European Union withholding tax
Encyclopedia
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. (The European Union
has no taxation powers, so the name is strictly a misnomer). 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. 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).
whilst bank secrecy remained protected.
laws prevent the disclosure of information about account holders, their assets, and their interest or other income.
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. 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 35% 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.
Together with their dates of accession, the 27 current members of the European Union are:
Initial reports as to the amounts of funds raised by the withholding tax suggest that the anti-avoidance measures have not been particularly effective.
, discretionary trust
s, foundation
s, stiftungs, anstalts, investment funds, etc., except in very special circumstances, e.g. a "bare trust
".
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. Neither Jersey nor Switzerland are in the European Union
.
between member states.
. The law gained its nickname after the footballer David Beckham
became one of the first foreigners to take advantage of it. 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.
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.
(till 31.12.2009) and Austria
have agreed to exchange information with each other. Belgium has decided to discontinue applying the transitional withholding tax as of 1 January 2010 and exchange information as of that date.
In Luxembourg
clients can choose between exchange of information and withholding tax retention.
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. 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.
Among the third countries signatories there are also, Anguilla
, Cayman Islands
, Montserrat
and Aruba
who have agreed to exchanging information.
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):
, Hong Kong
, Bermuda
and Barbados
did not sign any agreement.
Bermuda
, an UK dependent territory was missed out by EU by accident.
Withholding tax
Withholding tax, also called retention tax, is a government requirement for the payer of an item of income to withhold or deduct tax from the payment, and pay that tax to the government. In most jurisdictions, withholding tax applies to employment income. Many jurisdictions also require...
which is deducted from interest earned by European Union
European Union
The European Union is an economic and political union of 27 independent member states which are located primarily in Europe. The EU traces its origins from the European Coal and Steel Community and the European Economic Community , formed by six countries in 1958...
residents on their investments made in another member state, by the state in which the investment is held. (The European Union
European Union
The European Union is an economic and political union of 27 independent member states which are located primarily in Europe. The EU traces its origins from the European Coal and Steel Community and the European Economic Community , formed by six countries in 1958...
has no taxation powers, so the name is strictly a misnomer). The aim of the tax is to ensure that citizens of one member state do not evade taxation
Tax evasion
Tax evasion is the general term for efforts by individuals, corporations, trusts and other entities to evade taxes by illegal means. Tax evasion usually entails taxpayers deliberately misrepresenting or concealing the true state of their affairs to the tax authorities to reduce their tax liability,...
by depositing funds outside the jurisdiction of residence and so distort the single market. 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
Single market
A single market is a type of trade bloc which is composed of a free trade area with common policies on product regulation, and freedom of movement of the factors of production and of enterprise and services. The goal is that the movement of capital, labour, goods, and services between the members...
policy).
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. This came into effect on the 1st July 2005.Objective of the EU Savings Directive
The original aim of the EUSD was that all countries 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 the Isle of Man, 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 taxWithholding tax
Withholding tax, also called retention tax, is a government requirement for the payer of an item of income to withhold or deduct tax from the payment, and pay that tax to the government. In most jurisdictions, withholding tax applies to employment income. Many jurisdictions also require...
whilst bank secrecy remained protected.
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 secrecyBank secrecy
Bank secrecy is a legal principle in some jurisdictions under which banks are not allowed to provide to authorities personal and account information about their customers unless certain conditions apply...
laws prevent the disclosure of information about account holders, their assets, and their interest or other income.
Finally an agreement was struck with the objecting countries. The objecting countries achieved agreement from the EC
European Commission
The European Commission is the executive body of the European Union. The body is responsible for proposing legislation, implementing decisions, upholding the Union's treaties and the general day-to-day running of the Union....
