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:
The European Union withholding tax is the common name for 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 itself 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.
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 that came into effect on 1 July 2005.
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 tax whilst bank secrecy remained protected.
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.
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 income NOT considered as sourced in Switzerland, such as interest earned on fiduciary reposits, is passed on anonymously to the EU countries concerned, and is known informally as the EU Withholding Tax.
In the example below we use Greece as an example, but the same mechanism applies to any Member State.
If a Greek individual receives e.g. EUR 500 of interest income from a fiduciary deposit in a Swiss bank, the individual would have 2 possibilities:
(1) to accept the levying of the 35% "retention" tax under the EU-CH agreement (as discussed above), or
(2) to expressly authorise the Swiss bank to report that he has received the interest payments to the Swiss authorities that are then obliged to pass on automatically the information to the Greek competent authority (Art. 2 of the EU-CH agreement).
If the beneficial owner decides to be subject to the 35% "retention" tax under the EU-CH agreement, upon filing the Greek tax return, that tax is fully creditable, with possible subsequent reimbursement by Greece under Article 9(1) of the EU-CH agreement: "Where this amount exceeds the amount of tax due on the total amount of interest subject to retention in accordance with its national law, the Member State of residence for tax purposes shall repay the excess amount of tax withheld to the beneficial owner.". In the example, the "retention" tax under the EU-CH agreement is 500*0.35=175. 75% of that EUR 175 (175*0.75=131.25) would be transferred anonymously to Greece. Upon filing his tax return, the Greek beneficial owner is entitled to full credit, not only for the amount paid to Greece (EUR 131.25), but for the total "retention" tax levied under the EU-CH agreement (EUR 175). Therefore, if the Greek tax liability would be 500*0.10=50 and the credit would be EUR 175, the credit would cover 100% of the Greek tax liability and would exceed it by 50-175=-125. That excess credit (EUR 125) must be refunded to the beneficial owner by Greece.
If the beneficial owner chooses option (2) and authorises the Swiss bank to report the information, he will be only taxed in Greece according to the Greek domestic rate of 10% and the Greek competent authority will have the possibility to check that he has correctly declared the interest payments received from the Swiss bank.
In the example below we use Greece as an example, but the same mechanism applies to any Member State.
If a Greek beneficial owner has an ordinary bank account (i.e. not a fiduciary deposit) that produced interest income of e.g. EUR 500, he will be subject to 35% anticipatory tax in Switzerland under its domestic law (i.e. NOT under the EU-CH Agreement), i.e. 500*0.35=175.
Then, if the beneficial owner would like to use the reduced rate under GR-CH double tax treaty (10%), he would have to file a refund claim to the Swiss tax authorities. That claim would have to be accompanied by a certificate of tax residence issued by the Greek tax authorities. When requesting this certificate, the beneficial owner is effectively signalling to the Greek tax authorities the fact that he has earned or will earn income from a foreign source. Once he has filed the refund claim to the Swiss authorities, the Greek beneficial owner will be entitled to a refund for the difference between the anticipatory tax (500*0.35=175) and the maximum tax under the double tax treaty (500*0.10=50), which is 175-50=125. So, the actual tax burden in Switzerland after the application of the refund procedure is EUR 50. Now if the Greek domestic tax on the inbound interest income is 10%, it would in principle be levied on a gross basis, i.e. the tax base would be the full amount of interest income received (EUR 500). The Greek tax liability would be 500*0.10=50. However, under Art. 22 of the GR-CH Double tax treaty "Where a resident of Greece derives income which, in accordance with the provisions of this Convention may be taxed in Switzerland, Greece shall allow as a deduction from the tax on the income of that resident an amount equal to the income tax paid in Switzerland. Such deduction shall not, however, exceed that part of the Greek tax, as computed before the deduction is given, which is attributable to the income which may be taxed in Switzerland." The Greek beneficial owner would therefore be entitled to credit the EUR 50 levied in Switzerland against his tax liability in Greece, which is also EUR 50. Therefore, after the application of the credit, the Greek beneficial owner would not owe any Greek tax on that interest income.
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:
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.
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. [1]
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".
The EU withholding tax is levied only on individuals and not on companies, discretionary trusts, foundations, 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.[ citation needed ] 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.
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. [2] 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.
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. The exemption needs to be proven.
Spain has introduced a similar concept to the UK non-domiciled rule above, known as the Beckham law. 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.
