A:  The EU Directive on Taxation of Savings Income (the Savings Directive) will come into force on 1 July 2005 .  

Introduction

The EU Directive on Taxation of Savings Income, commonly known as the Savings Directive, will come into force on 1 July.  

This Directive 2003 / 48 / EC that was adopted in Council on the 3 June 2003 refers to taxation of all income accruing on savings.  However, there are two other Directives that are related to it, viz.

(a)                Directive 2004 / 66 / EC of the 26 April 2004 , on the free-movement, among others, in the field of taxation after the accession of the 10 new member states, among them Malta , to the EU last May;

(b)               Directive 2004 / 587 / EC of the 29 July 2004 on the coming into force of the first Directive mentioned above.  

Coming into force

At the ECOFIN Council meeting of the 12 April 2005 it was agreed that once all third countries would be ratifying this Agreement by the end of next June – the EU Directive on Taxation of Savings Income would come into force on 1 July 2005 .  

Objective of this Directive

Savings income, in the form of interest payments, made in the Member State of the beneficiary owner, by a paying agent in another Member State will be subject to tax according to tax laws in the former Member State .  

What it means

As on 1 July 2005 , EU Member States and third countries must take all necessary measures for the implementation of this Directive – among them full cooperation for the transfer of information which will be mandatory on all those paying agents, irrespective of the location of the investment on which interests are being transferred.

This can be made either

(1)               through an automatic transfer between the Member State of the paying agent and of that beneficiary owner, or

(2)               on the basis of transition provisions the paying agency shall retain at source a withholding tax on such transfer payments which savings income are included.  

The Directive applies to all income on savings paid by a paying agency in a Member State under the EU Treaty and in a third country that is a signatory to this directive.  

The Directives applies to all savings income arising from:

-         Savings deposits;

-         Corporate and Government Bonds;

-         Other negotiable securities.  

Interests cover all interests paid or capitilised, and include all calculated interests that accrues up to the date of transfer or maturity of the bond where interests are normally paid together with the principal (Zero-Coupon Bond).  

The Directive also covers all interests resulting from indirect investment via a Collective Investment Undertaking or investment funds that are managed by a fund manager who places various investments made with him into various assets under defined risk criteria.  

The Directive, however, excludes all income arising from payments of pensions or insurance benefits.  

How the exchange of information will work

When a beneficiary owner is resident in a Member State that will be other than that of the paying agent, the Directive mandates the paying agent to report to the Competent Authorities in his Member State to transfer information on:  

-         the identity and residence of the beneficiary owner,

-         the name and address of the paying agent,

-         the bank account of the beneficiary owner, or

-         in the absence of such bank account, all information about the investment on which interest is paid, as well as all other relevant information.

Moreover, other information must be transferred on the interests being paid by the paying agent according to the specific categories as drawn up in the same Directive.  However Member States, may restrict this information to the total amount of interest paid and to the total income deriving from the redemption on the date of maturity.  

The competent authorities in the Member State of the paying agent must communicate, at least once a year, within six months from the close of the fiscal year in the same Member State , all information to the competent Authorities where the beneficiary owner is resident.  

The transitory provisions of the Withholding Tax.

The Countries that would be applying the transitory provisions, instead of exchanging information will retain withholding tax as follows:

-         15% in the first three years (2005 – 2007),

-         20% in the next three years (2008 – 2010), and

-         35% after 2011.  

With regard to the distribution of their withholding tax, the Directive provides that all Countries that are withholding it will retain 25% of all receipts at their end and will transfer the remaining 75% to the Member State where the beneficiary owner is resident.  

With regard to double taxation, the Directive provides that the Member State where the beneficiary owner is resident, and therefore where he normally pays his tax dues, should ensure that tax is not paid more than once when applying the withholding tax rates.  

Countries providing for the exchange of information

All EU Member States with the exception of Belgium , Luxembourg , and Austria .  

Among the third countries signatories there are also, Anguilla , Cayman Islands , Montserrat and Aruba .  

Countries providing for the Withholding Tax retention under the Transitory Provisions.

Belgium , Luxembourg and Austria from among the EU Member States.

Switzerland, Leichtenstein, San Marino, Monaco, Andorra, Jersey, Guernsey, Isle of Man, Channel Islands, Antilles, British Virgin Islands, and the Turks and Caicos Islands, from among third countries.  

Directive 2003 / 48 / EC on Taxation of Savings Income.

Malta implemented the Directive when this was adopted in Council on the 3 June 2003 , through the provision of Article 528 of the Income Tax Act (Regulation No. 5 of Legal Notice No 267 / 2004).  This regulation brought the provision of the Savings Directive into force on 1 May 2004 .  

On the 19 July 2004 , by Council Decision 2004 / 587 / EC, the bringing into force of the directive was established as on 1 July 2005 .  Therefore, all provisions under the agreement will become effective as on that date.  There is no need for ratification by Parliament of this agreement. Guidelines will instead be published by Regulation together with the agreement on the Savings Directive before the end of June 2005.  This regulation will come into force on 1 July 2005 .  

B.                    Investment Regulation Scheme 2005

Later on this week, Government will publish an Investment Registration Scheme Regulation.  

The purpose of this Regulation is for residents of Malta who have foreign investments to be given a last opportunity to regularise themselves in regard to these investments once they are not registered for tax purposes.  

