For most British expatriates the three most critical centres are Jersey , Guernsey and the Isle of Man , but of course Switzerland , Dublin and other banking centres are also involved. It is worth back tracking a little to consider why Jersey , Guernsey and the Isle of Man are involved at all – they are not in the EU! they are not even part of the UK , they are Crown Dependencies and their postal address is for example Isle of Man , IM99 FG, British Isles rather than UK .

The EUSTD was in fact initiated with the deposit takers of the EU in mind, however it was very apparent that if the Crown Dependencies and Switzerland etc did not join the club, there would be a rapid and considerable flight of capital to those areas, effectively negating the intentions of the directive. Eventually after various pressures, subtle and otherwise, were applied the Crown Dependencies and Switzerland agreed that in the interest of good relations they would voluntarily comply with the directive.

This then brings us to the question ‘what is the EUSTD?’ The original intention was that there would be full disclosure, Exchange of Information, on an automatic basis. That is that if a client of a bank, building society or deposit taker had an address in another EU country then full information regarding that client’s name address and interest earned would be automatically passed to the tax authorities of the country of which the client was resident. A number of issues, particularly client confidentiality, made this a bitter pill to swallow and an interim measure ‘withholding or retention tax’ was proposed. This gave deposit takers the option of applying a withholding tax instead of making full disclosure. Switzerland favoured this option as did the Isle of Man , the Channel Islands initially opted for full disclosure. More recently, and after the delay in implementation from the 1st January 2005 until 1st July 2005 , three EU centres have also opted out of disclosure in favour of withholding tax and the Channel Islands have followed suit.

So, assuming there is no further delay, which seems unlikely, from 1st July 2005 the Crown dependencies along with Switzerland and three of the EU members will apply withholding tax to all interest paid to any account for which the account holder has an EU address. For the first three years this will be at 15% rising to 20% for a further three years. All the other EU members will make full disclosure on the same basis. 25% of the withholding tax will be retained by the authorities of the centre in which the account is held and the balance will be passed on to the country of which the account holder is resident. On the 1st July 2011 this will increase further to 35% where it will remain until an agreement is reached for automatic exchange of information.

If the account number wishes to continue to receive gross interest they will need to advise their deposit taker that they wish to agree to Exchange of Information in which case all information regarding income received from savings and deposits will be passed automatically to the tax authorities in the (EU) country of which the account holder is resident for tax purposes.

It is worth remembering that once withholding tax has been paid it cannot be recovered (although it can be set against tax due if a certificate is obtained). If you do not live in the EU but use an EU address for correspondence from your bank then you should make them aware of the fact and will probably need to produce documentary evidence.

There are still a number of alternatives that fall outside of the scope of the EUSTD and which completely legally can avoid the need to suffer withholding tax or be involved in disclosure, indeed which, equally legally, are not even taxable in most circumstances -- so do investigate your options.

Ross Pays is the Chairman of The FAA based in Cyprus. FAA offer advice on wills, tax registration services, home, health and car insurance and tax planning, including Inheritance Tax Planning, together with full accounting services.

Visit Ross Pays website at www.rosspays.com, Telephone 00 357 25 82 58 76, Fax 00 357 25 33 35 93 or e-mail ross@rosspays.com
Initial consultations are free and no obligation and fee quotations will be provided in advance for all services.