Theodore Fortsakis Professor at the National and Capodistrian University of Athens with the collaboration of Katerina Savaidou Attorney at law, Ph.D. and Andreas Tsourouflis Attorney at law, Ph.D. The implementation of the Interest Savings Directive in Greece National Report Α. Brief overview 1. Brief overview of the taxation of interest income in Greece Under Greek law interest income is taxed in two ways: either separately at a specific rate with extinction of the fiscal obligation of the taxpayer or as income from investment securities. Interest income that is earned in Greece by individuals or associations of individuals, irrespective of nationality, residence or domicile, is taxed separately (Article 12 1 of the Greek Income Tax Code, hereinafter GITC). For beneficial owners of interest income who are individuals, this separate taxation extinguishes their fiscal obligation with respect to this income, which is therefore not counted in the calculation of the income tax due on the basis of the progressive scale used for personal income tax in the Greek legal system (Article 9 GITC) 1. For the purposes of separate taxation of interest income, the concept of interest includes the interest paid in Greece on any form of deposit (including certificates of deposit in any bank, savings institution in Greece and deposits in the Deposits and 1 In contrast to the situation of individuals, personal companies, banks and insurance companies, co-operatives and associations of these, as well as non-profit corporations, whose fiscal obligation is extinguished by this levying of integral withholding tax, the interest income acquired by domestic and foreign capital enterprises and permanent installations of foreign companies in Greece is taxed in accordance with the general provisions of the Greek Income Tax Code. 1
Loans Fund), as well as the interest paid on corporate bonds and debentures. Additionally, for the purposes of separate taxation of interest income as interest is considered the income realised due to repurchase agreements on government bonds and Greek Treasury Bills quoted on the Athens Stock Exchange (repos and reserve repos), as well as interest income from public debt issued in the form of government bonds or Treasury bills since 1-1-1997 or approved interest-bearing securities issued in Greece by the European Investment Bank and the international development banks 2. The interest paid on deposits in any form held by non-residents in any bank in Greece or in the Postal Savings Bank is exempt from withholding tax, as in fact it is from income tax in general. Also exempt from withholding tax is the interest paid on voluntary sight deposits held by non-residents with the Deposits and Loans Fund, as long as the sum is denominated in a foreign currency 3. Interest income that is not taxed integrally is not exempt from taxation in general, but is taxed in accordance with the general provisions of the Greek Income Tax Code. There are also certain tax exemptions for interest paid on Greek government bonds and Treasury bills. Interest that is covered by the provisions of Article 12 2 GITC on the separate taxation of income is taxed at 10%. Interest income realised due to a repurchase agreement concluded before January 1, 2005, on government bonds and Greek Treasury Bills quoted on the Athens Stock Exchange (repos and reserve repos) is taxed at 7% (Article 12 8 GITC). This tax is withheld at source, when the government securities are issued or the interest coupons cashed or the ex-coupon bonds mature. The tax thus withheld is credited to the appropriate Treasury account at the Bank of Greece. Apart from the interest income that is taxed integrally, the interest paid to beneficial owners of investment securities from founders shares and stock in domestic corporations, from Greek government securities and securities issued by domestic public entities and domestic enterprises generally, from similar foreign securities and interest-bearing cash or surety deposits, and from debt securities, whether or not secured by mortgage (Article 24 1 GITC), is also taxed as income from investment securities. The taxable income is the sum which remains after deduction of the 2 Specifically, by the International Finance Corporation, the World Bank for Reconstruction and Development and the Asian Development Bank. 3 Also exempted from withholding tax under this section are: the interest on building society deposits, as long as the product of these deposits is used exclusively towards securing a housing loan for the taxpayer s purchase of a first home; bonds and debentures, generally, issued before 1-1-1991; interest on debentures denominated in a foreign currency issued by the Bank of Greece between 1-1-1991 and 31-12- 1996; foreign currency term deposits contracted by permanent residents of Greece before 1-1-1997 and until their first renewal on or after that date; and term deposits denominated in drachmas deriving from imports of foreign currency and contracted by non-residents of Greece before 1-1-1998 and until their first renewal on or after that date. 2
