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The so-called European Union withholding tax is a withholding tax which is deducted from interest earned by European Union residents on their investments made in another member state, by the state in which the investment is held. Withholding tax is an amount withheld by the party making payment to another (payee and paid to the taxation authorities The European Union ( EU) is a political and economic union of twenty-seven member states, located primarily in (The European Union has no taxation powers, so the name is strictly a misnomer). The European Union ( EU) is a political and economic union of twenty-seven member states, located primarily in The aim of the tax is to ensure that citizens of one member state do not evade taxation by depositing funds outside the jurisdiction of residence and so distort the single market. Tax avoidance is the legal utilization of the Tax regime to one's own advantage in order to reduce the amount of tax that is payable by means that are within the law The tax is withheld at source and passed on to the EU Country of residence. All but three member states disclose 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).

Contents

Date of introduction

The tax was introduced at the time of the introduction of the European Union Savings Directive (EUSD), a directive on the taxation of interest income from savings within the European Union. A directive is a legislative act of the European Union which requires member states to achieve a particular result without dictating the means of achieving This came into effect on the 1st July 2005.

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. Withholding tax is an amount withheld by the party making payment to another (payee and paid to the taxation authorities

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. Bank secrecy (or bank privacy) is a legal principle under which Banks are allowed to protect personal information about their customers through the use of Numbered

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. The European Commission (formally the Commission of the European Communities) is the executive branch of the European Union. 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 informally as the EU Withholding Tax.

Countries affected

The EU withholding tax currently applies to the residents of the 27 European Union Member States as shown below:

Together with their dates of accession, the 27 current members of the European Union are:

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. A Member State of the European Union is any one of the twenty-seven sovereign Nation states that have acceded the European Union (EU since its De facto Austria (Österreich ( officially the Republic of Austria (Republik Österreich Year 1995 ( MCMXCV) was a Common year starting on Sunday. Events of 1995 The Kingdom of Belgium is a Country in northwest Europe. It is a founding member of the European Union and hosts its headquarters as well as those Year 1952 ( MCMLII) was a Leap year starting on Tuesday (link will display full calendar of the Gregorian calendar. Year 1958 ( MCMLVIII) was a Common year starting on Wednesday (link will display full calendar of the Gregorian calendar. The state of Bulgaria (България transliterated bg-Latn ''Balgaria'' The country preserves the traditions (in ethnic name language and alphabet of the First Bulgarian Year 2007 ( MMVII) was a Common year starting on Monday of the Gregorian calendar in the 21st century. Cyprus (Κύπρος transliterated: Kýpros,; Kıbrıs officially the Republic of Cyprus (Κυπριακή Δημοκρατία Kypriakī́ Dīmokratía "MMIV" redirects here For the Modest Mouse album see " Baron von Bullshit Rides Again " The Czech Republic ( ˈt͡ʃɛskaː ˈrɛpuˌblɪka short form in Česko ˈt͡ʃɛskɔ also called Czechia, "MMIV" redirects here For the Modest Mouse album see " Baron von Bullshit Rides Again " The Kingdom of Denmark ( ˈd̥ænmɑɡ̊ (archaic ˈd̥anmɑːɡ̊ commonly known as Denmark, is a country in the Scandinavian region of northern Europe Year 1973 ( MCMLXXIII) was a Common year starting on Monday (link will display full calendar of the 1973 Gregorian calendar. Estonia, officially the Republic of Estonia ( Eesti or Eesti Vabariik) is a Country in Northern Europe in the Baltic region "MMIV" redirects here For the Modest Mouse album see " Baron von Bullshit Rides Again " Finland, officially the Republic of Finland ( is a Nordic country situated in the Fennoscandian region of northern Europe. Year 1995 ( MCMXCV) was a Common year starting on Sunday. Events of 1995 This article is about the country For a topic outline on this subject see List of basic France topics. Year 1952 ( MCMLII) was a Leap year starting on Tuesday (link will display full calendar of the Gregorian calendar. Year 1958 ( MCMLVIII) was a Common year starting on Wednesday (link will display full calendar of the Gregorian calendar. Germany, officially the Federal Republic of Germany ( ˈbʊndəsʁepuˌbliːk ˈdɔʏtʃlant is a Country in Central Europe. Year 1952 ( MCMLII) was a Leap year starting on Tuesday (link will display full calendar of the Gregorian calendar. Year 1958 ( MCMLVIII) was a Common year starting on Wednesday (link will display full calendar of the Gregorian calendar. Greece (Ελλάδα transliterated: Elláda, historically, Ellás,) officially the Hellenic Republic (Ελληνική Δημοκρατία Year 1981 ( MCMLXXXI) was a Common year starting on Thursday (link displays the 1981 Hungary (Magyarország 'mɔɟɔrorsaːg) officially in English the Republic of Hungary ( Magyar Köztársaság, literally Magyar (Hungarian Republic "MMIV" redirects here For the Modest Mouse album see " Baron von Bullshit Rides Again " Ireland ( Irish: Éire, ˈeːrʲə is a country in north-western Europe. Year 1973 ( MCMLXXIII) was a Common year starting on Monday (link will display full calendar of the 1973 Gregorian calendar. Italy (Italia officially the Italian Republic, (Repubblica Italiana is located on the Italian Peninsula in Southern Europe, and on the two largest Year 1952 ( MCMLII) was a Leap year starting on Tuesday (link will display full calendar of the Gregorian calendar. Year 1958 ( MCMLVIII) was a Common year starting on Wednesday (link will display full calendar of the Gregorian calendar. Latvia ( Latvija officially the Republic of Latvia (Latvijas Republika is a Country in Northern Europe in the Baltic region. "MMIV" redirects here For the Modest Mouse album see " Baron von Bullshit Rides Again " Lithuania, officially the Republic of Lithuania (Lietuvos Respublika is a Country in Eastern often referred to as Northern Europe or in the "MMIV" redirects here For the Modest Mouse album see " Baron von Bullshit Rides Again " Luxembourg (Groussherzogtum Lëtzebuerg Grand-Duché de Luxembourg Großherzogtum Luxemburg is a small Landlocked country in Western Europe, bordered by Year 1952 ( MCMLII) was a Leap year starting on Tuesday (link will display full calendar of the Gregorian calendar. Year 1958 ( MCMLVIII) was a Common year starting on Wednesday (link will display full calendar of the Gregorian calendar. Malta, officially the Republic of Malta (Repubblika ta' Malta is a European Microstate, comprising an Archipelago of three islands "MMIV" redirects here For the Modest Mouse album see " Baron von Bullshit Rides Again " The Netherlands ( Dutch:, ˈnedərlɑnt is the European part of the Kingdom of the Netherlands, which consists of the Netherlands the Netherlands Year 1952 ( MCMLII) was a Leap year starting on Tuesday (link will display full calendar of the Gregorian calendar. Year 1958 ( MCMLVIII) was a Common year starting on Wednesday (link will display full calendar of the Gregorian calendar. Poland (Polska officially the Republic of Poland "MMIV" redirects here For the Modest Mouse album see " Baron von Bullshit Rides Again " Portugal, officially the Portuguese Republic (República Portuguesa is a country on the Iberian Peninsula. Year 1986 ( MCMLXXXVI) was a Common year starting on Wednesday (link displays 1986 Gregorian calendar) Romania ( dated: Rumania, Roumania Year 2007 ( MMVII) was a Common year starting on Monday of the Gregorian calendar in the 21st century. Slovakia (long form Slovak Republic; Slovak:, long form, is a Landlocked country in Central Europe with a population of over five million "MMIV" redirects here For the Modest Mouse album see " Baron von Bullshit Rides Again " Slovenia, officially the Republic of Slovenia (Republika Slovenija) is a Country in southern Central Europe bordering Italy to the west "MMIV" redirects here For the Modest Mouse album see " Baron von Bullshit Rides Again " Spain () or the Kingdom of Spain (Reino de España is a country located mostly in southwestern Europe on the Iberian Peninsula. Year 1986 ( MCMLXXXVI) was a Common year starting on Wednesday (link displays 1986 Gregorian calendar) "Sverige" redirects here For other uses see Sweden (disambiguation and Sverige (disambiguation. Year 1995 ( MCMXCV) was a Common year starting on Sunday. Events of 1995 The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom, the UK or Britain,is a Sovereign state located Year 1973 ( MCMLXXIII) was a Common year starting on Monday (link will display full calendar of the 1973 Gregorian calendar.