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. 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 35% 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:
| (1995) (founding member: 1952/58) (2007) (2004) (2004) (1973) (2004) (1995) (founding member: 1952/58) (founding member: 1952/58) (1981) (2004) (1973) (founding member: 1952/58) | (2004) (2004) (founding member: 1952/58) (2004) (founding member: 1952/58) (2004) (1986) (2007) (2004) (2004) (1986) (1995) (1973) |
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.Anti-avoidance
Certain anti-avoidance 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.
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 companiesCompany
A company is a form of business organization. It is an association or collection of individual real persons and/or other companies, who each provide some form of capital. This group has a common purpose or focus and an aim of gaining profits. This collection, group or association of persons can be...
, discretionary trust
Discretionary trust
In British and Canadian law, 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 trust instrument by the settlor. It is sometimes referred to as a family trust in Australia...
s, foundation
Foundation (charity)
A foundation is a legal categorization of nonprofit organizations that will typically either donate funds and support to other organizations, or provide the source of funding for its own charitable purposes....
s, stiftungs, anstalts, investment funds, etc., except in very special circumstances, e.g. a "bare trust
Bare trust
A bare trust is a trust in which the beneficiary has a right to both income and capital and may call for both to be remitted into his own name. He is also entitled to take actual ownership and control of the trust property...
".
The EU withholding tax is not deducted from individuals who reside outside the European Union. Thus, for example, a resident of Jersey
Jersey
Jersey, officially the Bailiwick of Jersey is a British Crown Dependency off the coast of Normandy, France. As well as the island of Jersey itself, the bailiwick includes two groups of small islands that are no longer permanently inhabited, the Minquiers and Écréhous, and the Pierres de Lecq and...
or of Switzerland
Switzerland
Switzerland name of one of the Swiss cantons. ; ; ; or ), in its full name the Swiss Confederation , is a federal republic consisting of 26 cantons, with Bern as the seat of the federal authorities. The country is situated in Western Europe,Or Central Europe depending on the definition....
, would not pay the tax, even though these countries have signed the agreement with the EU. Neither Jersey nor Switzerland are in the European Union
European Union
The European Union is an economic and political union of 27 independent member states which are located primarily in Europe. The EU traces its origins from the European Coal and Steel Community and the European Economic Community , formed by six countries in 1958...
.
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. 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 treatiesTax treaty
Many countries have agreed with other countries in treaties to mitigate the effects of double taxation . Tax treaties may cover income taxes, inheritance taxes, value added taxes, or other taxes...
between member states.
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 lawBeckham law
The "Beckham Law" is a Spanish Tax Decree passed in June 2005. The law gained its nickname after the footballer David Beckham became one of the first foreigners to take advantage of it. However the law is aimed at all foreign workers living in Spain...
. The law gained its nickname after the footballer David Beckham
David Beckham
David Robert Joseph Beckham, OBE is an English footballer who plays midfield for Los Angeles Galaxy in Major League Soccer, having previously played for Manchester United, Preston North End, Real Madrid, and A.C...
became one of the first foreigners to take advantage of it. 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.
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 BelgiumBelgium
Belgium , officially the Kingdom of Belgium, is a federal state in Western Europe. It is a founding member of the European Union and hosts the EU's headquarters, and those of several other major international organisations such as NATO.Belgium is also a member of, or affiliated to, many...
(till 31.12.2009) and Austria
Austria
Austria , officially the Republic of Austria , is a landlocked country of roughly 8.4 million people in Central Europe. It is bordered by the Czech Republic and Germany to the north, Slovakia and Hungary to the east, Slovenia and Italy to the south, and Switzerland and Liechtenstein to the...
have agreed to exchange information with each other. Belgium has decided to discontinue applying the transitional withholding tax as of 1 January 2010 and exchange information as of that date.
In Luxembourg
Luxembourg
Luxembourg , officially the Grand Duchy of Luxembourg , is a landlocked country in western Europe, bordered by Belgium, France, and Germany. It has two principal regions: the Oesling in the North as part of the Ardennes massif, and the Gutland in the south...
clients can choose between exchange of information and withholding tax retention.