corresponding withholding tax, which is paid to the beneficial owner (Article 24 2 GITC). 2. An overview of typical special provisions in your country s tax treaties with respect to interest income (cf. Article 11 (Interest) of the OECD Model) There are currently 39 bilateral treaties for the avoidance of double taxation in force in Greece. In general terms Greece s tax treaties follow the OECD Model Agreement, including with respect to interest income. In principle the power of taxation is invested in the state of residence of the beneficial owener. However, the state of source retains the right to levy a withholding tax. In general the rates of withholding tax provided for in Greece s tax treaties vary between 0% and 15%. In one single case (India) interest income is taxed only in the country of source. In two cases (Austria, United Kingdom) interest income is taxed only in the country of residence. Thirteen of Greece s tax treaties contain provisions exempting from withholding tax interest paid by the governments, local authorities and public entities of the contracting states and interest paid to public financing organisations. In twenty of these treaties the concept of interest payments is defined by reference to domestic law, while nineteen tax treaties expressly provide that the term interest does not include penalty charges for late payment. Β. Questions of implementation 1. Did your country implement the Interest Savings Directive, fully or partially? Council Directive 2003/48/EC of 3 June 2003 (EEL 157/38/26-6-2003) on taxation of savings income in the form of interest payments was fully implemented into Greek legislation by Law 3312/2005 on the Mutual assistance of EU Member States in the field of direct taxation, taxation of savings income and other provisions (Articles 3-13 thereof). In addition eleven laws concerning the taxation of savings income in the form of interest payments were voted in application of Article 17 of the Directive, as implemented in Article 13 of Law 3312/2005. More specifically, five among them concern the ratification in accordance with Article 28 1 of Greek Constitution of the agreements between the European Community and the Swiss Confederation (Law 3363/2005), the Principality of Liechtenstein (Law 3365/2005), the Republic of San Marino (Law 3362/2005), the Principality of Monaco (Law 3364/2005) and the Principality of Andorra (Law 3361/2005) providing for the application of measures 3
equivalent to those contained in the Directive. The other six laws concern the ratification of bilateral Agreements in the form of exchange of letters between Greece and all the relevant or associated territories of the UK and the Netherlands, i.e. the Netherlands, Antilles and Aruba (Law 3352/2005), the Turks and Caicos Islands (Law 3353/2005), Montserrat (Law 3354/2005), the Cayman Islands (Law 3355/2005), Guernsey, the Isle of Man and Jersey (Law 3358/2005), Anguilla (Law 3359/2005) and the British Virgin Islands (Law 3360/2005). 2. In implementing the Interest Savings Directive, did the implementing legislation just refer to the Directive and incorporate it into national legislation as a whole, or was specific national legislation developed for the implementation? Law 3312/2005, which Greece adopted to implement the Interest Savings Directive, as noted above (under 1), substantially repeated the terms of the Directive without adding different arrangements. Three ministerial decisions were issued for a more detailed arrangement of certain matters, such as, for example, the issuing of tax residence certificates etc. 3. When specific national legislation was developed, did the national legislator use identical concepts (interest, beneficial owner, paying agent etc.) as in the Directive, or are there deviations from the Directive? You can answer those questions in detail in one of the other questions below referring specifically to these concepts. As we noted above (under 2), the Greek legislation adopted the concepts and provisions of the EC Directive nearly verbatim, without having recourse to the respective framework provisions of Greek tax law. Thus, for example, the definition of income interest does not refer to Article 24 GITC, but repeats the definition given in the Directive (other examples are cited below under 4, 5 and 6). 4. Beneficial ownership is a central concept in the Directive. Is there a concept of beneficial ownership in your national tax system and/or tax treaty system and how is it structured? How does it apply to concepts such as trusts (discretionary trusts and other forms of trusts, Stiftungen), foundations and other similar forms of intermediaries? Article 4 2 of Greece s implementing legislation (Law 3312/2005) adopts nearly verbatim the EU definition of the concept of beneficial owner, as set out in Article 2 of the EC Directive, without trying to integrate it into the Greek tax system, at least 4
