10 Q&A on the Savings Directive
The Savings Directive will shortly enter into force in Europe. The ultimate aim of the Directive is to enable savings income in the form of interest payments made in one EU Member State to beneficial owners who are individuals resident for tax purposes in another EU Member State to be made subject to effective taxation in accordance with the laws of the latter Member State. Directive will apply to income derived from third countries ( Switzerland , Andorra , Liechtenstein , Monaco and San Marino) and dependent or associated territories. The U.K. Revenue and Customs recently released questions and answers on the EU savings tax directive. This Q&A although specifically adressed to UK resident or domiciled taxpayers, may be used by resident in other EU countries to understand the mechanics of the new saving directive. Find below a selection of some of the most relevant Q&A which I adapted to tackle general issues arising in any EU member state:
1. When will the savings tax directive begin?
The savings tax directive comes into effect on 1 July 2005.
2. Which are the prescribed territories?
The prescribed territories are the territories prescribed in regulations. They are:
- the 25 EU Member States
- Aruba, the British Virgin Islands, Gibraltar, Guernsey, the Isle of Man, Jersey, Montserrat and the Netherlands Antilles
3. Where can I get hold of a copy of the Directive?
The Directive was published in the Office Journal of the European Union on 26 June 2003.
4. Which territories will be withholding tax?
The following territories will be withholding tax during a transitional period:
- Austria, Belgium and Luxembourg
- The British Virgin Islands, Guernsey, the Isle of Man, Jersey, the Netherlands Antilles and the Turks & Caicos Islands
- Andorra, Liechtenstein, Monaco, San Marino and Switzerland
5. I have a bank account in Austria/Jersey etc. -- will I have tax withheld?
Paying agents in these territories will be withholding tax from savings income they pay. You will be able to have the income paid without deduction of withholding tax under the Directive. Basically there are 2 options that territories can use to allow you to do this. Each territory will decide which of the 2 options it will adopt. (under procedure 1, the individual may authorise the paying agent to report details of the savings income payment to its tax authority, who will supply it to its tax authorities. Under procedure 2, the individual can ask its tax authorities for a specific certificate showing certain data. The individual then presents the completed certificate to the paying agent, and requests them not to withhold tax from the savings income).
6. I have a bank account in a country that will exchange information -- what does this mean for me?
The Directive will have no impact on anyone who properly declares all their income. In future the tax authorities of the country where you reside will receive information about savings income you receive from abroad. This will be supplied by the tax authority of the country in which the person who pays you (or who collects the income for you) is based. The information will then be compared with what you disclose in your tax return.
7. I already have tax withheld on my overseas bank account -- will this change?
No. Any tax withheld under the Directive is in addition to any tax withheld under the domestic laws of the country where the account is held.
8. How much tax will be withheld under the Directive?
Under the Directive, 15% tax will be withheld during the first three years after it takes effect, 20% during the next three years, and 35% after that.
9. Can I reclaim the tax withheld?
There are procedures on how you can ensure that no tax is withheld under the Directive. But if it is withheld, you can set it off against other tax you have to pay, or reclaim it (though any other foreign tax withheld can, as now, only be set off against any tax liability and cannot generally be repaid).
10. How will conventional tax withheld (at source) and tax withheld under the Directive (by paying agents) be treated?
Credit will be given first for any conventional tax withheld at source under existing rules before giving credit for tax withheld by paying agents under the Directive. This ensures that you get the maximum amount of credit.
Example
Suppose you receive interest of 100 from which tax of 10 is withheld in the country of source and from which tax of 15 is also withheld under the Directive by a paying agent in Luxembourg.
- If you have no worldwide tax liability, the tax authorities will repay to you the 15 Luxembourg tax. As now, there is no provision for repaying any of the tax withheld in the country of source.
- If you have a worldwide tax liability of 10, all the 10 tax withheld in the country of source will be credited against that liability, reducing it to nil, and the excess Luxembourg tax of 15 will be repaid to you.
