Taxation of savings income
The European Union is pursuing its ultimate goal of enabling interest on savings received in one Member State by individuals who are resident for tax purposes in another Member State to be made subject to effective taxation in accordance with the laws of the latter Member State.
ACT
Council Directive 2003/48/EC of 3 June 2003 on taxation of savings income in the form of interest payments.
SUMMARY
Aim of the Directive
The aim of the Directive is to enable savings income, in the form of interest payments made in one Member State to "beneficial owners" * who are individual residents for tax purposes in another Member State, to be made subject to effective taxation in accordance with the laws of the latter Member State. The automatic exchange of information between Member States concerning interest payments * is the means chosen to achieve effective taxation of these "interest payments" in the Member State where the beneficial owner is resident for tax purposes. Member States must therefore take the necessary measures to ensure that the tasks necessary for the implementation of this Directive - cooperation and exchange of banking information - are carried out by paying agents established within their territory, irrespective of the place of establishment of the debtor of the debt claim producing the interest.
Scope of application
The scope of this Directive is limited to taxation of savings income in the form of interest payments on debt claims, to the exclusion of the issues relating to the taxation of pension and insurance benefits. At territorial level, the Directive applies to interest paid by a "paying agent" * established within the territory to which the Treaty applies.
The general system: exchange of information
- Information reporting by the paying agent
Where the beneficial owner is resident in a Member State other than that in which the paying agent is established, the Directive stipulates that the latter must report to the competent authority of its Member State of establishment a minimum amount of information, such as the identity and residence of the beneficial owner, the name and address of the paying agent, 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.
Moreover, the minimum amount of information concerning interest payment to be reported by the paying agent must distinguish between the specific categories of interest listed in the Directive. However, Member States may restrict the minimum amount of information to the total amount of interest or income and to the total amount of the proceeds from sale, redemption or refund.
- Automatic exchange of information
Under the Directive, the competent authority of the Member State of the paying agent must communicate - at least once a year, within six months following the end of the tax year of the Member State of the paying agent - the information referred to above to the competent authority of the Member State of residence of the beneficial owner.
Transitional provisions: withholding tax (Belgium, Luxembourg and Austria)
During a transitional period, Belgium, Luxembourg and Austria are not required to exchange the information on savings income covered by this Directive if they apply a withholding tax to this income. These three Member States may apply the transitional system until the Swiss Confederation, the Principality of Andorra, the Principality of Liechtenstein, the Principality of Monaco and the Republic of San Marino ensure effective and complete exchange of information upon request concerning payment of interest, and until the Council agrees unanimously that the United States of America is committed to exchange of information upon request as defined in the OECD Model Agreement. The Directive entitles these three Member States to receive information from the other Member States. During the period of transition, Belgium, Luxembourg or Austria may opt for the introduction of an automatic exchange of information, and in this case countries having exercised this option will no longer apply withholding tax and the corresponding tax revenue sharing. Belgium thus announced that it had decided to apply information exchange as per the ‘Savings’ Directive as from 1 January 2010.
As regards the withholding tax system, the Directive lays down that where the beneficial owner is resident in a Member State other than that in which the paying agent is established, Belgium, Luxembourg and Austria shall levy a withholding tax at a rate of 15% during the first three years of the transitional period, 20% for the subsequent three years and 35% thereafter.
As regards revenue sharing, the Directive lays down that Member States levying withholding tax shall retain 25% of their revenue and transfer 75% of the revenue to the Member State of residence of the beneficial owner of the interest.
As regards double taxation, the Directive lays down that the Member State of residence for tax purposes of the beneficial owner is to ensure the elimination of any double taxation that might result from the imposition of the withholding tax.
Lastly, the Directive does not preclude Member States from levying other types of withholding tax than that referred to above in accordance with their national laws or double-taxation conventions.
Context
As part of the "tax package" aimed at combating harmful tax competition, the European Community (EC) decided to draw up a legislative instrument to overcome existing distortions in the effective taxation of savings income in the form of interest payments.
Savings income in the form of interest payments from debt claims constitutes taxable income for residents of all EU Member States. However, owing to the free movement of capital (Articles 56 to 60 of the Treaty) and the absence of any coordination of national systems for taxing savings income in the form of interest payments, and in particular the treatment of interest received by non-residents, residents of Member States are often able to avoid any form of taxation in their Member State of residence on interest they receive in another Member State. The resulting distortions in the movement of capital between Member States are incompatible with the internal market. Moreover, this situation encourages the evasion of tax on savings income and increases tax pressure on income from less mobile sources such as that derived from work, which adversely affects labour costs and therefore, indirectly, job creation.
This Directive builds on the consensus reached at the Feira European Council of 19 and 20 June 2000 and the subsequent Ecofin Council meetings of 26 and 27 November 2000, 13 December 2001 and 21 January 2003. The consensus lies in the setting up of an automatic exchange of information system between all Member States except for Belgium, Luxembourg and Austria, which will be given a transitional period during which, instead of providing information to the other Member States, they must apply a withholding tax to the savings income covered by this Directive.