Gibraltar
Gibraltar
Gibraltar is a British overseas territory located on the southern end of the Iberian Peninsula at the entrance of the Mediterranean. A peninsula with an area of , it has a northern border with Andalusia, Spain. The Rock of Gibraltar is the major landmark of the region...
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. Residents of Gibraltar
Gibraltar
Gibraltar is a British overseas territory located on the southern end of the Iberian Peninsula at the entrance of the Mediterranean. A peninsula with an area of , it has a northern border with Andalusia, Spain. The Rock of Gibraltar is the major landmark of the region...
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.
Among the third countries signatories there are also, Anguilla
Anguilla
Anguilla is a British overseas territory and overseas territory of the European Union in the Caribbean. It is one of the most northerly of the Leeward Islands in the Lesser Antilles, lying east of Puerto Rico and the Virgin Islands and directly north of Saint Martin...
, Cayman Islands
Cayman Islands
The Cayman Islands is a British Overseas Territory and overseas territory of the European Union located in the western Caribbean Sea. The territory comprises the three islands of Grand Cayman, Cayman Brac, and Little Cayman, located south of Cuba and northwest of Jamaica...
, Montserrat
Montserrat
Montserrat is a British overseas territory located in the Leeward Islands, part of the chain of islands called the Lesser Antilles in the West Indies. This island measures approximately long and wide, giving of coastline...
and Aruba
Aruba
Aruba is a 33 km-long island of the Lesser Antilles in the southern Caribbean Sea, located 27 km north of the coast of Venezuela and 130 km east of Guajira Peninsula...
who have agreed to exchanging information.
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:
- AustriaAustriaAustria , officially the Republic of Austria , is a landlocked country of roughly 8.4 million people in Central Europe. It is bordered by the Czech Republic and Germany to the north, Slovakia and Hungary to the east, Slovenia and Italy to the south, and Switzerland and Liechtenstein to the...
- BelgiumBelgiumBelgium , officially the Kingdom of Belgium, is a federal state in Western Europe. It is a founding member of the European Union and hosts the EU's headquarters, and those of several other major international organisations such as NATO.Belgium is also a member of, or affiliated to, many...
- abolished as of 31 December 2009 - LuxembourgLuxembourgLuxembourg , officially the Grand Duchy of Luxembourg , is a landlocked country in western Europe, bordered by Belgium, France, and Germany. It has two principal regions: the Oesling in the North as part of the Ardennes massif, and the Gutland in the south...
Other countries (Not EU member states), (the following countries also maintain bank secrecy):
- AndorraAndorraAndorra , officially the Principality of Andorra , also called the Principality of the Valleys of Andorra, , is a small landlocked country in southwestern Europe, located in the eastern Pyrenees mountains and bordered by Spain and France. It is the sixth smallest nation in Europe having an area of...
- British Virgin IslandsBritish Virgin IslandsThe Virgin Islands, often called the British Virgin Islands , is a British overseas territory and overseas territory of the European Union, located in the Caribbean to the east of Puerto Rico. The islands make up part of the Virgin Islands archipelago, the remaining islands constituting the U.S...
- Channel IslandsChannel IslandsThe Channel Islands are an archipelago of British Crown Dependencies in the English Channel, off the French coast of Normandy. They include two separate bailiwicks: the Bailiwick of Guernsey and the Bailiwick of Jersey...
- LebanonLebanonLebanon , officially the Republic of LebanonRepublic of Lebanon is the most common term used by Lebanese government agencies. The term Lebanese Republic, a literal translation of the official Arabic and French names that is not used in today's world. Arabic is the most common language spoken among...
- LiechtensteinLiechtensteinThe Principality of Liechtenstein is a doubly landlocked alpine country in Central Europe, bordered by Switzerland to the west and south and by Austria to the east. Its area is just over , and it has an estimated population of 35,000. Its capital is Vaduz. The biggest town is Schaan...
