What is the EU Savings Tax Directive 2005?

Summary: In July 2005 up to 39 countries across the world will start automatically exchanging private information relating to individuals who bank and invest in these countries. If you bank or invest in one of these countries and reside in another of the countries your privacy is about to be lost, information relating to your personal financial status will be passed to your tax authority and you could face at best a large tax bill, at worst a full investigation into your financial affairs. Are you prepared?

In July 2005 up to 39 countries across the world will start automatically exchanging private information relating to individuals who bank and invest in these countries.

If you bank or invest in one of these countries and reside in another of the countries your privacy is about to be lost, information relating to your personal financial status will be passed to your tax authority and you could face at best a large tax bill, at worst a full investigation into your financial affairs.

Are you prepared?

The EU Savings Tax Directive 2005, also known as ESD, is one third of the EU Tax Package which comprises of measures relating to the taxation of individuals and businesses that have been agreed by the European Union.

It is planned to come into effect on the 1st of July 2005 - providing that all the criteria for its introduction have been met by then.

This article is designed to give you - as an individual - the facts that you need to know; and as the other two measures within the EU Tax Package - namely the European Directive on Interest and Royalties and the Code of Conduct - relate to business taxation, they will not be discussed in this article.

Simply put, ESD is an agreement between the EU Member States to automatically exchange information about any customers who earn savings income in one EU State but who reside in another EU State.  This is known as the ‘automatic exchange of information option’ and it is the ultimate objective of the Directive.

Therefore, an individual’s identity, their address, the bank or investment house where their affected assets are held, the level of ‘savings income’ received and the period over which it has been received will all be passed automatically to the tax authority in the country in which the money is ‘housed’.  This information will then automatically be passed on to the tax authority in the country in which the individual resides!

But what does the EU mean by ‘savings income’?  Good question, glad you asked

Under the ESD there are actually 4 main category of ‘savings income’: -

1) the interest paid out on debt claims or credited to accounts
2) the interest rolled up and paid on the termination of a debt claim
3) the distributions from certain investment funds which have over 15% of the fund invested in debt claims
4) the income accumulated and paid out upon the sale or redemption of units in certain investment funds where over 40% of the fund is invested in debt claims

Confused?! 

Well, savings income as defined by the ESD is basically interest earned on your bank account deposits, interest from and proceeds from the sale or redemption of certain types of bond, and income from certain types of investment fund.

Now bearing in mind that the EU is a rather large and cumbersome beast, there are of course all sorts of exceptions and a number of additions to the Directive and nothing is ever as simple as it might first seem!

Firstly, three EU Member States have decided against the automatic exchange of information option.

Austria, Belgium and Luxembourg have decided to apply a ‘withholding tax option’ for a given transitional period instead.

In these three countries tax will be deducted at source from income derived from savings belonging to EU residents who are resident in another EU State. 

The rate of withholding tax will be 15% initially in July 2005 rising gradually to 35% from July 2011.

But…

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