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What is a Paying Agent Upon Receipt?
The most profound change of the EU Savings Tax Directive is the introduction of the Paying Agent Upon Receipt. The EU Commission amendment proposal  introduction describes on pages 4 - 6 regarding changes to Art 4 - Paying Agent - why Paying Agent Upon Receipt was introduced.
A Paying Agent Upon Receipt is defined in Article 4(2) as:- An entity or a legal arrangement which has its place of effective management within a Member State and which is not subject to effective taxation under the general rules for direct taxation applicable either in that Member State, or in the Member State where it is established, or in any country or jurisdiction where it is otherwise resident for tax purposes, shall be considered to be a paying agent upon receipt of an interest payment or upon securing of such payment.
| EU Commission commentary | Remarks |
Not all territories recognise a residual entity as being last in chain of payments to an individual:
The European Banking Federation has raised concerns about exceptional cases of passive receipt or passive payment, where the general principle that the Paying Agent is the last intermediary in the chain may not be consistently applied by all Member States. At present, there is no common guidance regarding concepts of passive receipt or passive payment. This can lead to duplication of tasks or to situations where none of the economic operators involved is considered the paying agent. In order to avoid this, a change is proposed to require Member States to take appropriate measures to ensure that paying agents’ responsibilities in respect of the same interest payment do not overlap. | Loophole: For example, Switzerland did not incorporate any aspect of a Paying Agent being intermediary entity or legal arrangement, sometimes referred to as a residual entity. This allowed all trusts, IBCs and foundations to escape the savings tax.
Look through concept: Furthermore, in line with the proposed amendment to Art. 2 (Beneficial Owner) in relation to the application of the look-through approach to payments to certain entities and legal arrangements established in countries outside the EU, it is clarified that a payment made or secured for the immediate benefit of an entity or legal arrangement listed in Annex I shall be deemed to be made or secured for the immediate benefit of the beneficial owner, as defined in the EU Money Laundering directive, of the entity or legal arrangement. Therefore Paying Agents Upon receipt can look through their own structure when identifying the beneficial owner. |
Explicit list of Paying Agent Upon Receipt:
The concept of Paying Agent Upon Receipt, contained in the original savings directive par 2 - 5, seems to have generated uncertainty and needs to be developed further. As explained in relation to the proposed amendments to Art. 2, an extension of the look through approach to all the entities established in the EU Member States seems to be disproportionate.
However, the lack of alternative mechanisms covering payments to untaxed intermediate structures within the EU could encourage individuals to make extensive use of intermediate structures to circumvent the EU savings tax directive. Recent cases show that, where the Paying Agent Upon Receipt concept is not consistently implemented, room is left for abuse and distortions. | The extension of Paying Agent Upon Receipt to all entities would create too much information flow. Therefore the definition of interest only applies to untaxed entities within (via Paying Agent Upon Receipt) and outside (look through by paying agent) the EU.
Rather than abandoning the Paying Agent Upon Receipt, the concept has to be clarified to ensure consistent application. The proposed amendment aims at moving from the present main focus on the upstream economic operator paying interest to the entities concerned, to an approach based on a positive definition of the intermediate structures obliged to act as a paying agent upon receipt. |
Indicative list of Paying Agents upon receipt:
In order to avoid market distortions, the new definition of the structures acting as Paying Agent Upon Receipt is based on substantive elements rather than on their legal form. The proposed amendment favours a definition including all entities and legal arrangements which are not taxed, at least on that part of their income arising to their non-resident participants, under the general rules for direct taxation applicable in the Member State where the entity or legal arrangement has its place of effective management and can be considered to be established/ resident.
However, the list is not exhaustive for the Member State. Member States should take the necessary measures to ensure that all entities and legal arrangements other than those listed under (a), (b), (c) and (d) above, which are not taxed under the general rules for direct taxation and have the place of effective management on their territory act as paying agent upon receipt, regardless of whether these entities and legal arrangements are included in the list of Annex III or of the information actually received from foreign upstream economic operators. |
Exemptions:
Only the following entities and legal arrangements are excluded:- Investment funds covered by Art. 6 of the EUSD;
- Pension funds and assets relating to life insurance contracts;
- Entities and arrangements set up exclusively for charitable purposes;
- Cases of shared beneficial ownership to which interest payments are made by an economic operator that has identified all the beneficial owners.