The Countries that would be applying the transitory provisions, instead of exchanging information will retain withholding tax as follows:
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.
As of 2018 [update] , all EU member states exchange information with each other, per EU Council directive 2014/107/EU.
Prior to 2017, there were several exceptions for member countries. The most recent exception was Austria. Belgium decided to discontinue applying the transitional withholding tax in 2010 and exchange information afterwards. [3] In Luxembourg, clients could choose between exchange of information and withholding tax retention until 2015. [4]
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.
Countries that are not EU member states that also maintain bank secrecy:[ citation needed ]
Singapore, Hong Kong, Bermuda and Barbados did not sign any agreement.
Bermuda, a UK dependent territory was missed out by EU by accident. [5]
Banking in Switzerland dates to the early 18th century through Switzerland's merchant trade and has, over the centuries, grown into a complex, regulated, and international industry. Banking is seen as emblematic of Switzerland. The country has a long history of banking secrecy and client confidentiality reaching back to the early 1700s. Starting as a way to protect wealthy European banking interests, Swiss banking secrecy was codified in 1934 with the passage of a landmark federal law, the Federal Act on Banks and Savings Banks. These laws, which were used to protect assets of persons being persecuted by Nazi authorities, have also been used by people and institutions seeking to illegally evade taxes, hide assets, or generally commit financial crime.
An offshore bank is a bank that is operated and regulated under international banking license, which usually prohibits the bank from establishing any business activities in the jurisdiction of establishment. Due to less regulation and transparency, accounts with offshore banks were often used to hide undeclared income. Since the 1980s, jurisdictions that provide financial services to nonresidents on a big scale can be referred to as offshore financial centres. OFCs often also levy little or no corporation tax and/or personal income and high direct taxes such as duty, making the cost of living high.
A tax treaty, also called double tax agreement (DTA) or double tax avoidance agreement (DTAA), is an agreement between two countries to avoid or mitigate double taxation. Such treaties may cover a range of taxes including income taxes, inheritance taxes, value added taxes, or other taxes. Besides bilateral treaties, multilateral treaties are also in place. For example, European Union (EU) countries are parties to a multilateral agreement with respect to value added taxes under auspices of the EU, while a joint treaty on mutual administrative assistance of the Council of Europe and the Organisation for Economic Co-operation and Development (OECD) is open to all countries. Tax treaties tend to reduce taxes of one treaty country for residents of the other treaty country to reduce double taxation of the same income.
Double taxation is the levying of tax by two or more jurisdictions on the same income, asset, or financial transaction.
Taxation in Ireland in 2017 came from Personal Income taxes, and Consumption taxes, being VAT and Excise and Customs duties. Corporation taxes represents most of the balance, but Ireland's Corporate Tax System (CT) is a central part of Ireland's economic model. Ireland summarises its taxation policy using the OECD's Hierarchy of Taxes pyramid, which emphasises high corporate tax rates as the most harmful types of taxes where economic growth is the objective. The balance of Ireland's taxes are Property taxes and Capital taxes.
Tax withholding, also known as tax retention, pay-as-you-earn tax or tax deduction at source, is income tax paid to the government by the payer of the income rather than by the recipient of the income. The tax is thus withheld or deducted from the income due to the recipient. In most jurisdictions, tax withholding applies to employment income. Many jurisdictions also require withholding taxes on payments of interest or dividends. In most jurisdictions, there are additional tax withholding obligations if the recipient of the income is resident in a different jurisdiction, and in those circumstances withholding tax sometimes applies to royalties, rent or even the sale of real estate. Governments use tax withholding as a means to combat tax evasion, and sometimes impose additional tax withholding requirements if the recipient has been delinquent in filing tax returns, or in industries where tax evasion is perceived to be common.
International taxation is the study or determination of tax on a person or business subject to the tax laws of different countries, or the international aspects of an individual country's tax laws as the case may be. Governments usually limit the scope of their income taxation in some manner territorially or provide for offsets to taxation relating to extraterritorial income. The manner of limitation generally takes the form of a territorial, residence-based, or exclusionary system. Some governments have attempted to mitigate the differing limitations of each of these three broad systems by enacting a hybrid system with characteristics of two or more.
A common contractual fund (CCF) is a collective investment scheme structure in Ireland introduced by the European Communities UCITS Regulations, 2003.
