European Union withholding tax
From Wikipedia, the free encyclopedia
The European Union withholding tax, more commonly known as the EU withholding tax is a withholding tax which is deducted from interest earned by European Union residents on investments in another member state. Its aim is to ensure that they do not avoid taxation by depositing funds in tax havens with strong bank secrecy laws. The rate of tax is currently at 15% of the interest earned. The tax is withheld at source and passed on to the EU Countries without any disclosure as to who was actually the recipient of the interest concerned. (Most EU states already apply a withholding tax to savings and investment income earned by their nationals on deposits and investments in their own states. The Directive seeks to bring inter-state income into the same arrangement, under the Single Market policy).
[edit] Date of introduction
The tax was introduced at the time of the introduction of the European Union Savings Directive (EUSD) on the taxation of interest income from savings within the European Union. This came into effect on the 1st July 2005.
[edit] Objective of the EU Savings Directive
The original aim of the EUSD was that all counties would freely disclose interest earned by a resident of an EU country in order to ensure that the interest was fully declared in his country of residence. The plan was that non-EU countries would also agree to disclose information about the interest earned by EU residents. Many non-EU states and countries agreed to introduce similar measures. These countries included most tax havens and dependent territories of the EU countries. Countries such as Jersey, Guernsey, Cayman Islands, Andorra, Turks & Caicos, British Virgin Islands, Monaco, Switzerland, and many others thus agreed to implement similar or transitional arrangements (see below). The transitional arrangements involved the payment of a withholding tax whilst bank secrecy remained protected.
[edit] Maintenance of bank secrecy laws and the EU withholding tax
Some countries agreed to fully comply with the EU Savings Directive by disclosing the names of their account holders and the interest that they earned. However, several other EU and non-EU countries, such as Switzerland, objected to the disclosure of account holders' names on the grounds that such a disclosure would be contrary to their bank secrecy laws. Bank secrecy laws prevent the disclosure of information about account holders, their assets, and their interest or other income.
Finally an agreement was struck with the objecting countries. The objecting countries achieved agreement from the EC that no further attempt would be made to commence negotiations regarding bank secrecy rules for at least 7 years, in return for which individual account holders could, if they so wished, voluntarily elect to waive bank secrecy and authorise disclosure. Those individuals who did not make any election would see a withholding tax deducted from their bank and bond interest. To avoid the withholding tax, certain types of individuals could also prove that they were exempt from taxation in their country of residence. Exempt individuals include certain diplomats and others with a special tax status in their country of residence.
Accordingly, in order to guarantee privacy and bank secrecy for EU residents who have accounts within certain territories such as Switzerland, a withholding tax of 15% is being levied on the interest earned by those EU residents. This withholding tax, which applies only to certain interest, such as bank deposit interest and bond interest, is passed on anonymously to the EU countries concerned, and is known as the EU Withholding Tax.
[edit] Countries affected
The EU withholding tax currently applies to the residents of the 25 European Union Member States as shown below:
Together with their dates of accession, the 25 current members of the European Union are:
[edit] Income on which the EU tax is deducted
The EU withholding tax applies only to bank interest, bond interest, and analogous income, such as income from bond funds, money-market funds, loans, and mortgages.
[edit] Anti-avoidance
Certain anti-avoidance measures exist, for example, to levy the tax where interest has been converted to some form of capital gain. Typically this would apply where, for example, a zero coupon bond has been bought and sold at a profit, or where a bond fund, or a money-market fund, does not pay out its interest and the fund is subsequently sold at a profit. The rules define how much of the fund's assets must be in bonds for it to be classified as "interest earning".
Initial reports as to the amounts of funds raised by the withholding tax suggest that the anti-avoidance measures have not been particularly effective.[1]
[edit] Income gains and profits which are not taxed
The EU withholding tax is not levied on any other forms of income such as employment income, trading profits, commercial activities, royalties, annuities and similar income. Also, the EU withholding tax does not apply to dividends from shares, nor to capital gains and other profits realised on investments. All these types of income and profits are described as being "out of scope".
[edit] Individuals and accounts which are not affected
The EU withholding tax is levied only on individuals and not on companies, discretionary trusts, foundations, stiftungs, anstalts, investment funds, etc., except in very special circumstances, e.g. a "bare trust".
The EU withholding tax is not deducted from individuals who reside outside the European Union. Thus, for example, a resident of Jersey or of Switzerland, would not pay the tax, even though these countries have signed the agreement with the EU. Neither Jersey nor Switzerland is in the European Union.
[edit] UK Resident but not UK domiciled individuals
In the UK such individuals have a special tax status which limits them to paying tax on income and gains from UK sources, and on foreign income and gains which are remitted to the UK. A similar status can be accorded to individuals in some other European countries (e.g. Belgium and the Netherlands), because they are only temporarily resident for the purpose of employment. Certain countries such as Jersey and Switzerland accept that these individuals may be exempt from tax on income earned and retained overseas, and are thus not subject to any retention. Needless to say, the exemption needs to be proven.
[edit] The transitory provisions of the Withholding Tax
The Countries that would be applying the transitory provisions, instead of exchanging information will retain withholding tax as follows:
-
- 15% in the first three years (1.7.2005 – 30.6.2008),
- 20% in the next three years (1.7.2008 – 30.6.2011), and
- 35% after 1.7.2011.
With regard to the distribution of their withholding tax, the Directive provides that all Countries that are withholding it will retain 25% of all receipts at their end and will transfer the remaining 75% to the Member State where the beneficiary owner is resident.
With regard to double taxation, the Directive provides that the Member State where the beneficiary owner is resident, and therefore where he normally pays his tax dues, should ensure that tax is not paid more than once when applying the withholding tax rates.
[edit] Countries providing for the exchange of information
All EU Member States with the exception of 
Belgium , 
Luxembourg , and 
Austria have agreed to exchange information with each other.
Gibraltar is deemed to be part of the UK for the purposes of the EU Savings Directive and thus will exchange information with other EU countries such as Spain and the UK. Residents of Gibraltar will either suffer withholding tax on interest arising overseas, or have that income reported to the UK who will pass it on to Gibraltar authorities.
Among the third countries signatories there are also, 
Anguilla , 
Cayman Islands , 
Montserrat and 
Aruba who have agreed to exchanging information.
[edit] Countries providing for the withholding tax retention under the Transitory Provisions
The following countries maintain bank secrecy and will deduct the withholding tax from interest:
From among the EU Member States, the following countries maintain bank secrecy:
Other countries (Not EU member states), (the following countries also maintain bank secrecy):
- Andorra
- British Virgin Islands
- Channel Islands
- Dutch Antilles
- Isle of Man
- Liechtenstein
- Monaco
- San Marino
- Switzerland
- Turks and Caicos Islands
[edit] Countries who did not sign any agreement
Singapore, Hong Kong, Bermuda and Barbados did not sign any agreement.
[edit] External links to legislation, guidelines and commentary
- European Council Directive 2003/48/EC
- Article regarding implications of the EU Savings Tax Directive