partly because the concept of beneficial owner does not, as a term, have a counterpart in Greek tax law. That said, sporadic arrangements intended to reveal the ultimate beneficial owner of income, and, which therefore correspond to the concept of beneficial owner, are not foreign to the Greek tax legislation. This type of regulations is found mainly in the framework of the principle of substance over form in Greek tax law and in attempts to combat tax evasion. One such case is exemplified by the arrangements contained in Articles 15-18 of Law 3091/2002, which require foreign companies with rights in rem on property in Greece to pay a special annual tax of 3% on the value of such property. Article 16 of that law provides that interposed persons are jointly liable for the tax together with the principal obligor. An interposed person is any individual or legal person that in any form or with any percentage participates in a legal entity or participates in a third legal entity that owns or has other rights in rem in real property or is interposed in any way in the series of shareholders in the capital of a legal person. The aim of this tax provision was to ensure that the real beneficial owner of the income or other benefit arising from real estate property would not escape taxation. Similar rules govern the operation of fictitious business entities. The Council of State (Greek Supreme Court in administrative matters, including tax matters) has ruled that where a company is effectively run by someone other than the apparent and purported operator, the tax obligations must be imputed to the person who is the effective operator and therefore the real beneficial owner of the income. Moreover, Article 5 2 of Greek Law 2238/1994 provides that the income of one spouse that is derived from an enterprise that depends financially upon the other spouse shall be added to the income of the other spouse and taxed in his/her name. Such regulation is inspired by the principle of (economic) substance over form, according to which subject to tax obligation is the person of the real beneficial owner of the income, that is, the spouse upon whom the enterprise is financially dependent. Matters relating to trusts are dealt with in the same spirit. Greek law, it should be noted, does not recognise the institution of the trust. All deeds performed by a trust in Greece are deemed to be performed in the name of the trustee. Under Article 17 4 of Law 2961/2001, however, the beneficial owners of sums collected by a trust are taxed for those sums directly. 5. Paying agent is a central concept in this Directive. Is there such a concept in your national tax system and has it been used for the implementation of the Directive, or did your country develop a new concept, or amend the existing concept? 5
The concept of paying agent did not exist in Greek tax law before the implementation of the Directive. The concept of paying agent, as defined in the Greek legislation (Article 4 2 of the implementing Law 3312/2005), is similar to that contained in Article 4 of the Directive. However, the Greek implementing legislation, instead of referring exclusively to the economic operator who pays interest to or secures the payment of interest for the immediate benefit of the beneficial owner, expressly designates certain such operators, and specifically the legal persons, and their branches established in Greece, defined in Article 2 of Greek Law 2076/1992: that is, the credit institutions whose activity consists in accepting deposits or other returnable capital sums from the public and the financial institutions whose primary activity consists in placements in securities. 6. Interest is a central concept in the Directive. Does the concept of interest of the Directive coincide with the concept of taxable interest in your country, and if not in what way do the two concepts vary? The concept of interest in Greek law is very broad, but in general terms we may say that it coincides with the concept of interest in the Directive. They do, however, diverge in certain cases: First of all, penalty charges for late payment (default interest) are taxed as income from investment securities. Exceptionally, default interest from bills of exchange and promissory notes from commercial transactions and from sales of merchandise between merchants are taxed as business income. The same applies to interest from commodity sales on credit between merchants as well as to default interest from late payment of such credited price. This arrangement, by which such default interest is not taxed as income from investment securities but as business income, applies on condition that the person acquiring such income exercises a commercial activity in Greece. In the case of foreign persons, the person must have a permanent establishment in Greece and the interest must come from the activities of such permanent establishment. Interest awarded by a court decision is also deemed to be business income. Moreover, certain types of income are, for tax purposes, deemed general income from investment securities rather than interest. This includes, for example, income from mutual fund gains and the added value acquired by unit-holders of mutual funds from the redemption of units at a price higher than the acquisition price (Article 24 1d GITC). Similarly, profits from the surplus-yield of mathematical reserves established under the provisions of Legislative Decree 400/1970 regarding life insurance policies are also classified as income from securities rather than interest income. 6
