The changing tax environment for cross-border financial services

Marc Dassesse *


Pursuant to the provisions of the Treaty of Rome, the liberalization, of banking and insurance services goes hand in hand with the liberalization of movements of capital and payments. In 1988, the Council adopted a directive which came into effect on 1st July 1990. The main effect of that directive has been to liberalize, effective 1st July 1990 the movements of capital and payments connected with savings and financial investments which had hitherto not been subject to compulsory liberalization in terms of EEC law (as opposed to movements of capital and payment connected with the free movement of goods, services, persons and establishment, which were already liberalized : saying that the free movement of goods is guaranteed throughout the Community is an empty commitment if the French importer of German goods does not have the right, as a matter of EEC law, to acquire freely, and at a normal rate, the necessary Deutsche Marks to pay for the imported goods).

The adoption of the 1988 free movement of capital and payments directive thus paved the way for the subsequent, complete, liberalization of banking, insurance and investment services throughout the Community. This liberalization was, in turn, achieved by the adoption of the Second Banking Directive, the Second and Third Life and Non-life Insurance Directives, and the Investment Services Directive. All these directives are either already in force or scheduled to come into force shortly.


The Single Passport Directives

All the aforementioned financial services directives are basically modeled along the same lines : they provide, in substance, that a financial institution incorporated in one member State (say the United Kingdom) in accordance with national law meeting (at least) the minimum requirements laid down Community-wide by the relevant directive, has a Single Passport recognized throughout the Community. Under that Passport, the relevant EEC financial institution can operate in all Member States (besides its own, so-called Home Member State) either by way of establishment (branches) or by way of cross-border provision of services, subject only, as a rule, to the supervision of its Home Member State regulators. Thus, a bank incorporated in the United Kingdom can operate in France by way of a branch, or by way of cross-border provision of services, subject only, as a rule, with regard to its French operations, to the supervision of the Bank of England, to the exclusion of the French banking supervisors.

The notification procedure inherent to the Single Passport directives

As a quid pro quo for this new freedom, a rather cumbersome procedure has however been introduced, which is applicable, in terms of the relevant directives, not only to cross-border services aimed at retail customers but also to operations amongst professionals.

Thus, in our aforementioned example, the position is now as follows (leaving aside certain transitional provisions) : the British bank must inform the United Kingdom banking supervisor (i.e. the Bank of England) that it proposes to provide cross-border services in France (for the first time). If the Bank of England agrees with these plans, it must, in turn, inform the French banking supervisor that bank X is planning to provide cross-border services in France. Bank X will thereafter be free, as a rule, to provide its services cross-border on the French market without further ado.

Unforeseen consequences of the notification procedure

The impact of this procedure, which is (soon to be) duplicated in the insurance field and the investment services field, should not be underestimated. First, it means that certain operations on the wholesale market which had hitherto been conducted cross-border without any regulatory hassle now become subject to the procedure of prior authorization and notification summarized above. This is paradoxical bearing in mind that the directives which have introduced that procedure were intended to remove existing restrictions, and not to introduce new ones, however well intentioned. Secondly, the above procedure means that for the first time ever, the authorities of a Host Member State (France, in our above example) are entitled, as a matter of EEC law, to receive from the competent authorities of the Home Member State (in our example, the United Kingdom) the list of all financial institutions (banks, insurance companies, investment services firms) incorporated in that Member State (United Kingdom) which provide cross-border services in the territory of the Host Member State (France), be it actively (by taking the initiative to contact clients there) or passively (as where the client based in France takes the initiative of contacting the financial institution based in the United Kingdom).

Tax implications of the new notification procedure

The new procedure just described means that the Member State of provision of service (in our example, France) is now in a position to effectively demand (i) compliance of all the foreign (EEC-incorporated) institutions with (inter alia) all tax regulations applicable to locally established institutions, and (ii) to require said foreign institutions to provide said authorities, with respect to their (local) clients, with all information which can be required from locally established institutions. (Thus, in many Member States, insurance companies must, in case of death of the policy-holder, provide the tax authorities, at their own initiative, with details of any life insurance or fire and theft insurance policies of the deceased : this information is useful for checking the accuracy of the tax return filed by his heirs for death duty purposes).