Switzerland is not a member state of the European Union (EU). It is associated with the Union through a series of bilateral treaties in which Switzerland has adopted various provisions of European Union law in order to participate in the Union's single market, without joining as a member state. Among Switzerland's neighbouring countries, all but one are EU member states.
Taxation in Greece is based on the direct and indirect systems. The total tax revenue in 2017 was €47.56 billion from which €20.62 billion came from direct taxes and €26.94 billion from indirect taxes. The total tax revenue represented 39.4% of GDP in 2017. Taxes in Greece are collected by the Independent Authority for Public Revenue.
Taxes in Switzerland are levied by the Swiss Confederation, the cantons and the municipalities.
Netherlands benefits from a strategic geographic location, a world-class economy, a stable political climate, and a skilled workforce. The Netherlands has a large network of tax treaties, a low corporate income tax rate and a full participation exemption for capital gains and profits. These characteristics, in addition to a favorable tax environment, make Netherlands one of the most open economies in the world for multinational corporations (MNCs).
In Austria, taxes are levied by the state and the tax revenue in Austria was 42.7% of GDP in 2016 according to the World Bank The most important revenue source for the government is the income tax, corporate tax, social security contributions, value added tax and tax on goods and services. Another important taxes are municipal tax, real-estate tax, vehicle insurance tax, property tax, tobacco tax. There exists no property tax. The gift tax and inheritance tax were cancelled in 2008. Furthermore, self-employed persons can use a tax allowance of €3,900 per year. The tax period is set for a calendar year. However, there is a possibility of having an exception but a permission of the tax authority must be received. The Financial Secrecy Index ranks Austria as the 35th safest tax haven in the world.
Taxes in Germany are levied by the federal government, the states (Länder) as well as the municipalities (Städte/Gemeinden). Many direct and indirect taxes exist in Germany; income tax and VAT are the most significant.
The European Union Savings Directive (EUSD), formally Council Directive 2003/48/EC of 3 June 2003 on taxation of savings income in the form of interest payments, was a directive of the European Union enacted to implement the European Union withholding tax, requiring member states to provide other member states with information on interest paid to achieve effective taxation of the payments in the member state where the taxpayer is resident for tax purposes.
Taxes in Spain are levied by national (central), regional and local governments. Tax revenue in Spain stood at 36.3% of GDP in 2013. A wide range of taxes are levied on different sources, the most important ones being income tax, social security contributions, corporate tax, value added tax; some of them are applied at national level and others at national and regional levels. Most national and regional taxes are collected by the Agencia Estatal de Administración Tributaria which is the bureau responsible for collecting taxes at the national level. Other minor taxes like property transfer tax (regional), real estate property tax (local), road tax (local) are collected directly by regional or local administrations. Four historical territories or foral provinces collect all national and regional taxes themselves and subsequently transfer the portion due to the central Government after two negotiations called Concierto and the Convenio. The tax year in Spain follows the calendar year. The tax collection method depends on the tax; some of them are collected by self-assessment, but others follow a system of pay-as-you-earn tax with monthly withholdings that follow a self-assessment at the end of the term.
In Slovakia, taxes are levied by the state and local governments. Tax revenue stood at 18.732% of the country's gross domestic product in 2019. The tax-to-GDP ratio in the Slovakia increased by 0.4 percentage points from 34.3% in 2018 to 34.7% in 2019. The most important revenue sources for the state government are income tax, social security, value-added tax and corporate tax.
Taxation in Malta is levied by the State and it is administered by the Commissioner for Revenue. The total tax revenues in 2014 amounted to €2.747 Billion, which represents 34.6% of the Maltese GDP. The main sources of tax revenue were value-added tax, income tax, and social security contributions.
The organization responsible for tax policy in Ukraine is the State Fiscal Service, operating under the Ministry of Finance of Ukraine. Taxation is legally regulated by the Taxation Code of Ukraine. The calendar year serves as a fiscal year in Ukraine. The most important sources of tax revenue in Ukraine are unified social security contributions, value added tax, individual income tax. In 2017 taxes collected formed 23% of GDP at ₴969.654 billion.
The Directive on Administrative Co-operation in the field of taxation is a Directive which sets rules for the Automatic Exchange of Information (AEOI) which apply to members of the European Union (EU).
So the deed is done, and the EU Savings Tax Directive will come into force in all member states, and all those offshore jurisdictions beholden in one way or another to the member states, on 1 July 2005. Only Bermuda, through an accident of geography, seems to have been left out.