Anti-evasion

Certain anti-evasion 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]

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".

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. Generally a company is a form of Business organization. The precise definition varies A discretionary trust is a trust where the beneficiaries and/or their entitlements to the trust fund are not fixed but are determined by the criteria set out in the A foundation is a legal categorization of Nonprofit organizations. A collective investment scheme is a way of investing money with other people to participate in a wider range of investments than those feasible for most individual investors , except in very special circumstances, e. g. a "bare trust". A bare trust (sometimes referred to as a simple trust) is a trust in which the beneficiary has a Right to both Income and capital

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. The Bailiwick of Jersey ( Jèrriais: Jèrri) is a British Crown dependency off the coast of Normandy, France. Switzerland (English pronunciation; Schweiz Swiss German: Schwyz or Schwiiz Suisse Svizzera Svizra officially the Swiss Confederation Neither Jersey nor Switzerland is in the European Union. The European Union ( EU) is a political and economic union of twenty-seven member states, located primarily in

Companies

The EU withholding tax does not apply to interest paid to companies. A separate EU directive, the Interest and Royalties Directive, applies to interest (or royalties) paid by a company in one member state to an associated company in another member state. [1] Such interest is exempt from withholding tax, although in many cases interest paid is in any event exempt from withholding tax under the terms of double tax treaties between member states. Tax treaties exist between many countries on a bilateral basis to prevent Double taxation ( Taxes levied twice on the same Income, Profit,

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.

Beckham Law

Spain has introduced a similar concept to the UK non-domiciled rule above, known as the Beckham law. The " Beckham Law " (Royal Decree 687/2005 is a Spanish Tax Decree passed in June 2005 The law gained its nick-name after the footballer David Beckham became one of the first foreigners to take advantage of it. David Robert Joseph Beckham, and is also a member of the England national team. However the law is aimed at all foreign workers (particularly the wealthier ones) living in Spain. Upon application and acceptance such individuals are only liable for Spanish taxes on their Spanish source income and assets. As with the UK non-domiciled individuals, exemption from tax on foreign income must be proven to the financial institution to avoid the EU Savings Tax deduction.

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 (2005-07-01 – 2008-06-30),
  • 20% in the next three years (2008-07-01 – 2011-06-30), and
  • 35% after 2011-07-01. Year 2005 ( MMV) was a Common year starting on Saturday (link displays full calendar of the Gregorian calendar. "July 1st" redirects here For the Ayumi Hamasaki song see H (song. 2008 ( MMVIII) is the current year in accordance with the Gregorian calendar, a Leap year that started on Tuesday of the Common Events 350 - Roman usurper Nepotianus, of the Constantinian dynasty, is defeated and killed by troops of the Usurper 2008 ( MMVIII) is the current year in accordance with the Gregorian calendar, a Leap year that started on Tuesday of the Common "July 1st" redirects here For the Ayumi Hamasaki song see H (song. 2011 ( MMXI) will be a Common year starting on Saturday of the Gregorian calendar. Events 350 - Roman usurper Nepotianus, of the Constantinian dynasty, is defeated and killed by troops of the Usurper 2011 ( MMXI) will be a Common year starting on Saturday of the Gregorian calendar. "July 1st" redirects here For the Ayumi Hamasaki song see H (song.

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.

