European Union Savings Tax Directive
Story added: 17/08/2005
From 1 July 2005, EU law requires member states to exchange information about customers who earn savings income in one Member state but live in another.
However, Austria, Belgium and Luxembourg have elected to apply alternative arrangements for a transitional period during which they will automatically withhold tax at source from income earned by an individual resident in an EU state from savings invested in another Member state.
In addition, the Channel Islands and the Isle of Man have also introduced provisions similar to the European Directive.
In effect, if you are resident in an EU member state and you receive savings income from accounts or investments held in another Member state or the Channel Islands or the Isle of Man, you will need to make a choice from three options:
- Exchange of Information Option
If you choose this option your savings income can be paid gross and the financial institution responsible for your deposit or investment will send details confirming your income received to their local tax authorities who in turn will forward the information to the tax authority of the country in which you are resident. You should then declare this income on your personal tax return as necessary.
Under the Exchange of Information Option you will need to provide the relevant financial institution with your Tax Identification Number (TIN) or, your date, place and country of birth.
- Tax Retention Option
You may prefer to choose to elect for the financial institution responsible for your deposit to withhold tax from the interest you receive. The Directive has initially set this tax retention at 15%. However, from 1 July 2008 the rate will increase to 20% and from 1 July 2011 the rate will be increase further to 35%.
Under the Tax Retention Option the relevant financial institution pay the tax withheld over to their local tax authorities who in turn pass it on to the country where you are resident. However, when the tax is paid over by the financial institutions no amount is attributable to any individual, so your confidentiality is maintained. Tax retained in this way may be available to claim back from your local tax authority when you declare the interest on your personal tax return.
- Exemption Option
If you do not pay tax in an EU member country or you are resident but not domiciled in an EU Member state you may qualify for exemption from the directive. In these circumstances you will need to provide the financial institution responsible for your investment:
- A Tax Certificate from your local tax authority
- A self certified exemption form
- A letter from your professional adviser, accountant or solicitor confirming that either:
- You are exempt from paying tax in your Member state of residence or;
- Because no interest is remitted to the individual no liability to income tax arises in their Member state of residence.
These exemptions are valid for a maximum of three years after which they will need to be renewed.
In addition to the EU, the Channel Islands and the Isle of Man, many other so called tax havens will be observing the EU directive. Only accounts held in company names and by discretionary trusts are exempt whether they are resident in the EU or not, however certain trusts such as interest in possession and bare trusts may be affected.