7. How did the national legislator organize the transfer of information by the paying agent to the competent authority of the national tax legislation? Did the national legislator use existing rules with respect to exchange of information between financial institutions and the national tax administration, or have new rules been developed and if so what rules? Have the concrete administrative procedures to provide the information (forms, channels, dates) already been implemented and if so what are the rules? In Greece, tax secrecy restricts the transfer of information from credit institutions to the tax authorities, and consequently the transfer of information would not have been possible without the lifting of that secrecy, in accordance with rules of Greek tax law, and specifically following joint application by the inspector and the head of the competent Inland Revenue Office for the purpose of facilitating a specific tax audit. The implementing legislation therefore instituted a new procedure for the automatic transfer of information by the paying agent to the competent national authorities. This new procedure was organised by Ministerial Decision 1141/18-11-2005, which fixed, for example, the forms, dates, etc. It provides that paying agents are obliged to prepare computer files of the particulars of the beneficial owners of interest income at the latest by March 1 of each year; exceptionally, for the first year the final date for the report of this information by the paying agents is fixed at 30 April 2006. These particulars are completed on the basis of the documentary proof of identity produced by the beneficial owner of the interest. These documentary proofs of identity are specified in Appendix 1 to the Ministerial Decision and are kept on file by the paying agent. The obligation of paying agents to report to the competent authorities the detailed information on interest payments that they maintain on their computer files became effective as of 1 January 2006. The Ministerial Decision designated the General Secretariat for Information Systems as the authority competent to receive these electronic files from the paying agents. The General Secretariat for Information Systems processes the encrypted data gathered by the paying agents so that the information can be reported. It then reports the information to the competent Directorate of International Financial Relations for communication to the competent authorities in the Member States of residence of the beneficial owners of the interest income. 8. How did the national legislator organize the transfer from the national competent authority to the competent authorities of the Member States? Did 7
the national legislator use existing procedures on the basis of bilateral tax treaties or on the basis of the OECD arrangements on exchange of information, or did he develop specific procedures, and if so what are these rules? With regard to the procedure for the automatic exchange of information, the implementing legislation provides that the Ministry of Finance & Economy Directorate of International Financial Relations is the competent Greek authority for the communication of information between the Member State of the paying agent and the competent authority of the Member State of residence of the beneficial owner of the interest income (Law 3312/2005, Article 4 4). The Ministry of Finance & Economy Directorate of International Financial Relations communicates the information to the competent authority in the Member State of residence of the beneficial owner (Law 3312/2005, Article 8 1). The information is communicated automatically at least once a year, by the end of June at the latest, and covers all interest payments made during the year in question, as required by the Directive (Law 3312/2005, Article 8 2). The provisions of Articles 19-20 and 22-23 of Law 1914/1990, which implements into Greek law Directive 77/799/ EEC on the mutual assistance of the competent authorities of the Member States of the European Union in the field of direct taxation, are also applicable within the scope of the procedure for the automatic exchange of information, which makes possible the effective taxation of interest payments in the Member State of residence of the beneficial owner, provided that they do not derogate from the provisions of the implementing legislation (Law 3312/2005, Article 8 3; Directive 2003/48/EC, Article 9 3). These provisions concern the exchange of information, the confidentiality of information reported by Member States, the settlement of matters of common interest and the notification to be made to the Council. Within the scope of application of the procedure for the automatic exchange of information, Article 21 of Law 1914/1990, which provides that information may be refused in certain cases, becomes inapplicable. This is particularly the case when the competent authority of the requesting Member State has not exhausted its own usual sources of information, when the competent authority of the requesting Member State does not implement the provisions of Greek law relating to fiscal, commercial, industrial or professional secrecy, when these provisions are stricter than those in the national legislation of the requesting Member State, when it is contrary to public order, and when the reciprocal exchange of information is not possible (reciprocity requirement). These cases are in any case covered by Directive 2003/48/ΕC (Article 9 3), which provides that Article 8 of Directive 77/799/ΕEC shall not apply to the information to be provided for the purpose of the taxation of savings income in the form of interest payments. Exclusion of the possibility of restricting or refusing the exchange of information was judged necessary in order to make the effective taxation of interest 8
