The EU is bringing in a new banking directive which affects non-EU banks dealing with clients who are resident in the EU – for example an American living in Germany who maintains at least one account in the US.
The new directive affects all non-EU countries, but it seems that American banks are the most likely to tell their customers that they will have to close their accounts, and readers of The Local have reported this happening to them.
We asked tax expert Jonathan Hadida from Hadida Tax Advisors, and financial adviser Brian Dunhill of Dunhill Financial to explain the implications for Americans.
Why is this letter being sent out?
It's all to do with the EU Capital Requirements Directive, Article 21(c). This is a new EU directive intended to 'harmonise' banking rules within the Bloc.
The Directive will require non-EU banks, financial institutions and other entities that provide 'core banking services' in an EU country to establish an authorised local branch.
READ ALSO: What new EU banking law means for foreigners in Germany
Core banking services are defined as taking deposits, providing loans or credit guarantees. Find the full text of the law here.
The Directive does, however, have several exemptions.
The first is 'reverse solicitation' – the restrictions will not apply where an EU client has approached the non-EU bank/lender at their "own exclusive initiative".
The second is a grandfather clause stipulating that a contract entered into and signed before July 11th 2026 should not be covered by the new legislation.
I've had my bank account for years, surely I'm covered by the grandfather clause, so I can challenge the closure?
The Local asked Brian Dunhill, a financial adviser specialising in advising Americans in Europe.
He said: "What's important to understand is why banks are sending these letters – it's usually because they don't want to continue working with clients in Europe. They think the compliance is not worth it for what is usually a tiny slice of their business.
"The Directive has a 'grandfather' clause, so anybody who had an account prior to July 11th, when it came in, will be grandfathered in.
"So the majority of people in the next couple of months that are getting letters, it's not really because of the Directive, it's because the companies don't want to have to conform with different aspects of the law longer term – they're not going to be able to grow their business, so why not get out of the business when it's a tiny share of what they do.
READ ALSO: Q&A - What to know about holding a foreign bank account in Germany
"We saw this with FATCA legislation, Brits saw it with Brexit, we're seeing it now with Article 21, and we'll probably see it again in the future with something else.
"What you want is to avoid a situation where your account is being closed with no notice.
"So I would advise people not to fight it. Instead, find an institution that does want to work with you – and there are plenty".
Tax specialist Jonathan Hadida added that there can also be tax implications.
"If it's your bank account that is closed, that's just annoying, but if it's a brokerage account that closes on you, they will just send you a cheque for the amount there – and that's taxable as a capital gain.
"If the money is paid out, there is very little we can do about it. It's a large lump sum and will be taxed.
"So the key is planning ahead to make sure that doesn't happen."
Does this affect brokerage firms for investments, share packages etc?
The EU Directive is aimed at 'banking services', but many Americans in Europe who have investments are also reporting getting letters from their brokers.
Brian told us: "It's directed at the banking area, it doesn't go directly after brokerages.
"But what we have to remember is that most American brokerages will have banking features on those brokerage accounts, and therefore their compliance managers – especially when it's a firm that might have thousands and thousands of clients, but only a handful are in Europe – they might lump it into the same rule and therefore decide they don't want to work with clients in Europe anymore.”
Do I actually need a US bank account if I live in Germany?
It depends on your personal situation, but in many cases, yes.
Jonathan explained: "The IRS doesn't do direct deposits to foreign banks, so if the IRS wants to do a direct deposit and you don't have a US bank account, there's nowhere for it to go.
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"Government benefits can, however, be paid to a foreign bank."
Brian said: "When it comes to 401ks and other pensions, it depends on the company – but I would argue that even if you can have it paid into a German bank, you don't really want to because you will be losing out on the exchange rate and you might be charged extra fees."
People who have investment packages or stocks will also likely need a brokerage company.
OK, so which companies will deal with Americans living in Germany?
If all you need is simple banking and money transfer services, then internet banks such as Wise or Revolut will provide that. These accounts can be set up in both dollars and euros and will also provide you with both a US and an EU account number.
Brian said: "For basic banking, these are fine. I use them, they have all you need – they used to have quite tight limits on the amount you can have in the account or transfer, but those are increasing.
"The only thing I would avoid is transferring very large amounts, because if something goes wrong you'll have to talk to a chatbot. Also, they don't allow for the deposit of cheques – and yes, the IRS still issues cheques on paper."
Alternatively, a good bet for Americans overseas is Credit Unions, since they are specifically designed with overseas workers like State Department employees in mind. They all have a presence in the EU, so they meet the Directive Requirements.
Brian said: "There are five credit unions, including the State Department Federal Credit Union – the one that deals with all the dignitaries – that will take Americans who live over in (Europe). They have no problem with the address, naturally, because the State Department, that's all they are, a bunch of foreigners that live across the world. Navy Federal Credit Union, same thing, etc."
When it comes to brokerage firms, there are plenty who will work with Americans overseas, although Brian advises: "Use one which specialises in working with Americans so that you get the best return on your investments."
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