- MonacoMonacoMonaco , officially the Principality of Monaco , is a sovereign city state on the French Riviera. It is bordered on three sides by its neighbour, France, and its centre is about from Italy. Its area is with a population of 35,986 as of 2011 and is the most densely populated country in the...
- Netherlands AntillesNetherlands AntillesThe Netherlands Antilles , also referred to informally as the Dutch Antilles, was an autonomous Caribbean country within the Kingdom of the Netherlands, consisting of two groups of islands in the Lesser Antilles: Aruba, Bonaire and Curaçao , in Leeward Antilles just off the Venezuelan coast; and Sint...
- San MarinoSan MarinoSan Marino, officially the Republic of San Marino , is a state situated on the Italian Peninsula on the eastern side of the Apennine Mountains. It is an enclave surrounded by Italy. Its size is just over with an estimated population of over 30,000. Its capital is the City of San Marino...
- SwitzerlandSwitzerlandSwitzerland name of one of the Swiss cantons. ; ; ; or ), in its full name the Swiss Confederation , is a federal republic consisting of 26 cantons, with Bern as the seat of the federal authorities. The country is situated in Western Europe,Or Central Europe depending on the definition....
, although on Sept. 25th, 2009, Switzerland was added to the OECD list of countries having substantially implemented the internationally agreed tax standards - Turks and Caicos IslandsTurks and Caicos IslandsThe Turks and Caicos Islands are a British Overseas Territory and overseas territory of the European Union consisting of two groups of tropical islands in the Caribbean, the larger Caicos Islands and the smaller Turks Islands, known for tourism and as an offshore financial centre.The Turks and...
Countries and territories of E.U. members who did not sign any agreement
SingaporeSingapore
Singapore , officially the Republic of Singapore, is a Southeast Asian city-state off the southern tip of the Malay Peninsula, north of the equator. An island country made up of 63 islands, it is separated from Malaysia by the Straits of Johor to its north and from Indonesia's Riau Islands by the...
, Hong Kong
Hong Kong
Hong Kong is one of two Special Administrative Regions of the People's Republic of China , the other being Macau. A city-state situated on China's south coast and enclosed by the Pearl River Delta and South China Sea, it is renowned for its expansive skyline and deep natural harbour...
, Bermuda
Bermuda
Bermuda is a British overseas territory in the North Atlantic Ocean. Located off the east coast of the United States, its nearest landmass is Cape Hatteras, North Carolina, about to the west-northwest. It is about south of Halifax, Nova Scotia, Canada, and northeast of Miami, Florida...
and Barbados
Barbados
Barbados is an island country in the Lesser Antilles. It is in length and as much as in width, amounting to . It is situated in the western area of the North Atlantic and 100 kilometres east of the Windward Islands and the Caribbean Sea; therein, it is about east of the islands of Saint...
did not sign any agreement.
Bermuda
Bermuda
Bermuda is a British overseas territory in the North Atlantic Ocean. Located off the east coast of the United States, its nearest landmass is Cape Hatteras, North Carolina, about to the west-northwest. It is about south of Halifax, Nova Scotia, Canada, and northeast of Miami, Florida...
, an UK dependent territory was missed out by EU by accident.
See also
- DomicileDomicile (law)In law, domicile is the status or attribution of being a permanent resident in a particular jurisdiction. A person can remain domiciled in a jurisdiction even after they have left it, if they have maintained sufficient links with that jurisdiction or have not displayed an intention to leave...
- List of sovereign states and dependent territories in Europe
- Offshore bankOffshore bankAn offshore bank is a bank located outside the country of residence of the depositor, typically in a low tax jurisdiction that provides financial and legal advantages. These advantages typically include:...
- Private bankPrivate bankPrivate banks are banks that are not incorporated. A private bank is owned by either an individual or a general partner with limited partner...
- Swiss bank