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Impact of EU Savings Tax amendments on the B.V.I. BVI flag


Collective Investments

The savings tax only targeted UCITS because the EU Commission believed those were the only funds authorised for distribution to cross border EU residents. However became apparent that non-UCITS and Caribbean non-UCITS equivalent funds were being distributed such as hedge funds or adoption of home rules. Even more blatant tax avoidance occurred in countries like the Caymans and BVI which converted all their funds to non-UCITS equivalent purely to escape the savings tax. Therefore the amendments expand the definition of interest to include:
  1. Within the EU Savings tax territory: Undertakings for collective investment or other collective investment funds or schemes that either are:-
    • registered as such in accordance with the law of any of the countries party to the directive, or
    • have fund rules or instruments of incorporation governed by the law relating to collective investment funds or schemes of one of these States or countries.
    This applies irrespective of the legal form of such undertakings, funds or schemes and irrespective of any restriction to a limited group of investors of the purchase, sale or redemption of their shares or units.

  2. Outside the EU savings tax territory: Any collective investment fund or scheme established outside the directive’s territory. This applies irrespective of the legal form of that fund or scheme and irrespective of any restriction to a limited group of investors of the purchase, sale or redemption of its shares or units.

  3. Entities and legal arrangements similar to a UCITS can elect to be treated as a collective fund, such as a investment club. In this case the bank reverts back to be the Paying Agent.
Catch Funds
Indicative list of fund types added to the directive's scope

  • Luxembourg SICAV II, SICAR, SIF-SICAV
  • Ireland UCITS-III collective investments
  • Investment Company with Variable Capital / OEICs
  • Professional investors funds
  • Qualifying investors funds
  • Caribbean non-UCITS equivalent funds
  • Hedge funds
  • Private equity funds
  • Income trusts
  • Manged Futures Accounts which act like a mutual fund for more than one investor
  • Micro finance funds
  • Pooled private investment clubs
  • Mutual funds
  • Closed end funds
  • Unit trusts
  • Fonds commun de placement
  • Beleggingsvennootschap met vast kapitaal / PRIVAK
  • Exchange Traded Funds (ETF)
  • Real Estate Investment Trusts (REIT)
  • Listed investment company, etc.
.
Note: Collective investments not caught by the 25% threshold and if not taxed, are indeed candidates for:
  • Paying Agent upon receipt according to Article 4 Par 2, or
  • Look through entities or legal arrangements according to Article 2 Par 3, or
  • Some collective investments, notably ETFs, when marketed to private individuals and not held by financial intermediaries, might also be regarded as wrapper products found in Art 6 Par 1(aa), rather than investment funds


Entities and legal arrangements
Discretionary Trusts

It is estimated that 95% of trusts are discretionary, which to date have avoided the savings tax directive. The amendments will appoint the trust as Paying Agent Upon receipt with responsibilities to apply the savings tax provisions. The principal settlor will be deemed the beneficial owner, irrespective if the settlement is irrevocable. This concept is similar to a US grantor trust. If the principal settlor is not identifiable, e.g. deceased estate, then the trust must keep track of interest earned and apply the savings tax when a beneficiary becomes entitled to the payment within 10 years. Note that the use of a nominee settlor is looked through as per the EU money laundering directive. A nominee agent is regarded as a trust & company service" and is candidate to being a Paying Agent Upon Receipt to identify for whom they are acting for.
Legal entities

BVI companies managed within the EU savings tax territory, will become paying Agents Upon Receipt. In most cases, the EU resident is the management of the BVI company. The management will have to identify beneficial owners of the company according to the 3rd EU money laundering and anti terrorist financing directive PDF document.

  • The Beneficial Owner of a company is any shareholder who owns more than 25% equity of a company; or
  • alternatively it is the natural person who exercises control over the management of a legal entity:
  • Note the oldest trick in the offshore world of using nominees to either hold shares or act as a director will no longer be feasible. The money laundering directive states that nominees used to hold shares or act as management on behalf of a beneficiary, are themselves "trust and company service providers" and are consequently candidates to be Paying Agents Upon receipt.
      • In the event that a beneficial owner cannot be identified, then the principal contributor of assets giving rise to the interest is deemed to be the beneficial owner.

      If the principal contributor is not identifiable, then the company becomes a Paying Agent Upon Receipt and must apply the savings tax provisions on any beneficiary who becomes entitled to the assets within 10 years of the company's receipt of the income.

      Art 11(5) - Note that the Paying Agent must report payments to the BVI company if managed within the savings tax territory, irrespective of the eventual identity of the beneficial owner. If the entity / legal arrangement does not agree to having its information reported, then the Paying Agent must withhold 35% tax, irrespective of the eventual identity of the beneficial owner.
BVI company shareholders
Unhappy beneficial owners of BVI companies

Reporting on Payments to Paying Agents Upon Receipt
An unoticed but devastating clause of the directive is Article 11(5. If a BVI account held within the savings tax territory the bank must report on interest payments to any untaxed BVI entity / legal arrangement if it is managed in another savings tax territory, no matter who the beneficial owner is. In territories where banks may withhold interest, if the BVI company / trust does not agree on having its payments reported, the bank must withhold 35% tax, irrespective of who the beneficial owner is.

For instance, Switzerland paying interest to a BVI company managed in say Jersey must report the payment, even if the beneficial owner is say a Russian or Chinese resident! As Switzerland won't break banking secrecy, the Swiss bank must withhold 35% tax on a non-EU resident.
snitch


- EU Savings Tax Expert -
Although I regularly consult with the EU Commission, not all my interpretations of the directive have been confirmed by them.