2014. April 19.

Bank secrecy no longer provides protection?

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.

  1. 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.

  1. 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

  1. i) paying agent,
  2. 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

 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:

  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.
  1. 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.
  1. 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.
  1. 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.
  1. 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.

In case you would like to receive more information on the above, please do not hesitate to turn to us and the professionals of our Law Office will remain at your kind disposal.

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