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By Jeremy Smith
BRUSSELS, Nov 13 (Reuters) - European Union regulators announced proposals on Thursday that aim to close off loopholes in the EU's strict tax rules and crack down on tax evasion linked to cross-border investments.
The idea is to prevent investors in an EU member country such as Germany from parking millions of euros in secretive banks in the tiny Alpine principality of Liechtenstein.
Non-EU countries like Liechtenstein and Switzerland signed up to the EU's savings tax rules when they were introduced in 2005. But at present, those rules only cover interest on bank accounts held outside a home state.
In a news conference, EU Tax Commissioner Laszlo Kovacs said the current scope of the EU savings tax directive needed to be extended, to help Europe in its battle to stamp out tax evasion.
"At present, it is relatively easy for individuals to circumvent it (directive) ... it is beneficial to all parties to go further in extending the scope of measures," he said.
Ways of getting round the rules included using trusts or foundations where there was no income tax, he said, or rearranging financial portfolios so that income from interest fell outside the EU's formal definition of interest payments.
Existing EU rules ensure that banks and other institutions either report to authorities the interest income which they pay to savers resident in other EU countries, or levy a withholding tax on the interest income received.
The new proposal thus requires paying agents to apply the rules to payments of interest to structures outside the EU, and extends the rules to payments of interest to certain trusts and foundations. It further proposes extending the scope of the rules to cover certain life insurance contracts.
For example, if a bank established within the EU pays interest to a trust based in Switzerland or Hong Kong, and if it knows -- under anti-money-laundering provisions -- that the effective beneficial owner of the trust is an individual resident in the EU, the bank will have to apply EU rules at the time of payment as if this was directly made to the individual.
OUTSIDE EU SCOPE
In March, Germany persuaded EU finance ministers to speed up a review of tax rules covering interest that EU savers receive on bank accounts or mutual funds in other member states or in non-EU countries applying the bloc's rules -- such as Liechtenstein, Switzerland or San Marino.
The rules came into force in 2005 after years of haggling but loopholes have emerged, such as arrangements for investment trusts in Liechtenstein which fall outside the rules' scope.
The European Commission had already opened talks with selected important financial centres -- Hong Kong, Singapore and Macao -- to extend the geographical scope of the savings tax directive, Kovacs said.
Formal negotiations will start soon with Norway, while other jurisdictions like Bermuda and Iceland have shown interest in participating in the EU savings taxation arrangements.
The proposals will need unanimous backing from all the EU's 27 member countries to enter force, as in all EU tax matters.
Kovacs said EU finance ministers would hold an initial discussion of his proposal at their next meeting on Dec. 2. If all EU countries agreed, as well as the European Parliament, it could receive full endorsement by the end of next year, he said. (Reporting by Jeremy Smith; editing by Andy Bruce)