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MEMO/05/228

Brussels, 30 June 2005

Savings Taxation: frequently asked questions

What EU savings tax measures will have effect on 1 July?

The EU Savings Taxation Directive will become applicable on that date. So will the savings taxation agreements that the EU has concluded with Andorra, Liechtenstein, San Marino, Monaco and Switzerland and that the individual EU Member States have concluded with the ten dependent and associated territories of the UK and the Netherlands (Anguilla, Aruba, the British Virgin Islands, the Cayman Islands, Guernsey, the Isle of Man, Jersey, Montserrat, the Netherlands Antilles and the Turks & Caicos Islands).

What will be the effect of the EU Savings Taxation Directive?

Under the Directive, each EU Member State will ultimately be expected to provide information to other Member States on interest paid from that Member State to individual savers resident in those other Member States.

But for a transitional period, Belgium, Luxembourg and Austria will apply a withholding tax instead of providing information, on interest income that is paid to individual savers resident in other EU Member States. The rate will be 15% for the first three years (1 July 2005-30 June 2008), 20% for the subsequent three years (1 July 2008-30 June 2011) and 35% from 1 July 2011 onwards). These three Member States will then transfer the 75% revenue of the tax withheld to the tax authorities of the resident's Member State, retaining 25% to cover their administrative costs in applying the withholding tax.

However, the withholding tax will not be applied if the taxpayer presents a certificate from the tax authorities of his Member State of residence that confirms that they are aware of the investment made abroad (Luxembourg will also allow the individual to opt instead to authorise the paying agent to disclose the information to the tax authorities). There will be no need in that case for a withholding tax because the tax authorities of the taxpayer's Member State of residence will be in a position to subject the interest to the same tax rules as interest earned domestically.

What income is covered by the Directive and Agreements?

The definition of "interest" in the Directive and Agreements is a broad one, covering interest from debt-claims of every kind, including cash deposits and corporate and government bonds and other similar negotiable debt securities. The definition of interest extends to cases of accrued and capitalised interest. This includes, for example, interest that is calculated to have accrued by the date of the sale or redemption of a bond of a type where normally interest is only paid on maturity together with the principal (a so-called "zero-coupon bond"). The definition also includes interest income obtained as a result of indirect investment via collective investment undertakings (i.e. investment funds managed by a specialist fund manager who places the investments made by individuals in a diverse range of assets according to defined risk criteria).

Are the EU Savings Taxation Directive and savings taxation agreements introducing a new tax?

No. All that the new arrangements are doing is ensuring that EU Member States have the necessary information to apply their taxation rules to their own residents in respect of interest payments which they receive from any of the Member States, third countries and territories concerned.

Do the Directive and Agreements effectively harmonise the taxation of interest income within the EU?

No. The Directive and Agreements enable the Member States to apply their existing taxation rules to interest payments which their residents receive from paying agents in other Member States and relevant third countries and territories. They leave the choice of whether or not to tax the income to the Member State of residence. They also only cover a particular type of interest income - cross-border savings income in the form of interest paid in one Member State/third country/territory to individuals who are resident in other Member States. They do not deal, for example, with interest income paid within a Member State to residents of that State.

Will the Directive and Agreements give rise to double taxation?

No. First, the application of the withholding/retention taxes can be avoided if the taxpayer discloses the savings income or allows it to be disclosed to the EU Member State where he is resident.

If withholding/retention tax has been levied, the taxpayer's Member State of residence will credit it against the tax due by the taxpayer in that State. If the withholding tax exceeds the tax due in the Member State where he is resident, the Member State of residence will refund the remainder of the withholding tax.

What will be the effect of the five EU savings taxation agreements with the European third countries?

The five third countries will apply a retention tax, under the same arrangements as are applicable in Belgium, Luxembourg and Austria, to the savings income of EU residents which is paid in those five countries. The retention tax can be avoided if the taxpayer authorises disclosure of the interest payments to the EU Member State where he is resident., Moreover, these third countries will exchange information on the request of tax authorities of EU Member States in all criminal or civil cases of tax fraud or similar misbehaviour on the part of taxpayers, on the basis of reciprocity.

What will be the effect of the bilateral agreements with the dependent and associated territories of the UK and the Netherlands?

The British Virgin Islands, Guernsey, the Isle of Man, Jersey, the Netherlands Antilles and the Turks and Caicos Islands will apply a withholding tax during the same transitional period as applies to Austria, Belgium and Luxembourg. The same provisions concerning withholding tax as apply to those three countries will also apply to these territories as regards interest income from savings that arises in those territories and is payable to an EU resident.

Anguilla, Aruba, the Cayman Islands and Montserrat will provide for automatic exchange of information.

The arrangements with seven of the dependent and associated territories with which the EU agreements on savings tax have a reciprocal effect. Under the agreements with Aruba, British Virgin Islands, Guernsey, Isle of Man, Jersey, Montserrat and Netherlands Antilles, EU Member States will receive information or tax relating to EU residents with interest income from savings in those territories. But they will also be required to exchange information or apply a withholding tax on interest income from savings that arises in an EU Member State and is payable to a resident of one of those territories. The agreements with the remaining 3 territories - Anguilla, Cayman Islands and Turks and Caicos Islands - do not, for the time being, have a reciprocal effect as the residents of those territories are not taxable on their savings income.

What type of certificate from EU tax authorities must an EU taxpayer present in order to avoid the imposition of withholding/retention tax?

