A Taxing Situation

By Jonathan Katan, McLeans International Attorneys

On July 1, 2005, the Retention Tax Ordinance 2005 (RTO) came into force. The RTO brings into Turks & Caicos Islands law the provisions of the European Savings Tax Directive (ESD). The ESD is an agreement between the member states of the European Union (EU) to exchange information automatically with each other about customers who earn savings income in one EU member state but live in another. The idea behind the ESD is to ensure that individuals who live in one EU member state do not receive savings income in another EU member state without the tax authority in their home country knowing about it.

This automatic exchange of information is currently taking place in all but three of the EU member states, namely Austria, Belgium and Luxembourg. Those states have decided to choose a “withholding tax option” rather than an automatic exchange of information. This is the option that the Turks & Caicos Islands government has chosen.

What has this got to do with the Turks & Caicos Islands?
It may seem very strange that the Turks & Caicos Islands now have a law implementing a directive from the EU when the TCI is neither an EU member state or even in Europe. The reason for this is that each EU state agreed that as well as implementing the directive in their country, they would also ensure that it was implemented in any stateÕs Crown, Dependent or Overseas Territory.

Who does this law affect?
The only people (and it is individual people, not companies) that are affected by this law are those who are resident for tax purposes in an EU member state and receive savings income in the Turks & Caicos Islands. It does not apply to anybody who is resident outside the EU. Therefore, the legislation will not affect Turks & Caicos Islanders even if they hold a UK passport as long as they reside in the Turks & Caicos Islands.

If the RTO does apply to you, what does it actually mean?
The RTO provides that the paying agent (i.e. your bank or savings institution) must automatically deduct tax from savings income that you receive on your account or investment with them. This withholding tax is paid to the TCI government who then forwards payments to the relevant EU member states. The current rate of withholding tax is 15%. This will rise to 20% on January 1, 2008 and, finally, to 35% on January 1, 2011.

The advantage of using the retention tax option is that your confidence is maintained. However, under the RTO, you can avoid the tax being imposed on your savings income. To do this you would need to authorise your paying agent to forward details about yourself and your account to the TCI government, who would then pass the information on to the tax authority in the EU state where you reside. There may be other ways to avoid the provisions of the RTO, but these would depend on an individual’s circumstances and would require professional advice.

What is savings income?
The detail of what payments qualify as savings income for the purpose of the RTO is outside the scope of this article. If you are in any doubt as to whether or not tax is going to be retained from any investment you have within the Turks & Caicos Islands, you should contact your bank or other financial service provider. However, in brief, the main categories of savings income are:

(A) Interest paid out on a debt claim or credited to accounts;
(B) Interest rolled up and paid out when a debt claim is repaid or sold;
(C) Distribution made by some units trusts and other collective investment funds which have invested more than 15% of their investments in debt claims;
(D) Accumulated income paid out when units in certain collective investment funds that have more than 40% of their investment in debt claims are redeemed and sold.

What this actually means is that savings income is essentially interest earned on bank deposits; interest from and proceeds on the sale and redemption of certain bonds; and income from certain types of investment funds (usually open ended money market retail funds). Most other types of income such as dividends on shares, salaries and pension payment will not be covered by the RTO and no tax will be imposed.

Is this law fair?
Nobody likes paying tax. However, EU governments would argue that if you reside in an EU member state and benefit from services provided by government, why should you be able to avoid your tax liability by simply investing in a foreign country? Others would say that this is simply a way of expanding the tax powers of EU states’ taxing authorities and is an unwelcome erosion of individual freedom and privacy. Whichever argument you support, it is unlikely that this will be the last attempt by governments in high tax jurisdictions — be they in Europe or North America — to seek the assistance of other countries in order to maximise their tax revenue from income earned by a tax payer whether in their country of residence or elsewhere.

Jonathan Katan is an attorney with the firm McLeans International Attorneys practicing in all aspects of corporate and commercial law, real estate and development.

He can be contacted at or (649) 946-4277.

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