- If you have a worldwide tax liability of 20, all the 10 tax withheld in the country of source and 10 of the Luxembourg tax will be credited against that liability, reducing it to nil. The tax authorities will repay to you the remaining 5 Luxembourg tax. If you have a worldwide tax liability of 40, all the 10 tax withheld in the country of source and all the 15 Luxembourg tax will be credited against that liability, reducing it to 15.
For the page of the EU commision on the Savings Directive click here.
1. When will the savings tax directive begin?
The savings tax directive comes into effect on 1 July 2005.
2. Which are the prescribed territories?
The prescribed territories are the territories prescribed in regulations. They are:
- the 25 EU Member States
- Aruba, the British Virgin Islands, Gibraltar, Guernsey, the Isle of Man, Jersey, Montserrat and the Netherlands Antilles
3. Where can I get hold of a copy of the Directive?
The Directive was published in the Office Journal of the European Union on 26 June 2003.
4. Which territories will be withholding tax?
The following territories will be withholding tax during a transitional period:
- Austria, Belgium and Luxembourg
- The British Virgin Islands, Guernsey, the Isle of Man, Jersey, the Netherlands Antilles and the Turks & Caicos Islands
- Andorra, Liechtenstein, Monaco, San Marino and Switzerland
5. I have a bank account in Austria/Jersey etc. -- will I have tax withheld?
Paying agents in these territories will be withholding tax from savings income they pay. You will be able to have the income paid without deduction of withholding tax under the Directive. Basically there are 2 options that territories can use to allow you to do this. Each territory will decide which of the 2 options it will adopt. (under procedure 1, the individual may authorise the paying agent to report details of the savings income payment to its tax authority, who will supply it to its tax authorities. Under procedure 2, the individual can ask its tax authorities for a specific certificate showing certain data. The individual then presents the completed certificate to the paying agent, and requests them not to withhold tax from the savings income).
6. I have a bank account in a country that will exchange information -- what does this mean for me?
The Directive will have no impact on anyone who properly declares all their income. In future the tax authorities of the country where you reside will receive information about savings income you receive from abroad. This will be supplied by the tax authority of the country in which the person who pays you (or who collects the income for you) is based. The information will then be compared with what you disclose in your tax return.
7. I already have tax withheld on my overseas bank account -- will this change?
No. Any tax withheld under the Directive is in addition to any tax withheld under the domestic laws of the country where the account is held.
8. How much tax will be withheld under the Directive?
Under the Directive, 15% tax will be withheld during the first three years after it takes effect, 20% during the next three years, and 35% after that.
9. Can I reclaim the tax withheld?
There are procedures on how you can ensure that no tax is withheld under the Directive. But if it is withheld, you can set it off against other tax you have to pay, or reclaim it (though any other foreign tax withheld can, as now, only be set off against any tax liability and cannot generally be repaid).
10. How will conventional tax withheld (at source) and tax withheld under the Directive (by paying agents) be treated?
Credit will be given first for any conventional tax withheld at source under existing rules before giving credit for tax withheld by paying agents under the Directive. This ensures that you get the maximum amount of credit.
Example
Suppose you receive interest of 100 from which tax of 10 is withheld in the country of source and from which tax of 15 is also withheld under the Directive by a paying agent in Luxembourg.
- If you have no worldwide tax liability, the tax authorities will repay to you the 15 Luxembourg tax. As now, there is no provision for repaying any of the tax withheld in the country of source.
- If you have a worldwide tax liability of 10, all the 10 tax withheld in the country of source will be credited against that liability, reducing it to nil, and the excess Luxembourg tax of 15 will be repaid to you.
- If you have a worldwide tax liability of 20, all the 10 tax withheld in the country of source and 10 of the Luxembourg tax will be credited against that liability, reducing it to nil. The tax authorities will repay to you the remaining 5 Luxembourg tax. If you have a worldwide tax liability of 40, all the 10 tax withheld in the country of source and all the 15 Luxembourg tax will be credited against that liability, reducing it to 15.
For the page of the EU commision on the Savings Directive click here.
posted by Talk Tax Blog at 2:12 pm
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