payments in the Member State of residence of the beneficial owner possible in all cases. The General Secretariat for Information Systems has also been designated the authority competent to receive the information about the beneficial owners of interest payments who are taxed in Greece. The information reported by the competent authorities of the states (Article 8 1) is officially received by the Ministry of Finance & Economy Directorate of International Financial Relations, pursuant to the provisions of Article 8 of Law 3312/2005 in collaboration with the General Secretariat for Information Systems. In this framework the General Secretariat for Information Systems is responsible for the recovery, storage, processing and utilisation of the corresponding information on beneficial owners of interest income who are taxed in Greece (Article 4 2). 9. How is the exchange of information organized from one paying agent to another paying agent within the same tax jurisdiction? Did your country develop new rules, or has use been made of existing rules? The provisions of Law 3312/2005 restrict the information that is reportedfrom paying agents and the services to which it is communicated. For the procedure relating to the exchange of information, see above under 8. Law 3312/2005 does not provide for a direct flow of information between paying agents. 10. The Directive provides for certain forms of evidence to establish the residence of taxpayers. Are the documents mentioned in the Directive available and used in your country to determine residence? Do you think there may be other documents or data, used in your country, enabling the national tax administration to establish the residence of a taxpayer? One of the particulars that a paying agent must report to the competent national authorities is the tax residence of the beneficial owner of the interest income. The documents mentioned in Directive 2003/48/ΕC for identifying the residence of taxpayers, that is, passport, official identity card and tax residence certificate are all recognised under Greek law and are used by the competent Greek authorities to determine residence. Ministerial Decision 1107688/2134/05/DOS/1140/11-11-2005 ruled the (two-stage) procedure for the issuance of tax residence certificates by the Greek authorities. Under this procedure the beneficial owner of the interest income applies to the competent tax office, which issues a certificate, on the basis of which the Ministry of Finance & Economy Directorate of International Financial Relations issues a tax 9
residence certificate. The tax residence certificate, which is issued within two months of the submission of the application, includes the applicant s full name, address and tax identification number, and is valid for one year from its notification to the beneficial owner. A similar tax residence certificate is issued by the Greek tax authorities in the framework of the application of the tax treaties Greece has concluded with other countries for the avoidance of double taxation. Under Greek law (Ministry of Finance & Economy decision 1109637/2412/05/DOS/30.11.2005, 4.1) it is also possible to use a certificate issued by a municipality as documentary proof of identity for the determination of tax residence, in cases where the beneficial owner of the interest income does not provide a certificate of residence. 11. Is there any provision in your national tax system on matching the tax credit for the special withholding tax with information on the effective withholding of such tax in the country of source? Can the tax credit for the special withholding tax be taken for the tax year in which the tax was withheld in the country of source? Article 10 of Law 3312/2005 stipulates that, during the transitional period provided by Directive 2005/48/ΕC for the levying of a withholding tax by Belgium, Luxembourg and Austria, savings income in the form of interest paid to a beneficial owner who is resident in Greece by a paying agent in one of the above countries will be taxed in Greece in accordance with the general provisions of the Greek Income Tax Code. If withholding tax has been levied on such income in Belgium, Luxembourg or Austria, this tax will be credited against the tax payable in Greece, provided that: a) the beneficial owner produces a certificate for the tax withheld, and b) 75% of the tax withheld has been transferred to Greece within a period of six months following the end of the preceding tax year. If the amount of tax withheld exceed the amount of tax due on that income in Greece, the excess amount will be refunded to the beneficial owner. In case that any other withholding tax has been levied, a tax credit will be granted, in application of the double taxation conventions, before the above procedure is applied. A beneficial owner who produces a certificate of withholding tax levied in another country is granted a tax credit on income received during the same calendar year as the income on which the withholding tax was levied, following the general principle of the integrality of tax years, which precludes the offsetting of income, whatever the country of source, from different fiscal years. 10