Government, therefore will be extending the scheme that was in place in 2003 (through LN 209 / 03 and 226 / 03) Up to 16 June 2005 with the following adjustments:

      (a)                so that the scheme will cover all investments abroad by the 31 March 2005 , and

(b)               for the payment of a 5% registration fee on the current market value of the assets to be registered.  

Previous Schemes  

The first Scheme

In September 2001, Government had launched an investment registration scheme.  The purpose of that scheme was to allow residents of Malta with foreign investments without the necessary permits under the Exchange Control Act and without their being declared for tax purposes, the opportunity to regularize their position under the two Acts.  

This scheme was wound up at the end of 2002.  

The total investment value that was registered under the scheme was Lm291.5 million of which Lm55.1 million were repatriated. A total of Lm10.5 million were paid by way of registration fee net of the commission fees that were paid by the government to the Investment Registration Agents.

 The Second Scheme

After the EU Council of Ministers adopted the said directive in June 2003, Government decided to grant an extension to the investment registration scheme for a restricted period between 1 September 2001 and 15 November 2003 .  

The total investment value that was registered under this extension was Lm132.5 million and the net registration fee collected amounted to Lm6.6 million.  

The Current Scheme

The investment registration scheme is now being extended for the last time for a restricted period that would close on the 16 June 2005 and will come into force on the date of publication of this regulation.  

This regulation is, by and large the same as the preceding regulations.  

A resident of Malta may register under the scheme any foreign investment that had to be declared under the Exchange Control Act in place up to 1 July 2003 .  All investment income that was to be declared under the Income Tax Act can also be registered under this scheme by those with foreign investment.  

The foreign investments that may be registered under this scheme are those that till now could not benefit under the previous. 

Registration of theses investments will be open both for those who intend to have them repatriated and for those who intend to retain them abroad.  

These investments include:  

1.        financial assets held abroad, including bank deposits, shares, bonds, collective investment schemes, derivatives and other investment instruments,

2.        life and annuity Long term insurance policies issued abroad,

3.        loans made by Maltese investors to overseas companies owned by him and whose operations involve reinvestment of funds,

4.        property held abroad,

5.        deposits in foreign currencies,

6.        investments in non-prescribed funds of collective investment schemes held in Malta , i.e. funds that were subject to annual overseas investment allowance under the Exchange Control Act

7.        long term insurance policies in foreign currency issued by insurance companies that have operations in Malta  

The registration of these investments will be made through agents who will be appointed for this purpose, i.e. credit institutions, stockbrokers, and all those investment services providers who hold a category 2 or a category 3 licence.  These agents will have special forms for the purpose of this registration.  

The agent appointed for this purpose will register only those investments after receiving an application from a holder and to which shall be attached the original copy of documentary evidence that confirms that the investment being registered belongs in deed to the applicant.  All those who are registering foreign investments will be asked to confirm that they are the holders of the investments being registered and that the information and documentation being submitted with their application are true and correct and that the investments are not the proceeds of an illegal income or some criminal activity.

Once this declaration is submitted, the appointed agent, will issue a registration certificate.

The registration certificate will be issued to the applicant against the payment of a registration fee equivalent to 5% of the market value of the investment being registered.  

Applicants will not be paying the services provided by the authorized agents.  These services will be paid for by the government.  However, wherever the applicants will ask for additional services, such as for an evaluation of the investment, then he should be asked to pay for these additional services.  

Three copies of the certificate will be issued.  The original will be given to the applicant, a second copy will be held by the registering agent, and a third copy will be sent to the Central Bank of Malta to be held in a Central Registration Certificate Depository.  This certificate will be non-transferable.

Upon registration, the applicant will be exempt from all retrospective action on the part of the Government in regard to the registered investment for Income Tax purposes and for Exchange Control purpose. Once a person registers the investment, that person will exempt from any tax due on income up to the date of registration.  

Moreover, upon registration, all persons registering an investment will be considered exempt from any breach of the Exchange Control.  

Act in regard to the registered investment.

Registration will be covered by full confidentiality and the agents appointed for that purpose, as will as the Central Bank, will be prohibited by law to disclose any information obtained in the registration process.  In order to secure such confidentiality, the Central Bank will put strict measures and procedures to ensure confidentiality on the information obtained from the Registration Certificate that will therefore be placed in the Central Registration Certificate Depository.  

Neither the Inland Revenue Department, not any other entity will have access to the information with the registering agents and with the Central Bank.  The only way for the Inland Revenue Department to receive such information will be from the taxpayer himself, when he produces, at his discretion, the Registration Certificate to the tax authorities if he is asked for evidence that he has regularized his position.  This can only take place when the taxpayer being investigated by the Tax Compliance Unit on information received from foreign tax authorities under the Savings Tax Directive or under some other bilateral agreement with the tax authorities of another country.  

Guidelines being drawn up by the Department of Inland Revenue

The Department of Inland Revenue is drawing up a set of guidelines which it will eventually publish through a Legal Notice under the Income Tax Act.  

These guidelines will provide all necessary information as well as all the necessary procedures in the implementation of the Tax Directive in Malta .  Among this information, there will be definitions for:

-                     the beneficial owners, i.e. those persons in receipt of income on foreign investments;

-                     their identity and residence;

-                     the paying agents, i.e. those financial institutions, Funds, Trustees, etc. who transfer such payments;

-                     the payments themselves, i.e. what they include;

-                     relative information;

-                     double taxation.  

DOI – 20.04.2005