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REFERENCES
| Act | Entry into force | Deadline for transposition in the Member States | Official Journal |
|---|---|---|---|
| Directive 2003/48/EC [adoption: consultation CNS/2001/0164] | Initially on 1.1.2005, postponed to 1.7.2005 | Date of transposition: 1.1.2004 Date of application: 1.7.2005 | OJ L 157 of 26.6.2003 |
| Amending act(s) | Entry into force | Deadline for transposition in the Member States | Official Journal |
|---|---|---|---|
| Directive 2004/66/EC | 1.5.2004 | 1.5.2004 | OJ L 168 of 1.5.2004 |
| Directive 2006/98/EC | 1.1.2007 | 1.1.2007 | OJ L 363 of 20.12.2006 |
RELATED ACTS
Proposal for a Council Directive of 13 November 2008 amending Directive 2003/48/EC on taxation of savings income in the form of interest payments [COM(2008) 727 final – Not published in the Official Journal].
This Proposal for a Directive aims at offsetting the shortcomings in the current directive, with a view to taxing savings income more effectively and eliminating the undesirable distortions of competition.
In this perspective, the main amendments proposed concern the following points:
- the definition of the beneficial owner: a proposal for a ‘look-through’ approach to cover interest payments made to legal persons or arrangements held by individuals (the current directive only covers interest payments made for the immediate benefit of individuals);
- the identification of beneficial owners: the recording of the date and place of birth of the beneficial owner in all cases and in addition the tax identification number of the beneficial owner when this number appears on documents presented for identification purposes is proposed;
- the definition of the notion of paying agent: clarification of the notion of ‘paying agent on receipt’ and the introduction of a ‘positive’ definition of intermediary structures established in Member States and bound to act as ‘paying agents on reception’;
- the definition of interest payment, in order to cover financial instruments that are equivalent to those which are explicitly covered: structured products that are equivalent in substance to debt commodities and some insurance products that are directly comparable to undertakings for collective investment since their performance is linked to debt claims or equivalent income;
- the extension of the scope to all undertakings for collective investment in transferable securities (UCITS);
- the communication of information by paying agents;
- the introduction of a comitology procedure so as to quickly decide implementation measures related to the Directive.
European Parliament Legislative Resolution adopted on 24 April 2009.
In its Resolution, Parliament approves the Commission’s Proposal and proposes a series of amendments (29) which, in Parliament’s opinion, would make the new law more effective.
Opinion of the Economic and Social Committee: The Opinion of the Economic and Social Committee was adopted on 13 May 2009. The Committee notes its full agreement with the Commission’s Proposal. It expresses some reserves with regard to some administrative and legal complications resulting from these new provisions.
European Parliament Consultation Procédure (CNS/2008/0215).
Council Decision2005/357/EC of 22 December 2004 on the conclusion of the Agreement between the European Community and the Republic of San Marino providing for measures equivalent to those laid down in CouncilDirective2003/48/EC on taxationof savings income in the form of interest payments [Official Journal L 114 of 4.5.2005].
Council Decision 2005/356/CE of 22 December 2004 on the conclusion of the Agreement between the European Community and the Principality of Andorra providing for measures equivalent to those laid down in Council Directive 2003/48/EC on taxation of savings income in the form of interest payments [Official Journal L 114 of 4.5.2005].
Council Decision 2005/353/EC of 22 December 2004 on the conclusion of the Agreement between the European Community and the Principality of Liechtenstein providing for measures equivalent to those laid down in Council Directive 2003/48/EC on taxation of savings income in the form of interest payments [Official Journal L 112 of 3.5.2005].
Council Decision2005/347/EC of 22 December 2004 on the conclusion of the Agreement between the European Community and the Principality of Monaco providing for measures equivalent to those laid down in Directive 2003/48/EC on taxation of savings income in the form of interest payments [Official Journal L 110 of 30.4.2005].
Council Decision2005/35/EC of 7 December 2004 on the signing of the Agreement between the European Community and the Principalityof Monaco providing for measures equivalent to those laid down in Council Directive 2003/48/EC on taxation of savings income in the form of interest payments and the approval and signing of the accompanying Memorandum of Understanding [Official Journal L 19 of 21 January 2005].
The agreement is aimed at permitting the effective taxation of savings income in the form of interest payments through the adoption of measures equivalent to those applied within the European Community, as laid down in Council Directive 2003/48/EC. These include a withholding tax on savings interest paid to residents of EU Member States, a mechanism that allows revenue-sharing with the Member State of residence of the recipient of the interest, voluntary disclosure of information regarding interest payments if the taxpayer so agrees and the exchange of information on request in cases of tax fraud or the like. The agreement also contains a review clause allowing its terms to be adapted in line with international developments.
CouncilDecision2004/903/EC of 29 November2004 on the signing of the Agreement between the European Community and the Republic of San Marino providing for measures equivalent to those laid down in Council Directive 2003/48/EC on taxation of savings income in the form of interest payments and the approval and signing of the accompanying Memorandum of Understanding [Official Journal L 381 of 28 December 2004].
