The need to avoid distortions to the movement of capital and allow effective taxation of interest payments received by individuals in Member States other than the Member State of residence have led to the adoption of a Directive on the taxation of savings income in the form of interest payments (Council Directive 2003/48/EC - see IP/03/787 ). This Directive enables such interest payments to be made subject to effective taxation in accordance with the laws of the Member State of residence of the individuals concerned.
On 1 July 2005, the provisions of the Directive started to be applied by all EU Member States. The same measures in the Directive have also been applied, from the same date (and from 1 January 2007 for Bulgaria and Romania), in 10 dependent or associated territories of EU Member States through the implementation of bilateral agreements signed by each of the 27 EU Member States with these jurisdictions; and equivalent measures have been applied, from the same dates, in five European third countries, including Switzerland.
The EU Directive:
The Directive on taxation of savings income in the form of interest payments adopted on 3 June 2003, formed one element of the "Tax Package" aimed at tackling harmful tax competition in the Community. On 19 July 2004 , the Council adopted a Decision establishing the application date of 1 July 2005 for this Directive (Council Decision 2004/587/EC).
Under the terms of the Directive:
- All Member States are ultimately expected to automatically exchange information on interest payments by paying agents established in their territories to individuals resident in other Member States. All Member States, except Belgium, Luxembourg and Austria, immediately introduced such a system of information reporting.
- Belgium has decided to discontinue applying the transitional withholding tax as of 1 January 2010 and exchange information as of that date. Therefore, only Luxembourg and Austria were entitled during a transitional period to levy a withholding tax at a rate of 15% for the first three years (until 30 June 2008), 20% for the following three years (until 30 June 2011), and 35% thereafter in place of information exchange. They transfer 75% of the revenue of this withholding tax to the investor's state of residence. These two Member States are entitled to receive information from the other Member States.
- The withholding tax levied by Luxembourg and Austria during the transitional period is entirely creditable or refundable in the investor's state of tax residence. The investor has an option to provide for preliminary information of his or her Member State of residence for tax purposes about the savings held abroad, or to permit the disclosure of the income to the same State, as an alternative to the retention or withholding tax.
- The transitional period ends:
- if and when the EC enters into an agreement, following a unanimous decision of the Council, with Switzerland, Liechtenstein, San Marino, Monaco and Andorra to exchange information upon request as defined in the OECD Model Agreement on Exchange of Information on Tax Matters released on 18 April 2002 in relation to interest payments, and these countries continue to apply simultaneously the withholding tax levied by them since 1 July 2005 on the basis of the already existing agreements with the EU in this field (see below), and
- if and when the Council agrees by unanimity that the United States is committed to exchange of information upon request as defined in the 2002 OECD Model Agreement with all EU Member States in relation to interest payments.
- Luxembourg or Austria may elect, as Belgium did, to introduce automatic exchange of information during the transitional period, in which case they no longer apply the withholding tax and the revenue sharing.
- The Directive has a relatively broad scope (article 6) that covers interest from debt-claims of every kind whether obtained directly or as a result of indirect investment via most collective investment undertakings and via other residual entities (paying agents upon receipt). This scope includes income realised at the sale, refund or redemption of shares or units in these aforementioned collective investment undertakings or entities, if these undertakings and entities have invested more than 40% of their assets in debt-claims. As from 1 January 2011 this threshold shall be lowered to 25%.
- A grandfathering clause was introduced excluding certain negotiable debt securities that were first issued before 1 March 2001 from the scope of the Directive. As of 1 January 2011, that exclusion will apply only if those securities contain gross-up or early redemption clauses and only when the paying agent is established in Luxembourg or Austria. Therefore, as of 1 January 2011, for economic operators established in the other 25 Member States, that grandfathering clause will only be relevant to cases where the savings income is paid to a residual entity (paying agent upon receipt) established in Luxembourg or Austria.
Agreements between the EU and five European countries
On 2 June 2004, the Council adopted a Decision on the signature and conclusion of an Agreement between the EC and Switzerland providing for measures equivalent to those laid down in the Directive. The Agreement was signed on 26 October 2004. The following key elements of this Agreement also form the basis for agreements with Andorra, Liechtenstein, Monaco and San Marino:
- a retention or withholding tax with revenue sharing at the same rates as applied by Luxembourg or Austria during the transitional period of the Directive;
- an option for the taxpayer to permit the disclosure of the income to his or her Member State of residence for tax purposes as an alternative to the retention or withholding tax;
- a provision for the exchange of information on request in cases of tax fraud or similar misbehaviour;
- a review clause to allow the Contracting Parties to review its working over time in line with international developments.
These agreements have all been signed (IP/04/1445 ) and concluded and are effectively applied since 1 July 2005 (1 January 2007 for Bulgaria and Romania).
The Directive and dependent/ associated territories
Ten relevant Member States' dependent or associated territories (the Channel Islands of Jersey and Guernsey, the Isle of Man and the dependent or associated territories of the Netherlands and the United Kingdom in the Caribbean) took a commitment in the form of written agreements or arrangements between each of them and each of the 27 EU Member States in order to provide since 1 July 2005 (1 January 2007 for Bulgaria and Romania) for the same measures as those in the Directive, i.e. they apply a system of information reporting or, during the transitional period of the Directive, levy a withholding tax on the same terms as Luxemburg or Austria. Four of these territories (Aruba, Anguilla, the Cayman Islands and Montserrat) have provided automatic exchange of information from the date of the start of application of the relevant agreements on 1 July 2005. Since that date the following UK dependent or associated territories have also moved to automatic exchange of information: Guernseyas from 1 July 2011; Isle of Man as from 1 July 2011; the British Virgin Islands as from 1 January 2012, and Turks and Caicos Islands as from 01 July 2012 .
The dissolution of the Netherlands Antilles on 10 October 2010 resulted in two new constituent countries (Curaçao and Sint Maarten), which continue to levy a withholding tax on the same terms as Luxemburg and Austria, and three special municipalities which are part of the Netherlands (Bonaire, Sint Eustatius and Saba) and provide automatic exchange of information.