident of the UK but you are not domiciled in the UK unless you choose to change that. Those who are Non Doms are not taxed on their foreign income unless they remit it back to the UK. This means that tax on foreign bank accounts is not payable. However since the 2008 Finance Act, if a Non Dom has been resident in the UK for 7 out of the last 10 years he or she must pay £30,000 pounds in tax in order to claim the remittance basis. This means that any foreign income under approximately £100k is taxed as if it were being remitted back to the UK anyway. Other Methods of Avoiding the ESD Firstly you can send your cash to a country not covered by the ESD such as Labuan, Panama, Hong Kong, Singapore, America, the Bahamas, Bermuda, Antigua, St Kitts and Nevis. Since the implementation of the ESD there has been a flood of cash to Singapore and Hong Kong. You can become a Non-EU resident and invest your cash anywhere you like without the ESD being applied. The ESD only applies to individuals and not companies. Therefore you could use an offshore or even an onshore company to hold your bank account. A common tax structure that is often applied is that you could use an offshore trust owned by an offshore trust or offshore foundation to hold your accounts. The ESD applies only to interest payments. This is written so as to include all forms of debt claims. This would therefore include Government Securities, Bonds or Debentures, Accrued and Capitalised Interest. However the ESD does not apply to dividends from shares or capital gains. Therefor investment in overseas equities as opposed to cash will fall outside the ESD. An Investment Bond with an offshore insurance company would also fall outside the scope of the ESD. Therefore the ESD has really only caused cash around from one jurisdiction to another although tax authorities have made some gains from the new legislation. As you can see with good tax planning and subsequent tax avoidance measure, it can be quite simple to avoid the effects of the ESD. In the future there have already been proposals to tighten up the ESD with a greater exchange of information between EU tax authorities and to alter the definition of which investments that the ESD will apply to. Jason Russell is a consultant with The Tax Experts, a UK based firm that specialises in UK Tax Avoidance Schemes and Tax Planning. The firm offers income tax planning, capital gains tax advice, corporate tax planning, inheritance tax planning and avoiding stamp duty and land taxes on residential and commercial property purchases.
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