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. The Kingdom of Belgium is a Country in northwest Europe. It is a founding member of the European Union and hosts its headquarters as well as those Luxembourg (Groussherzogtum Lëtzebuerg Grand-Duché de Luxembourg Großherzogtum Luxemburg is a small Landlocked country in Western Europe, bordered by Austria (Österreich ( officially the Republic of Austria (Republik Österreich

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. Gibraltar (dʒɨˈbrɒltər is a British overseas territory located near the southernmost tip of the Iberian Peninsula overlooking the Strait of Gibraltar 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. Gibraltar (dʒɨˈbrɒltər is a British overseas territory located near the southernmost tip of the Iberian Peninsula overlooking the Strait of Gibraltar

Among the third countries signatories there are also, Anguilla, Cayman Islands, Montserrat and Aruba who have agreed to exchanging information. Anguilla (English pronunciation ang-GWILL-ah, æŋˈɡwɪlə is a British overseas territory in the Caribbean, one of the most northerly of the Leeward The Cayman Islands are a British overseas territory located in the western Caribbean Sea, comprising the islands of Grand Cayman, Cayman Brac Montserrat (ˌmɒntsəˈræt is British overseas territory located in the Leeward Islands, part of the chain of islands called the Lesser Antilles Aruba is a -long island of the Lesser Antilles in the southern Caribbean Sea, north of the Paraguaná Peninsula, Falcón State, Venezuela

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):

Countries who did not sign any agreement

Singapore, Hong Kong, Bermuda and Barbados did not sign any agreement. Austria (Österreich ( officially the Republic of Austria (Republik Österreich The Kingdom of Belgium is a Country in northwest Europe. It is a founding member of the European Union and hosts its headquarters as well as those Luxembourg (Groussherzogtum Lëtzebuerg Grand-Duché de Luxembourg Großherzogtum Luxemburg is a small Landlocked country in Western Europe, bordered by Andorra, officially the Principality of Andorra ( Catalan: Principat d'Andorra) is a small Landlocked country in western The British Virgin Islands ( BVI) is a British overseas territory, located in the Caribbean to the east of Puerto Rico. The Channel Islands ( Norman: Îles d'la Manche, French: Îles Anglo-Normandes or Îles de la Manche) are a group of Islands The Netherlands Antilles ( Dutch:) previously known as the Netherlands West Indies or Dutch Antilles/West Indies, is part of the Lesser Antilles The Isle of Man (Ellan Vannin ˈɛlʲən ˈvanɪn or Mann (Mannin) is a self-governing Crown dependency, located in the Irish Sea at the geographical The Principality of Liechtenstein (Fürstentum Liechtenstein) is a tiny doubly landlocked Alpine country in Western Europe, bordered by Switzerland For other uses see Monaco (disambiguation Monaco, officially the Principality of Monaco ( French: Principauté de Monaco; Monégasque The Most Serene Republic of San Marino (Serenissima Repubblica di San Marino is a country in the Apennine Mountains. Switzerland (English pronunciation; Schweiz Swiss German: Schwyz or Schwiiz Suisse Svizzera Svizra officially the Swiss Confederation The Turks and Caicos Islands ( TCI) (ˈtɜːks ænd ˈkeɪkəs are a British Overseas Territory consisting of two groups of tropical islands in the West Indies Singapore Hong Kong ( officially the Hong Kong Special Administrative Region, is a territory located on China 's south coast on the Pearl River Delta, and borders Ba (officially The Bermuda Islands or The Somers Isles) is a British overseas territory in the North Atlantic Ocean. Barbados ( Portuguese word for bearded-ones, bɑrˈbeɪdoʊz -dɒs situated just east of the Caribbean Sea, is an independent Island nation

External links to legislation, guidelines and commentary

See also

An offshore bank is a Bank located outside the country of residence of the depositor typically in a low tax jurisdiction (or Tax haven) that provides financial Private banks are Banks that are not incorporated. A non-incorporated bank is owned by either an individual or a general partner(s with limited partner(s Banking in Switzerland is characterized by stability privacy and protection of clients' assets and information
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