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Home > Services > For Institutions > E.U. Market
Accessing the European Union Market
The objective of EU law is to ensure a free market, by safeguarding the four freedoms: movement of goods, movement of workers, movement of capital and the establishment of services. It is a body of made treaties, case law, directives and regulations, which operate alongside, but takes precedence over, national laws and constitutions. Its impact on the provision of wealth services both inside and outside the EU is considerable, and of growing importance.
The basic position is that personal taxation is a matter for individual governments to decide. However, the EU does consider that it has a role in ensuring that member states’ tax laws do not inhibit free movement - for example with regard to the transfer of pension rights - and that they do not discriminate against citizens of other member states. This in itself has a significant impact in how tax laws may be applied. For example, following a decision by the European Court of Justice last year, the British government included measures in Finance Act 2010 to extend the favorable tax treatment of U.K. charities to equivalent bodies in other jurisdictions of the EU, Norway and Iceland. The EU also considers that it has a role to play in fighting cross-border tax evasion.
An EU directive sets down the objectives which must be achieved, usually in great detail. It is then left up to national legislators to enact these into law. The application of directives will therefore vary from country to country, and it is critical that service providers have a sound understanding of both the general principles, and their specific, local application. In some cases Switzerland has entered into equivalent accords so that it is directly subject to the same or similar provisions as EU/EEA states. In other cases Switzerland will feel the indirect impact of EU a particular EU law.
We work with institutional clients to provide them with a full understanding of the nature and implications of relevant EU laws. Specifically, we provide strategic and consulting advice, compliance guidance and training, as well as risk analysis.
EU Savings Directive
The European Union Savings Directive (EUSD) aims to ensure that residents in one member state pay income tax in their home country on savings arising in another. It is, in essence, an attack on tax-evasion: its legal basis is to safeguard the free movement of capital within the EU.
It achieves this by forcing institution that pay interest (Paying Agent) to a person, to provide details about the amounts paid and the identity of the account holder, to its own tax authorities. This will then be passed to the tax authority where the account holder resides, in order that income tax can be attributed accordingly. This automatic exchange of information is often held up as a gold standard in the push for global transparency. Austria, Luxembourg and Belgium opted to have a withholding tax apply during a transitional period.
A number of other countries, including Switzerland and Liechtenstein, voluntarily entered into agreements with the EU to apply equivalent measures to the directive, also negotiating for the application of a withholding tax, with customers having the option to authorize information exchange rather than be subject to the tax. Where relevant, a tax payer may also apply for a certificate from the home country tax authorities confirming that he or she is not subject to pay tax in that jurisdiction, and so not liable for any withholding tax. (HMRC does not consider that being a remittance basis user is grounds for obtaining such a certificate. It issued updated Savings Income Reporting Guidance in April). The withholding tax rate is currently 20%, and will rise to 35% from July 2011.
The directive is undoubtedly flawed in its formulation, as evidenced by the relevant tax collected since it was introduced, which is estimated at somewhere between 1% and 10% of the total. Proposed amendments aimed at closing some of the loopholes are still awaiting the unanimous approval required. This may prove hard to come by, since earlier this year both Austria and Luxembourg announced that they would not accept the amendments unless a number of other countries, including Switzerland and Liechtenstein, also agreed to apply similar rules. They also confirmed that bank secrecy would be maintained in their countries until such a time as Switzerland agrees to automatic exchange of information.
If they are ever approved, the amendments will broaden the (currently extremely narrow) definition of savings income to cover, for example from certain life insurance products. Similarly, a Paying Agent currently captures on the financial institution which actually pays the interest, making it simple to avoid the provisions of the directive by routing payments through other entities, such as trusts within the EU, or arrangements, entities and financial institutions outside. The amendments aim to tackle this by making the first category Paying Agents (where they receive interest on behalf of beneficiaries), and forcing entities within the EU to “look through” those established in certain jurisdictions outside of the EU, using information already in their possession for anti-money laundering purposes, to establish whether they have an EU resident beneficial owner. The definition of beneficial owner, which presently covers individuals only, will also be widened.
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Markets in Financial Instruments Directive
The Markets in Financial Instruments Directive (MiFID) has been effective throughout the European Economic Area since 1 November 2007. It aims to achieve maximum harmonization in the regulation of financial services, so that a firm’s home country (usually where it is registered) will be responsible for it being authorized and regulated. Once authorized, firms are free to provide services to customers throughout the EEA – the concept of a European Passport. The country in which a service is provided is not able to insist on higher standards. This creates a level playing field for Europe’s financial instruments and trading venues, whilst ensuring harmonized and appropriate levels of protection for customers.
Only investment services and activities are subject to MiFID standards and benefit from the Passport. Ancillary services are not subject to MiFID, and nor can they benefit from the passport, unless they are provided by a firm also engaging in investment services and activities. Other key features of the directive include client categorization to ensure that each client is accorded appropriate protection and advice, and transparency requirements for equity markets.