The Directive lays down general requirements such as that the certificate must contain details of beneficial owner and paying agent and be valid for a period not exceeding three years. Apart from this, it is a matter for each Member State to decide on the appropriate certificate. The Commission has, in conjunction with Member States, drawn up a model format of a certificate but it is up to the tax authorities of each Member State to take the final decision.

How will those Member States and territories that have undertaken to exchange information collect and transmit this information to other Member States?

The Directive and Agreements lay down the details of the information that paying agents must report to tax authorities, such as the identity and residence of the beneficial owner, the amount of the interest payment and the identification of the debt claim giving rise to the interest.

With regard to the information to be reported to by one Member State to another, the Council in 2002 agreed (see MEMO/02/48) on a standard format that Member States would use to exchange information with each other on interest payments made to individual savers. Communication of the information in this standard format would be automatic and would take place at least once a year. The format reflects the information requirements contained in the proposed Directive, as regards the identity and residence of a beneficial owner and details of the payments made to him. Meetings with Member States are continuing to resolve the points of detail in relation to this format.

How will those Member States, third countries and territories that will apply a withholding/retention tax share revenues with other States?

The Member States, third countries or territories levying withholding tax are responsible for taking the necessary measures to ensure the proper functioning of the revenue-sharing system. In any event, the Directive and Agreements require such transfers to take place at the latest within a period of six months following the end of the tax year of the Member State of the paying agent or economic operator that is responsible for paying the interest.

Is there not a risk that the Directive will cause European investors to use non-EU paying agents or to invest in securities outside the EU?

We believe not.

Precisely because of the risk that the Directive could incite paying agent operations to relocate outside the EU, the EU has also concluded agreements on savings taxation with five key third countries and with the dependent and associated territories of the United Kingdom and the Netherlands.

The result is that paying agents of those countries and territories must apply the principles of the savings agreements to interest income from savings payable to EU residents. The EU's Council of Ministers after consideration has concluded that the bilateral arrangements that EU Member States have concluded with the United States of America are sufficient to enable EU Member States to apply their tax rules to their residents with savings in the United States. In addition, the Commission is, at the request of the Council, due to commence discussions shortly with other important financial centres with a view to providing for the adoption by those jurisdictions of measures equivalent to those to be applied within the EU.

Thus EU paying agents will be able to operate on an equal footing with their main competitors outside the Community.

Will the Directive and Agreements make it more attractive for European savers to invest in securities in other parts of the world?

No. For the purposes of the Directive and Agreements it will not matter whether the debt-claim giving rise to the interest were issued in a Member State or relevant third country or territory or elsewhere. Once the paying agent is located within the EU or relevant third country or territory, it will have to report on, or apply a withholding tax to, all interest, irrespective of the source of the related debt-claim, which it paid to an individual who was resident in an EU Member State. The Directive should not, therefore, lead to a relocation of the securities issuing activities of European companies outside the EU or the third countries or territories with which savings agreements have been concluded.

Are the Directive/Agreements too narrow in scope and will this allow investors to avoid the withholding tax or information exchange?

The Directive and Agreements apply to savings income in the form of interest payments. Other types of income such as dividends, income from insurance and pensions products and interest payments from certain grandfathered bonds have purposely been excluded from the Directive. The Commission will carefully monitor any substitution effects which may arise as a result of these choices and, if necessary, propose an appropriate extension of the scope

It is also possible that unintended loopholes may exist which will only become apparent when the parties involved have some practical experience of operating the arrangements.

But we do not believe that it is realistic to expect that every aspect of operating this Directive and these Agreements can be resolved with complete certainty before the arrangements take effect. If and when it becomes clear that there is scope for avoiding the application of the arrangements, the Commission will work with Member States to resolve these matters.

In fact, the Commission is required to report to the Council at least every three years on the operation of this Directive. Even before that, the Commission can and will propose to the Council any amendments that prove necessary in order better to ensure effective taxation of savings income and to remove undesirable distortions of competition. The Agreements with third countries and territories contain similar review clauses.

Why are interest payments made to companies (as opposed to individuals) excluded from the scope of the Directive/Agreements?

Because there are many more problems of tax evasion in the individual taxation area than in the company tax area. Companies are required to lodge annual tax returns and they are audited or are subject to the possibility of being audited on a regular basis. As far as companies are concerned, non-taxation of interest payments is not the main problem for tax administrations. The issue is more that of tax avoidance through aggressive tax planning. Some concerns have been expressed that individuals will claim to be representatives of companies in order to avoid the application of the Directive. The Commission hopes that Member States will, on the basis of the standards and rules laid down in this Directive, be able to establish the true identity of beneficiaries of interest and that the scope for tax evasion will be limited.

Do you have any estimates of the amount of money which is currently being evaded in the area of interest income from savings?

No. Neither the Commission nor the Member States have precise figures on tax evasion due to foreign bank accounts. A typical feature of tax evasion is that it is by definition not easily quantifiable. An OECD Report of 2000 on improving access to bank information suggests that the substantial growth of foreign assets and liabilities held by banks in OECD Member Countries since 1980 is an indication of risk of non-compliance with tax laws.

Where is further information available?

See the website of the Taxation Department of the European Commission at:

http://ec.europa.eu/taxation_customs/taxation/personal_tax/savings_tax/index_en.htm

and the website of the Council of the European Union at:

http://consilium.europa.eu/cms3_fo/showPage.asp?id=916&lang=en&mode=g


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