The European Union is expected to start talks next spring on widening the scope of its savings tax directive to include companies or even foundations, in a bid to deal with wrinkles in the present system, as demonstrated by how the directive has operated in Switzerland since becoming effective in July 2005.

When the directive took effect, Switzerland opted to pay withholding taxes anonymously rather than exchange information. Since that date, there has been a rise in the numbers of Europeans with accounts in Singapore, which demonstrates one of the flaws in the concept.

Additionally, the Swiss rules for applying the directive state this is applicable only to personal accounts. Accounts in the name of a company or other investment vehicles are not covered by the arrangement. In other words, putting assets in the name of any offshore company is a way to avoid the directive.

Given this situation, it is a surprise that Switzerland sent SFr489 million of withholding taxes to the EU in 2006.

The EU is expected to initiate discussions next year spring into widening the scope of the directive. No mention has been made of trusts at this stage, probably due to the complexities of establishing true beneficial ownership within many discretionary trust structures.

The notions of withholding versus information exchange will not be on the agenda, however. The EU may also seek to tax funds that accumulate income.

Given that all 27 EU countries have to agree to any changes it may be some time before the final situation is known. As any persons affected can simply move their accounts to Dubai or Singapore, the net result for the EU members’ coffers will probably be limited.

The directive currently affects accounts in Switzerland, Liechtenstein, Monaco, Andorra and San Marino as well as 10 UK dependant or associated territories, mainly offshore islands.