European Tax Directive FAQ

This FAQ is best read after reading our article on the EU Tax Directive .

When did the Savings Tax Directive come into force?

The STD came into effect on 1st July, 2005.

What types of income are covered by the STD?

Savings income is covered, which means essentially interest earned on bank deposits, interest from, and proceeds on the sale or redemption of, certain bonds and income from certain types of investment funds (principally open-ended money market retail funds). See above for a fuller definition.

Which countries are covered by the STD?

All Member States of the EU, and a number of third countries and dependent territories. Not Panama.

How will the Directive affect my income?

If your income is covered by the Directive, the entity paying you (bank, fund etc) either deducts tax from it (20% at present) or reports the income to your home tax authority.

If I receive income in the country where I reside, is it affected?

No. The Directive applies only to income you receive in affected countries or territories which are outside your country of residence.

I live in the USA. Am I affected by the Directive?

No. The US has not accepted the Directive. However, if you have investments in any of the affected countries you may need to prove to the bank or fund concerned that you are a US resident, in order to avoid taxation.

What information will I have to give to my bank?

This depends slightly on where you live, and they will ask you for the information if you need to give it. The minimum amount of information will consist of: identity and residence of the beneficial owner; name and address of the paying agent/ bank, account number of the beneficial owner; the amount of interest income earned, plus information regarding any proceeds from sale, redemption or refunds.

How much tax will I have to pay under the withholding tax regime?

If the country or territory where you receive income is operating the withholding tax regime, it will deduct 15% between 2005 and 2008, when the rate rises to 20%. From 2011 the rate will rise to 35%.

What happens to the tax I pay?

If the financial institution which is paying you is using the 'withholding tax' option, it pays the tax to the authorities in its own country. They keep 25% of the money and send on the remaining 75% to your home country (where you are resident).

Does my tax authority know I have paid the tax?

No, because the withholding tax is paid on in 'bundles' and individual payments are not identified. However, if you want to claim the tax payment against your home tax assessment, you need to obtain a certificate from the institution which paid you.

I have an offshore bank account; do I have to pay tax on the interest?

Only if the country or territory in which you have your bank account is applying the Directive . Therefore NOT applicable in Panama.

What is the position with joint accounts?

If one of the holders is resident in an EU Member State, then it may be that the income would be divided between the holders. This is a situation you need to discuss with your bank.

What is the position with companies?

The Directive applies only to individuals; companies and other corporate bodies (eg foundations and many trusts) are not covered by the Directive.

Which countries are applying the withholding tax?

Inside the EU, only Belgium, Austria and Luxembourg apply the withholding tax. Outside countries doing so include Switzerland, Liechtenstein, the Turks and Caicos Islands, Jersey, the BVI, Guernsey, and the Isle of Man.

Can I choose to provide information instead of paying the withholding tax?

This depends on the country concerned. All countries have the option of offering information-sharing rather than the withholding tax, but even in those that have decided to make such an offer it then depends on whether your particular financial institution has made the necessary administrative arrangements. Many may choose not to do so.

Glossary

FATF

The Financial Action Task Force. An office of the OECD responsible for the adoption and implementation of measures designed to counter the use of the financial systems by criminals.

Grandfathered Bond

A bond (a security on which interest payments are made to the holder) which was issued before 1st March 2001 and which matures before 2012. At the insistence of the UK, which has a very large bond issuance industry, such bonds were 'grandfathered' into the STD regime, and are not subject to withholding tax or information exchange under the STD.

Interest Payment

The EU has drafted a very broad definition of an 'interest payment' which seeks to encompass "debt claims of every kind." This includes income from government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures. It also encompasses accrued and capitalised interest, such as interest accrued on zero-coupon bonds. The definition of interest includes income derived through indirect investment, through funds of which more than 40% of the assets are invested in debt instruments.

OECD

The Organisation for Economic Cooperation and Development, comprising the 30 most advanced economies, based in Paris, and which was in the forefront of the attack on 'offshore' in the late 1990s.

Paying Agent

According to the Savings Tax Directive, a 'paying agent' is defined as "any economic operator who pays interest to, or secures the payment of interest for, the immediate benefit of the beneficial owner, whether the operator is the debtor of the debt claim which produces the interest or the operator charged by the debtor or the beneficial owner with paying interest or securing the payment of interest."

TIN (Tax Identification Number)

This is an individual's tax registration number in his or her country of residence. A financial institution in one of the countries covered by the Savings Tax Directive may ask for this information to form part of the information they 'exchange' with a payee's home country; but other information such as passport or identity card data is an adequate substitute.

UCITS

Undertakings for Collective Investment in Transferable Securities, which are covered by the EU's UCITS Directive, meaning that they can be freely marketed across the EU. Such investment funds are subject to the STD if they qualify by holding sufficient quantities of debt in their investment portfolios.

Withholding Tax

A tax which is applied by 'withholding' the appropriate percentage (15% under the STD at the time of this writing, but will be increasing in the coming years) of a payment.

You may also be interested in our article on the EU Tax Directive.