An unforeseen by-product of the aforementioned procedure is that the Host Member States will be increasingly tempted to raise revenue by levying indirect taxes on financial products : Indeed, thanks to the new notification procedure just summarized, they are in a position where they can insure, in practice, payment of such taxes not only by locally established financial institutions but also by foreign (EEC-incorporated) financial institutions operating (actively or passively) in their territory on a cross-border basis since (i) they can be informed of such provision of service thanks to the aforementioned notification procedure and (ii) they can demand that firms operating cross-border in their territory appoint a local representative having responsibility for all taxes payable in respect of the financial products, (such as indirect taxes on insurance premiums, or stamp duty taxes payable in respect of securities transactions). Such representative will also have responsibility for providing the local tax authorities with all data which these authorities can legitimately require from locally established institutions with respect to operations with local customers.

It can therefore be confidently expected that the years to come will see a resurgence of indirect taxes on financial products, whereas these were until recently regarded as an anachronism slated to disappear with the advent of the Single Market in financial services. This resurgence will no doubt be helped by the recent Commission's announcement, on the occasion of the Edinburgh Summit (December 1992) of its plan to abandon its long-standing proposal for a directive designed to do away with indirect taxes in the securities field.

Article 73d of the Maastrich Treaty : the big unknown

The tax environment for financial services in years to come is made all the more uncertain by Article 73d of the Maastricht Treaty.

Pursuant to that provision, the free movement of capital and payments (guaranteed, as a rule, as per Article 73B) "shall be without prejudice to the right of Member States [inter alia] to apply the relevant provisions of their tax laws which distinguish between tax-payers which are not in the same situation with regard to their place of residence, or with regard to the place where their capital is invested". In other words, the free movement of capital and payments is without prejudice to the right of Member States to "distinguish" between residents and non-residents and between local and foreign financial products.

This provision must be read in conjunction with the "Declaration" with respect thereto which is annexed to the Treaty.

Pursuant to that Declaration, "the Conference affirms that the right of Member States to apply the relevant provisions of their tax laws as referred to in Article 73d of this Treaty will apply only with respect to the relevant provisions which exist at the end of 1993. However, this Declaration shall apply only to capital movements between Member States and to payments effected between Member States".

The combination of Article 73d and the Declaration relating thereto is already the subject of widely divergent interpretation which does not bode well for the future.

These provisions are interpreted in some quarters as a commitment on the part of Member States not to introduce after 31 December 1993 additional legislation designed to turn them into a tax-haven attracting the savings of residents of other Member States (to the detriment, tax-wise, of the Member States in which these investors are resident).

However, some other circles wonder - albeit with some perplexity - whether Article 73d and its accompanying Declaration must not rather be understood to mean that it will henceforth be legitimate for Member States to discriminate, tax-wise, against the providers of financial services based in other Member States, or their products.

The risk that such a view could prevail can certainly not be dismissed especially when article 73d is looked at in combination vith the recent decision of the European Court of Justice in the BACHMAN case. The Court held on that occasion, to the surprise of most observers, that Member States may legitimately introduce tax rules which restrict the exercise of fundamental freedoms (in the instant case, i. a, the right of insurers established in Germany to provide cross-border services in Belgium) when the same is necessary to preserve the "Coherence, of their national tax system." This concept, hitherto unknown in the case-law of the Court, lends itself to a multiplicity of interpretation and thus reinforce the risk that article 73d be invoked by some Member States as a legal basis for introducing tax provisions which restrict the full exercise of the rights derived by EEC financial institutions from their newly gained Single Passport


These uncertainties are the increasingly heavy price which the Community pays for its failure - not remedied by Maastricht - to adopt qualified majority voting on tax issues.

According to an old English saying, "facts are stronger than the Lord Major of London".

It is submitted that this saying also holds true in the tax field : let us thus hope that the necessity to introduce a common policy in the tax field, both in terms of intra-Community transactions and in terms of the relations between the Community and third countries, will prevail in the near future over the present political deadlock. If not, many of the promises held out by the 1993 Single Market in financial services are unlikely to be fulfilled.


*  Professor, Free University of Brussels. (ULB), avenue F. Roosevelt, 50 - B-1050 Brussels. Member of the Brussels Bar.