European Union: EU Savings Tax Directive To Become Effective This Summer

The EU Savings Tax Directive (2003/48/EC) is intended to ensure that savings income in the form of interest payments made in one member state to physical persons residing in another member state are taxed in accordance with the legislation of that member state. Part of the EU tax package, the directive aims to overcome existing distortions in the effective taxation of savings income in the form of interest payments.

According to Council Decision 2004/587/EC, the directive will finally come into force on July 1 2005. The decision postponed the initial application date of January 1 2005. From July 1, the directive's provisions should be applied by all member states, as well as by some third countries and dependent and associated territories.

The automatic exchange of information between member states in respect of interest payments is the method envisaged by the directive to achieve effective taxation.

'Interest payment' means interest paid or credited to an account, relating to debt claims of every kind - whether or not secured by a mortgage and whether or not carrying a right to participate in the debtor's profits - and, in particular, income from government securities and income from bonds or debentures. Penalty charges for late payments are not regarded as 'interest payments'. The term also covers:

• interest accrued or capitalized at the sale, refund or redemption of debt claims referred to above;
• income deriving from interest payments distributed, either directly or through certain entities, by undertakings for collective investment in transferable securities (UCITS) authorized in accordance with the EU UCITS Directive (85/611/EEC) or certain undertakings for collective investment; and
• income realized upon the sale, refund or redemption of shares or units in UCITS, if they invest directly or indirectly, via other undertakings for collective investment or other entities, more than 40% of their assets in debt claims.

The directive's scope of application does not include issues relating to the taxation of pension and insurance benefits.

Under the directive, each member state is expected to provide information to other member states on interest paid by 'paying agents' established in its territory to individual savers who are resident in other member states.

'Paying agent' means any economic operator that pays interest to or secures the payment of interest for the immediate benefit of the beneficial owner, whether the operator is the debtor of the debt claim which produces the interest, or the operator charged by the debtor or the beneficial owner with paying interest or securing the payment of interest. Any entity established in a member state to which interest is paid, or for which interest is secured for the benefit of the beneficial owner, will be also considered as a paying agent upon such payment or securing of such payment.

The competent authority of the member state in which the paying agent is located must communicate the requested information to the competent authority of other member states at least once a year, within six months of the end of its tax year.

Requested information includes:

• the identity and residence of the beneficial owner;
• the name and address of the paying agent; and
• the account number of the beneficial owner or, where there is none, identification of the debt claim giving rise to the interest and information concerning the interest payment.

As an exception to the general system of information exchange, Belgium, Luxembourg and Austria need not participate in such cooperation and the exchange of banking information for a transitional period. Instead of information exchange, these member states must levy a withholding tax at a rate of:

• 15% for the first three years (2005 to 2007);
• 20% for the subsequent three years (2008 to 2010); and
• 35% from July 1 2011 onwards.

Belgium, Luxembourg and Austria will transfer 75% of the revenue of this withholding tax to the investor's state of residence. Moreover, these member states are entitled to receive information from the other member states.

This transitional period will end when: (i) the European Union enters into an agreement with Switzerland, Liechtenstein, San Marino, Monaco and Andorra on the exchange of information concerning interest payments; and (ii) the European Council unanimously agrees that the United States is committed to the exchange of information on interest payments as defined in the 2002 Organization for Economic Cooperation and Development Model Agreement.

Switzerland, Liechtenstein, San Marino, Monaco and Andorra have already executed the necessary agreements and these are due to be concluded shortly.

On October 26 2004 nine new agreements were signed with Switzerland after several years of negotiations. These agreements concern the taxation of savings, among other things.

Under the Agreement on Taxation of Savings Income, from July 1 2005 Switzerland will apply measures equivalent to those set out in the EU Savings Tax Directive. The agreement is based on the following key elements:

• Withholding tax - Swiss paying agents will levy a withholding tax on interest payments made to EU residents at the same rates and under the same terms as Belgium, Luxembourg and Austria.
• Voluntary exchange of information - the withholding tax will not be levied by Swiss paying agents if the EU resident taxpayer authorizes the paying agent to disclose information on the interest payment to his or her national tax authorities.
• Exchange of information upon request - for income covered by the agreement, Switzerland will grant exchange of information on request in cases involving fraud or similar misbehaviour.
• Review clause - contracting parties are allowed to review the terms of the agreement at least every three years or at the request of either contracting party to take account of international developments.

The Swiss-EU agreement forms the basis for the agreements with Liechtenstein, Monaco and San Marino. On December 7 2004 the European Commission welcomed the signature of these agreements. A similar agreement between EU and Andorra was signed on November 15 2004.

Dependent or associated territories of all relevant member states should also make provision for the new regime. To this end, the United Kingdom and the Netherlands are to ensure the introduction of the regime by the Channel Islands, the Isle of Man and the relevant territories in the Caribbean. Model agreements have been drawn up to conclude bilateral savings tax agreements between member states and each of these territories. At this stage, none of these bilateral agreements has been signed.

In theory, the provisions of the EU Savings Tax Directive will apply from July 1 2005 in all member states, as well as Andorra, Liechtenstein, Monaco, San Marino, Switzerland and dependent and associated territories of member states.

In practice, however, certain steps still need to be taken before the directive will be applied outside the European Union.

The application of the agreements with Andorra, Liechtenstein, Monaco, San Marino and Switzerland will be conditional on the adoption and implementation by dependent or associated territories of member states, by the United States, and by Andorra, Liechtenstein, Monaco, San Marino and Switzerland, of measures which conform with or are equivalent to those set out in the directive.

However, no such agreements have yet been concluded with dependent or associated territories of the member states, or with the United States.

The agreements with Andorra, Liechtenstein, Monaco, San Marino and Switzerland provide that if this condition is not met at least six months before the directive's entry into force inside the European Union, the parties will adopt a new applicable date.

As the condition was not met on January 1 2005, the entry into force of the agreements with Andorra, Liechtenstein, Monaco, San Marino and Switzerland will be postponed, and with this, the exchange of information with these key countries.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.