EU saving tax directive

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The European Union Savings Tax Directive came into effect on 1st July, 2005. It aimed at a uniform information exchange regime to apply across the Union, with all countries agreeing to report interest on savings paid to the citizens of other Member States to those States tax authorities.

The Commission allowed Austria, Luxembourg and Belgium to apply a withholding tax (at 15%) until 2009 due to strong traditions of banking secrecy. Many of the UK's offshore financial centres have been forced to join the directive, along with the Netherlands Antilles, Aruba and some European centres (Andorra, Monaco, Liechtenstein and San Marino). Most of these places will also take the withholding tax route, as will Switzerland.

The directive applies to many types of return on savings instruments, all loosely described as interest, when received by individuals, but does not affect interest paid to companies. Under the information exchange system, the identity of recipients will be known to their home tax authorities; when tax is withheld, the identity of the recipient will not be reported, thus preserving confidentiality. The EU Savings Tax Directive does not apply to offshore centres or other jurisdictions not connected to the EU.

Who Is Affected?

The Directive does not apply to persons including EU Nationals who are resident outside the 25 Member States of the EU or the Crown Dependencies of the UK (Jersey, Guernsey and the Isle of Man). Any new countries joining the EU will be obliged to accept the information-sharing variant of the directive, and their residents will be caught by the directive as and when those countries accede to the EU.

If you are an individual (natural person) who is resident in an EU Member State, and earn bank interest or other savings income on deposits or investments held in your own name in another EU Member State, third country or territory included, then it is likely that you will be affected by the directive.

How to Escape the Savings Tax Directive

The most effective way to escape the effects of the directive is to be a resident of a country which has not signed up to the directive, or if that is impossible, to make sure that you don't have investments that will be caught by the directive.

Entities Outside The Scope Of The Directive

Legal entities whose profits are taxed under the general arrangements for business taxation and similar entities (e.g. companies, partnerships and limited partnerships) are not relevant payees and payments to such persons fall outside the scope of the Directive, which only applies to individuals. Trusts and foundations are equally exempt in most territories. There is speculation that this may be extended in the future.