Our recent post provides a summary of the domestic,
international and Union legislative developments, which significantly concern
both the obligations of the banking sector and the question of taxation of the
savings of domestic investors across Europe.
Changes can be expected in connection with the Directive 2003/48/EC on taxation of savings’ income in the form of interest payments, the so called Savings Directive (hereinafter: „Directive”), which entered into force on July 1, 2005 with the aim to enable the savings income in the form of interest payments made in one Member State to beneficial owners who are individuals resident in another Member State to be made subject to effective taxation, its promotion and supervision.
For the fulfilment of the above, the Directive prescribes automatic reporting obligation to the source country, namely to the country of interest payment for the purpose of promotion and supervision of tax liability, in which information exchange all member states participate with the exception of Austria and Luxemburg. According to the notification of Luxemburg, as of January 1, 2015 it will switch to automatic exchange of information, hence as of that date only one member - Austria –insists on the institution of bank secrecy.
However, it is important to mention that except of the member states of the European Union, 5 European countries (Switzerland, Lichtenstein, San Marino, Monaco and Andorra) and severaldependant or associated territories (Guernsey, Jersey, Netherlands Antilles, Aruba, Anguilla, British Virgin Islands, Cayman Islands, Montserrat) also take part in the exchange of information or in the imposition of withholding tax.
iii) he acts on
behalf of another individual who is the beneficial owner.
The determination of the beneficial owner private
individual’s tax residency and identity happens through various special rules
according to whether the contractual legal relation serving as a base for the
payment, was established before or after January 1, 2004. Accordingly:
Member state using withholding tax retains 25% of the income – for administrative costs –and is obliged to transfer 75% to the member state of the beneficial owner.
Exemption from the withholding tax procedure
Changes can be expected in connection with the Directive 2003/48/EC on taxation of savings’ income in the form of interest payments, the so called Savings Directive (hereinafter: „Directive”), which entered into force on July 1, 2005 with the aim to enable the savings income in the form of interest payments made in one Member State to beneficial owners who are individuals resident in another Member State to be made subject to effective taxation, its promotion and supervision.
For the fulfilment of the above, the Directive prescribes automatic reporting obligation to the source country, namely to the country of interest payment for the purpose of promotion and supervision of tax liability, in which information exchange all member states participate with the exception of Austria and Luxemburg. According to the notification of Luxemburg, as of January 1, 2015 it will switch to automatic exchange of information, hence as of that date only one member - Austria –insists on the institution of bank secrecy.
However, it is important to mention that except of the member states of the European Union, 5 European countries (Switzerland, Lichtenstein, San Marino, Monaco and Andorra) and severaldependant or associated territories (Guernsey, Jersey, Netherlands Antilles, Aruba, Anguilla, British Virgin Islands, Cayman Islands, Montserrat) also take part in the exchange of information or in the imposition of withholding tax.
I. What persons and incomes
are affected by the change?
The scope of the Directive extends to economic actor
figuring as paying agent and to the so called beneficial owner private
individuals, who receive interest income. The Directive does not pertain to
legal entity or to organization other than legal entity receiving interest
payment through legal arrangements, and neither to private or legal persons
having residence in third countries. Thus its provisions may only and have to be
applied to the interest payments of paying agent resident in the territory of
the member states.
The scope of this Directive should be limited to
taxation of savings income in the form of interest payments on debt claims, to
the exclusion, inter alia, of the issues relating to the taxation of
pension and insurance benefits.
II. Who qualifies to be
beneficial owner private individual?
Beneficial owner means any individual, being
resident in another member state, who receives an interest payment or any
individual for whom an interest payment is secured, unless he provides evidence
that it was not received or secured for his own benefit. An exception is made
therefore, if the private individual acts as
i) paying agent,
ii) he acts on
behalf of a legal person, an entity which is taxed on its profits under the
general arrangements for business taxation, organization qualifying to be European
investment fund, or company qualifying to be paying agent, or
1.
For contractual legal
relations established before January 1, 2004it may be determined bythe rules of the country of the
paying agent’s residency, and upon the information available according to the
Directive 91/308/EGKon the prevention of
money laundering.
2.
In case of contracts
concluded on or after January 1, 2004the paying agent stipulates the name, address, further
the tax identification number of the beneficial owner, which he determines upon
the passport or official identity card. If the tax identification number does
not figures in the passport or official identity card presented by the
beneficial owner, the identification must be supplemented by the beneficial
owner’s birth place and date.
III. What shall be deemed
interest according to the Directive?
According to the Directive, interest shall mean:
·
interest paid
relating to debt claims of every kind, in particular, income from government securities
and income from bonds or debentures,
·
interest accrued or
capitalised at the sale, refund or redemption of the above claims,
·
investment companies’ payments
having interest character,
·
income realised
by the sale, refund, redemption of the shares or units of the investment
undertaking, if the undertakings and organizations invest more than 25% of
their available assets directly or indirectly into claims realising interest
income.
IV. How does the provision
of information and the exchange of information proceed?
The paying agent is obliged to provide information
pertaining to interest payments, which information the paying agent’s member
states’ authority is obliged to send to the member state of the beneficial
owner. This information must in all cases contain the following:
·
identity and residency of
the beneficial owner,
·
name and address of the
paying agent,
·
bank account number of the
beneficial owner, in the lack of this the legal base of the interest payment,
and
·
information referring to the
interest payment.