Purpose: to ensure that the Republic of San Marino adopts measures equivalent to those to be applied within the European Community to permit effective taxation of savings income in the form of interest payments. The measures involve withholding tax at a predetermined rate with revenue sharing, a voluntary procedure for the beneficiary based on the optional supply of information to his or her tax authority in place of withholding of tax at source by the paying agent, a mechanism for information exchange on request in the event of tax fraud or equivalent offences concerning interest, and a revision clause enabling the parties to consult each other every three years or at the request of one of the parties in order to improve the technical operation of the agreement and allow for international change in this domain.
Council Decision2004/897/EC of 29 November 2004 on the signing of the Agreement between the European Community and the Principality of Liechtenstein providing for measures equivalent to those laiddown in Council Directive 2003/48/EC on taxation of savings income in the form of interest payments and the approval and signing of the accompanying Memorandum of Understanding [Official Journal L 379 of 24 December 2004].
CouncilDecision2004/828/EC of 2 November 2004 on the signing of the Agreement between the European Community and the Principality of Andorra providing for measures equivalent to those laid down in Council Directive 2003/48/EC on taxation of savings income in the form of interest paymentsand the approval and signing of the accompanying Memorandum of Understanding [Official Journal L 359 of 4 December 2004].
The agreements are aimed at permitting the effective taxation of savings income in the form of interest payments through the adoption of measures equivalent to those applied within the European Community, as laid down in Council Directive 2003/48/EC. These include
- a withholding tax on savings-interest paid to residents of EU Member States;
- a mechanism that allows revenue-sharing with the Member State of residence of the recipient of the interest;
- a procedure allowing taxpayers to avoid withholding tax if they expressly authorise their paying agent established in the Liechtenstein to communicate the payment of interest to the competent authorities of that State in order to allow the information to be transmitted to the State of residence (‘voluntary disclosure’), or if they present a certificate stating that the State of Residence has been informed of the investment on Andorran territory.
- the exchange of information on request in cases of tax fraud or the like. The agreements also contain a review clause allowing their terms to be adapted in line with international developments.
CouncilDecision2004/912/EC of 25 October 2004 on the conclusion of the Agreement in the form of an Exchange of Letters between the European Community and the Swiss Confederation on the date of application of the Agreement between the European Community and the Swiss Confederation providing for measures equivalent to those laid down in Council Directive 2003/48/EC of 3 June 2003 on taxation of savings income in the form of interest payments [Official Journal L 385 of 29 December 2004].
Council Decision2004/911/EC of 2 June 2004 on the signing and conclusion of the Agreement between the EuropeanCommunity and the Swiss Confederation providing for measures equivalent to those laid down in Council Directive 2003/48/EC on taxation of savings income in the form of interest payments and the accompanying Memorandum of Understanding [Official Journal L 385 of 29 December 2004].
These Decisions aim to secure the adoption, by Switzerland, of measures equivalent to those to be applied within the Community to ensure effective taxation of savings income in the form of interest payments; and to enable Switzerland to benefit from the common system of taxation applicable in the case of parent companies and subsidiaries (Directive 90/435/EEC) and to interest and royalty payments made between associated companies (Directive 2003/49/EC). This draft Agreement is accompanied by an ancillary Memorandum of Understanding (MoU) between Switzerland, the European Community and its Member States. This MoU inter alia commits Switzerland and the Member States to enter into bilateral negotiations with a view to including in their respective double taxation conventions provisions on exchange of information on request for cases falling within the concept of "tax fraud or the like" with respect to items of income not subject to the Agreement but covered by their respective conventions, and with a view to defining individual categories of cases falling under "the like" in accordance with the procedure of taxation applied by those countries. The MoU also confirms that, during the transitional period provided for in Council Directive 2003/48/EC, the European Community will enter into discussions with other important financial centres with a view to promoting the adoption by those jurisdictions of measures equivalent to those to be applied by the Community. Finally, the MoU provides that the agreed measures will be implemented in good faith and that the parties will not act unilaterally to undermine this arrangement without due cause.
CouncilDecision2004/587/EC of 19 July 2004 on the date of application of Directive 2003/48/EC on taxation of savings income in the form of interest payments [Official Journal L 257 of 4.8.2004].
This Decision postpones the date of entry into force of Directive 2003/48/EC to 1 July 2005.
Decision of the Representatives of the Governments of the Member States meeting within the Council of 27November 2001 concerning the taxation of savings in Caribbean dependent or associated territories [Official Journal L 314 of 30.112001].
Ten important territories dependent upon or associated to Member States (Jersey, Guernsey, the Isle of Man and the Caribbean dependent or associated territories) have, since 1July 2005, applied measures which are identical to those provided for in the Directive - the automatic exchange of information or, during the period of transition laid down by the Directive, the deduction of a withholding tax under the same conditions as those laid down for Belgium, Luxembourg or Austria.
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