Firms operating in Third Countries (i.e. non-EEA), such as Switzerland and the U.S., are not subject to MiFID, although it does have indirect impact. First, it limits their ability to provide MiFID services to customers in EEA states. There are exceptions to this rule, such as the first approach principle which in very simple terms allows a staff member to visit an EEA country to provide covered services if they were approached to do so by the customer, and this is as the result of a relationship established outside of the EEA jurisdiction, and not as the result of marketing in that jurisdiction. It will, however, be crucial to look at how MiFID has been implemented locally, since not all EEA member states provide for this exemption. Third Country providers may also be bound to MiFID standards by virtue of a branch which is active in an EEA state, and has obtained a branch license to carry on business. Notably, no such branch will benefit from the Passport. Non-MiFID firms, including those from Third Countries, may nonetheless find themselves subject to certain MiFID standards, for example in the U.K., where the customer classification rules are applied across the board.
We are able to provide written guidance, including compliance and training, as to the impact of MiFID on Swiss and non-Swiss based providers.
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Automatic Exchange of Tax and Banking Information
To minimize the inequity of double taxation, and to counter tax evasion, countries enter into Double Taxation Agreements (DTAs) and Tax Information Exchange Agreements (TIEAs). The terms will determine the extent, form and conditions of the assistance. Switzerland has recently concluded a number these, including with the U.S. and the U.K., which comply with OECD standards. This marks an historic shift of direction. Although requests must generally provide specifics such as the individual’s identity, neither bank secrecy, nor the lack of double criminality (i.e. the fact that the act would not have constituted an offence had it been commit within territory of the requested state), will be permissible grounds for refusal. The ratification of these agreements and others like them, will inevitably transform the nature of wealth management in Switzerland. The challenge for businesses is to adapt to the newly environment, by managing customer expectations and re-model services accordingly, without losing global market share. That Switzerland is at the forefront of the move towards transparency should prove to an advantage over the long-term. We work with clients to understand what these changes will mean for the industry as a whole, and their businesses in particular.
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Anti-Money Laundering and Know Your Customer
It is important that advisors and providers outside of the EU understand the wide-reaching nature of how anti-money laundering laws in EU states may be applicable to acts committed in Switzerland. The key is to distinguish between money laundering regulations implemented as a result of EU directives, for example the so called Third Money Laundering Directive, which applies to regulated persons operating within the jurisdiction, and the principal money laundering offences.
For example, the U.K. Money Laundering Regulations (which implemented the directive), includes due diligence requirements, as well as the obligation to report suspicious activity (including, for the avoidance of doubt, any suspicion of tax fraud). It also includes a requirement to register with the relevant authority for the purposes of money laundering, and there is a fixed annual fine for any failure to do so. These regulations apply only to those operating within the U.K.
Contrast this with the principal offences of concealing, disguising, converting or transferring the proceeds of an offence, or conspiring, aiding or abetting such behavior. An individual may be guilty of this irrespective of where the act occurred. This could include, for example, advice to move assets out of Switzerland, or put them into a certain structure, to avoid the detection of undeclared assets. In contrast to the U.K., neither Switzerland nor the U.S. treats the unpaid tax from tax fraud as proceeds of crime for the purposes of money laundering.
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European Arrest Warrants
From April 2005, the political element, as well as the cost, length and uncertainty was taken out of the extradition process in Europe, with the introduction of the European Arrest Warrant (EAW) throughout the EU. The current system is one of automatic arrest and surrender of an individual in one member state, based on the existence of a warrant issued in another. The warrant may be for arrest with a view to stand trial or serve a sentence (including where conviction was in absentia).
There are only very limited grounds on which extradition can be refused when an EAW has been issued. Notably, it is not possible to refuse to surrender a suspect on the grounds that he is a national of the requested state, nor because the offence is a fiscal one. An EAW can be issued for a wide range of offences, including tax fraud and money laundering. These cannot be used for extradition to a third country, for example the U.S. unless the requested (i.e. surrendering country), consents.
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Travel Risks
In the past few years wealth management services in general have been marked by the push towards transparency, with Switzerland and Liechtenstein feeling this particularly keenly. The U.S. and U.K. governments have been notably active in their efforts to deal with the issue of undeclared offshore funds. One of the results has been a significant increase in the number of customers choosing to regularize their tax situations voluntarily. Another is the increased chance of prosecution for those suspected of involvement in tax or regulatory fraud.
Intermediaries find themselves in a difficult position. As individuals they will likely have been acting in accordance with the policy of the organization that employed them. That organization in turn will generally have been acting in accordance with Swiss law. That Swiss law and the law of another country may have been in conflict was not, until recently, recognized as a serious problem, especially where all business and meetings were carried out in Switzerland. As it turns out, this reasoning provided false comfort.
Both the U.S. and the U.K. may prosecute those who they suspect of assisting their tax payers to commit tax fraud. In England, dealing with the proceeds of tax fraud is sufficient basis for a money laundering charge. Money laundering is relatively easy to prove, particularly when brought against an intermediary, whose name may be known to the foreign authorities because, for example, clients were required to provide the information in the context of a voluntary disclosure. This is particularly likely in the case of U.S. clients.
Inevitably, for certain advisors, travel may present a risk. How great that risk may be is difficult to assess, and will necessarily depend on the particular case. There is also a risk, sometimes overlooked, from travel to third countries, in that a request for extradition could see the prosecuting country obtaining surrender of an individual for trial or to serve a sentence (if there has been a trial in absentia). The European Arrest Warrant and the Extradition Act 2003 – in particular the pattern of use we have seen by the U.S. since the latter was passed - are of particular relevance, given that Switzerland is something of an exception in its dual practice of not extraditing for fiscal offences, and never extraditing its own citizens.
We are able to provide country-specific and general advice on these matters.
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