V. Imposition of withholding
tax or provision of information?
We call the attention that, if the residency of the
person receiving the income differs from the member state of the paying agent,
thus the Luxemburg and Austria is obliged to deduct 35% withholding tax from
the income. The two member states applying the imposition of withholding tax
does not forward information about the paid interests, nevertheless, they
receive such information from other member states concerning their own
citizens!
As of 2010 Belgium has converted to providing data,
thus it does not apply withholding tax anymore.
Share of the income Member state using withholding tax retains 25% of the income – for administrative costs –and is obliged to transfer 75% to the member state of the beneficial owner.
Exemption from the withholding tax procedure
Article 13 of the Directive ensures an opportunity
that the beneficial owner may request exemption from the withholding tax,
namely request not to impose withholding tax on the incomes. This exemption may
be realised in two ways:
·
The beneficial owner
authorizes the paying agent to provide information in connection with the
payments fulfilled on behalf of him,
·
Presents the paying agent
one certificate issued by the tax authority of his member state to his own
name, in which it acknowledges himself as beneficial owner for the itemized
investments.
VI. What does the above
mean at national level?
Hungary applies the Directive since its entry into
force, it has been implemented by the Schedule
No. 7 to Act XCII of 2003 on the Rules of Taxation (hereinafter: the „Art.”)
on the disclosures on interest payments.
The automatic exchange of information is dealt by the Central
Contact Office of the National Tax and Customs Authority, which annually
forwards the information received from domestic paying agents to the tax
authorities located in the member state of the beneficial owners. The Art
provides same definition for the interest payments belonging to the scope of
information providing obligation as the Directive.
Who is the paying agent?
Paying agent is the legal person, business association
lacking the status of legal personality, or other organization, which directly
pays or secures interest to the beneficial owner being resident in another
member state of the European Union.
The person obliged to provide information communicates
electronically to the tax authority the name, address of the organization and
the amount of the interest paid to it until March 20thof the following
tax year, except when the person receiving the payment provides credible
evidence that the legal person, or the person subject to corporate tax in it’s member
state of residence or operates as European Investment Fund, or qualifies to be such
fund based on the certificate issued by the authority of the member state of
its residence.
Certificate about taxation may be requested by filling
out the application form No K07, which the tax authority issues in Hungarian
and English free of charge within two months.
Interest income according
to the national legislation
According to the Schedule 7 of the Art., it is the
amount, which the person obliged to provide information pays to transparent
organization, this concept, however, does not match with the notion of interest
income stipulated in the Act CXVII of
1995 on the personal income tax (hereinafter: the „Szja. Act”).Furthermore,
it is important to mention that the notion of interest does not include the
interest due to delayed fulfilment.
Can the withholding tax be
claimed back?
According to the domestic procedural rules governing
the refund of withholding tax, the withholding tax deducted and transferred by
the member state imposing withholding tax arrives to the national tax
authority’s separate account.
Within 30 days following the crediting on the account,
the tax authority attributes the transferred tax on the account of the
beneficial owner.
In case of interest income obtained following the day
of 1 September, 2006, the accounting of deducted withholding tax happens upon
the request of the taxpayer (according to section 14-15 of the Schedule No. 7
of Art.14-15.).
In case certain Hungarian resident private individual
would like to be exempted from the withholding tax, it may happen based on the
two procedures ensured by the directive.
Hungarian resident beneficial owners may require the
certificate about the non-deductibility of withholding tax at the territorially
competent tax authority. The certificate is issued by the tax authority free of
charge for a period not extending 3 years.
Practical example is when a German tax resident
private individual receives interest income upon his Hungarian bank deposit.
The interest income is taxable in Germany. If the German private individual has
certified his/her residency at his /her Hungarian bank, the bank will not
deduct tax, but it will provide information to the Hungarian tax authority, which
within the framework of automatic exchange of information will forward the
information to the German tax authority.
VII. Conclusion
As pointed out above, the aim of the Directive is foremost
to hinder the concealment of income through the exchange of interest in a
manner that it informs the state of the private individual about the creation
of the income. By the creation of the Directive, the taxation of interest
income happens on the basis of a three level – national, international, union –
regulation. The Treaties on the avoidance of double taxation determine where
the interest income is taxable. Based on the Treaties this is mainly the state
according to the residency of the beneficial owner, but besides, certain
treaties allow the imposition of withholding tax in the limited amount. Thus
for example based on the Hungarian-Polish Treaty the interest can be taxable in
the source country by the amount of 10%.
In summary, the inner relationship of the regulations
may be defined as follows: the tax treaty regulates where the tax income is
taxable, the national regulation how is it taxable, and the aim of the
Directive is to ensure the taxation according to the provisions of the tax
treaties. Nevertheless, it is important to note that in spite of the above the
Hungarian regulation – according to the Section65.§ (3) ab) of the Szja. Act –
withdraws from the scope of taxation the income, in connection of which the
Schedule No. 7 of Art. prescribes information providing obligation.
The European Committee puts the Directive under
constant development, as a result of which on March 14, 2014 the EU Council
adopted on political level the proposal on the extension of the Directive the
rules of the extended Directive will be applicable as of January 1, 2016. In
practice this means that the enhanced monitoring and analysing of the regulation
is indispensable both for the banking sector and from the side of the
investors.
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