Taxation of savings income

The European Union (EU) intends to enable interest on savings received in one EU country by individuals who are resident for tax purposes in another EU country to be made subject to effective taxation in accordance with the laws of the latter country.

ACT

Council Directive 2003/48/EC of 3 June 2003 on taxation of savings income in the form of interest payments.

SUMMARY

As part of the tax package aimed at combating harmful tax competition, the EU adopted a Directive in 2003 to reduce existing distortions in the effective taxation of savings income in the form of interest payments.

The aim of the Directive is to enable this interest paid in one EU country to individual residents for tax purposes in another country (beneficial owners), to be made subject to effective taxation in accordance with the laws of the country.

Scope

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, i.e. an economic operator (for example, a financial institution, a bank or an investment fund) which pays interest or secures their payment to beneficial owners, established in the territory of the EU. Any such entity established in an EU country to which interest has been paid or secured for the benefit of the beneficial owner is considered a paying agent within the meaning of the Directive. This way the paying agent is the last link in the chain of intermediaries that pays interest directly to the beneficial owner.

THE GENERAL SYSTEM: EXCHANGE OF INFORMATION

Information reporting by the paying agent

Where the beneficial owner is resident in an EU country other than that in which the paying agent is established, the Directive stipulates that the latter must report to the competent authority of the EU country 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.

The minimum amount of information to be transmitted by the paying agent must distinguish between the types of interest listed in the Directive. However, EU countries may restrict the minimum amount of information, for example, to the total amount of interest or income.

Automatic exchange of information

Under the Directive, the competent authority of the EU country of the paying agent must communicate, at least once a year, to the competent authority of the EU country of residence of the beneficial owner. This communication must occur within the six months following the end of the tax year of the EU country of the paying agent.

THE NEW RULES APPLICABLE FROM 1.1.2016

It appeared that certain financial instruments equivalent to interest-bearing securities and certain indirect means of holding these securities were not covered by the Directive 2003/48/EC. Consequently, a new Directive has been adopted, the Directive 2014/48/EU which will have to be transposed in the EU countries by 1.1.2016 in order to remedy this situation.

The aim of the Directive is to:

• reinforce the existing rules regarding the exchange of information on savings income for the purpose of enabling EU countries to combat fraud and tax evasion better;
• promote a transparent approach based on the obligation to customer due diligence which prevents individuals from circumventing the Directive by using an interposed legal entity (for example, a foundation) or arrangement (for example, a trust) located in a country outside the EU which does not ensure the effective taxation of this legal entity/arrangement on all of its income from financial products covered by the Directive;
• to improve the rules aimed at preventing individuals from circumventing the Directive by using an interposed legal entity (a foundation) or arrangement (a trust) located in an EU country. These rules imply notification by this legal entity or arrangement;
• to extend the scope of the Directive to include financial products which present characteristics similar to receivables (for example, securities with a fixed/guaranteed rate of return and certain life insurance products), but which are not legally classified as such;
• to take into account all income from investment funds received within and outside of the EU in addition to income from undertakings for collective investment in transferable securities authorised in accordance with the Directive 85/611/EEC (UCITS) which are already contained in the current Directive.

Last updated: 25.01.2015