A positive list, including entities and arrangements to be considered as paying agents upon receipt in each Member State, is introduced as Annex III. The proposed new Art. 18(b) provides a procedure for amending the Annex. |
Option to not be a Paying Agent Upon Receipt:
An entity (not a legal arrangement) which is a Paying Agent Upon Receipt, which is similar to an undertaking for collective investment or collective investment fund or scheme shall have the option of being treated for the purposes of this Directive as such an undertaking, investment fund or scheme.
Where an entity exercises that option, the Member State in which it has its place of effective management shall issue a certificate to that effect. The entity shall presentthat certificate to the economic operator making or securing the interest payment. The economic operator shall in that case be exempted from the Paying Agent Upon Receipt obligations. Member States shall lay down the detailed rules concerning this option for entities which have their place of effective management in their territory, with a view to ensure the effective application of this Directive. | In this case, the bank making the payment to the entity, reverts back to being a Paying Agent. |
Determining beneficial owner:
The sequential order in determining a beneficial owner by a Paying Agent Upon Receipt is as follows:-- Individual immediately entitled to assets or income
- Principal contributor, directly or indirectly, of the assets which gave rise to the interest payment.
- Paying Agent Upon Distribution applying the savings tax provisions on any beneficial owner who becomes entitled to the payment within 10 years.
or the Paying Agent can opt to be treated as a UCITS, with the bank reverting back to being the Paying Agent.
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Art. 1(a) - Definition of terms relating to Paying Agent Upon Receipt- Place of effective management of an entity, with or without legal personality, shall mean the address where key management decisions are taken that are necessary for the conduct of the entity’s activity as a whole. Where key management decisions are taken in more than one country or jurisdiction, the place of effective management shall be considered to be at the address where most of the key management decisions are taken relating to the assets producing interest payments within the meaning of this Directive;
- Place of effective management of a trust or other legal arrangement shall mean:
- The permanent address of the natural person who has the principal responsibility for the key management decisions relating to the assets of the legal arrangement, in the case of a trust the trustee. Where more than one natural person has such principal responsibility, the place of effective management shall be considered to be at the permanent address of the person who has the principal responsibility for most of the key management decisions relating to the assets producing interest payments within the meaning of this Directive, or
- The address where the legal person, who has the principal responsibility to manage the assets of the legal arrangement, in the case of a trust the trustee, takes the key management decisions relating to these assets. Where key management decisions are taken in more than one country or jurisdiction, the place of effective management shall be considered to be at the address where most of the key management decisions are taken relating to the assets producing interest payments within the meaning of this Directive
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| Example: Liechtenstein Foundation Holding Assets through a company | Who is a Paying Agent Upon Receipt?
A Paying Agent Upon Receipt is an untaxed entity / legal arrangement managed from within the EU savings tax territory who secures or makes an interest payment to a beneficial owner resident in another territory.
 | Bank to inform authority on payments to Paying Agent Upon Receipt:
Any economic operator established in the savings tax territory who makes an interest payment to, or secures such a payment for, an entity or a legal arrangement which has its place of effective management in the savings tax territory other than the State where the economic operator is established, shall inform the competent authority of its State of establishment the :-- the name of the entity or legal arrangement;
- its legal form;
- its place of effective management;
- the date of the latest interest payment;
- the total amount of the interest payment; made to, or secured for, the foundation;
| Foundation holds assets using a BVI or Panama company it controls
- The Swiss bank is the economic operator securing for the BVI company
- The economic operator is supposed to inform the competent authorities that a payment is being made to an untaxed entity or legal arrangement (BVI or Panama company) managed within the savings tax territory (Liechtenstein). As Switzerland won't exchange information, the economic operator must then apply the savings tax provisions. As the Swiss bank will not be able to determine the beneficial owner of a foundation, no savings tax will apply at this point.
- The BVI or Panama company's management in Liechtenstein secures interest on managed by the the Liechtenstein Foundation. The Liechtenstein Foundation is hence the Paying Agent Upon Receipt.
- The Foundation will apply the savings tax, with the principal contributor being the beneficial owner.
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