European "FATCA" on the road
European Commission proposes wider scope of automatic exchange of information within the EU
On 12 June 2013 the European Commission proposed extending the automatic exchange of information between EU Member States to dividends, capital gains, all other forms of financial income and account balance.
The automatic exchange of information is provided for under 2 key pieces of EU legislation.
It was first introduced in 2005, via the EU Savings Directive (“EUSD”). The EUSD applies to interest paid to individuals resident in a Member State other than the one where the interest is paid. In 2008, the Commission proposed to revise the EUSD seeking to ensure the taxation of interest payments channeled through intermediate tax-exempted structures and to extend its scope to income equivalent to interest obtained from certain innovative financial products and life insurance products.
The automatic exchange of information was then enhanced by the Administrative Cooperation Directive (“EUACD”). The first part of the EUACD (concerning exchange of information upon request and spontaneous exchange of information) was transposed in Luxembourg by the law of 29 March 2013. Its second and last part foreseeing the automatic exchange of information on certain income streams is to be transposed prior to 1 January 2015. Luxembourg already confirmed that out of the five categories of income listed by the EUACD, it intends to grant the automatic exchange of information on income from employment, director’s fees and pensions. The Commission’s proposal aims at extending the scope of the second part of the EUACD to additional items of income.
The proposal is to exchange information on dividends, capital gains and any other financial income and account balances secured or held by a financial institution for the direct or indirect benefit of a beneficial owner who is a natural person resident in that other Member State. Information would be exchanged as of 1 January 2015 in respect to taxable periods as from 1 January 2014.
What’s more, while the five categories of income already covered by the EUACD will only be subject to the automatic exchange if the information is “available”, this exception would not apply to the new items listed in the proposal. Automatic exchange would thus be mandatory for these new categories. The Commission proposed that the condition of “availability” for the five existing categories of income and capital is re-assessed during a review of the EUACD in 2017.
The possibility of extending the scope of the EUACD was envisaged under the current Directive, but not before 2017. The proposal therefore accelerates this process. The reasons for that are to be found in the “pilot multilateral exchange facility” initiated on 9 April 2013 by five EU Member States, subsequently joined by 11 additional Member States, and in the will of the Commission to take the initiative back in this domain in order to ensure a coherent EU approach.
In addition, as pointed out by the Commission, Member States either have, or are negotiating, a FATCA agreement with the US. Article 19 of the EUACD contains a “most favoured nation” clause under which Member States are bound to provide any EU partner that requests it with the same level of information as they provide third countries, if this is more than provided for under EU law. Although all slightly different, the FATCA agreements signed between Member States under the US all foresee a scope of automatic information exchange that is broader than currently provided for under EU law.
The signature of such FATCA agreements could therefore trigger a series of “most favoured nation” claims between the Member States. In this context, the Commission’s proposal is designed to ensure that the scope of automatic exchange of information between Member States is just as wide as the scope of FATCA (although confined to the EU, i.e. with no extraterritorial effect), thereby avoiding the need for the most favoured nation clause to be invoked.
Luxembourg did not yet officially react to the Commission’s proposal. However, important to note is that any extension of the scope of the EUACD requires unanimity.
There is no doubt that if the Commission’s proposals to amend the EUSD and the EUACD were adopted, this would represent a huge challenge for the Luxembourg financial sector. On the other hand, because of the existence of the “most favored nation” clause in the existing EUACD, and the future signing of Luxembourg - US FATCA agreement, the general trend seems to be clear. As stated by Commissioner Agirdas Semeta, “nobody wants a situation whereby this clause has to be invoked by one Member State after another”.
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