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William Byrnes (Texas A&M) tax & compliance articles

Historical Anecdotes Regarding the European Union Savings Directive

Posted by William Byrnes on November 1, 2009

Historical Anecdotes Regarding the European Union Savings Directive

This week I continue in my historical anecdotes on the subject of cross-border tax (financial) information exchange and cross-border tax collection in the context of the European Union Tax Savings Directive.  In our live course webinars, we will continue our indepth address of the related compliance issues.

2003 Savings Directive Agreement

On 21 January 2003, the EU Finance Ministers meeting within the Council of Ministers (“the ECOFIN Council”) reached a political agreement on a “tax package”, which comprises a Code of Conduct for business taxation, a proposal for a Community Directive on the taxation of interest and royalty payments and a proposal for a Community Directive on the taxation of income from savings (“the Savings Directive”).  Furthermore on 7 March the ECOFIN Council agreed the text of the Savings Directive, although the Directive has not yet been formally adopted.

In its current form, the Savings Directive only applies to interest paid to individuals, and in particular it does not apply to companies.

Article 2

Definition of beneficial owner

1. For the purposes of this Directive, ‘beneficial owner’ means any individual who receives an interest payment or any individual for whom an interest payment is secured…”[1]

The Savings Directive requires an automatic, cross-border, exchange of information between the EU members states and their territories.[2]


Article 8

Information reporting by the paying agent

1. Where the beneficial owner is resident in a Member State other than that in which the paying agent is established, the minimum amount of information to be reported by the paying agent to the competent authority of its Member State of establishment shall consist of:

(a) the identity and residence of the beneficial owner established in accordance with Article 3;

(b) the name and address of the paying agent;

(c) the account number of the beneficial owner or, where there is none, identification of the debt claim giving rise to the interest;

(d) information concerning the interest payment in accordance with paragraph 2.

Article 9

Automatic exchange of information

1. The competent authority of the Member State of the paying agent shall communicate the information referred to in Article 8 to the competent authority of the Member State of residence of the beneficial owner.

2. The communication of information shall be automatic and shall take place at least once a year, within six months following the end of the tax year of the Member State of the paying agent, for all interest payments made during that year.

Three EU members, the territories and dependencies of the UK, and to date the accession state of Switzerland have been granted a transitional period of time to implement automatic exchange of information.  The transitional period of time is to last until all listed non-EU members, i.e.  Switzerland, Monaco, Andorra, Liechtenstein, and the USA, have entered into automatic exchange of information with the EU member states.  During the transition, these States and jurisdictions must collect a withholding tax of which 75% of that tax must then be forward to the Member State of residence of the beneficial owner of the interest.  

Article 11

Withholding tax

1. During the transitional period referred to in Article 10, where the beneficial owner is resident in a Member State other than that in which the paying agent is established, Belgium, Luxembourg and Austria shall levy a withholding tax at a rate of 15 % during the first three years of the transitional period, 20 % for the subsequent three years and 35 % thereafter.

Each of the twenty-five members (including the accession of the new group of ten members), their relevant territories, and the non-EU members acceding to the Directive is allowed to interpret the Directive for legislative implementation under its national law.

Tax Based Elasticity and Capital Flight

The Savings Directive recognises the issue of capital flight due to the sensitivity of taxpayers to exchange of information.  At paragraph 24 it states, “So long as the United States of America, Switzerland, Andorra, Liechtenstein, Monaco, San Marino and the relevant dependent or associated territories of the Member States do not all apply measures equivalent to, or the same as, those provided for by this Directive, capital flight towards these countries and territories could imperil the attainment of its objectives. Therefore, it is necessary for the Directive to apply from the same date as that on which all these countries and territories apply such measures.calls for.”  This capital flight issue is based upon three historical benchmarks regarding the imposition of withholding tax on interest and the immediate and substantial impact that withholding tax on interest has on capital flight.  The benchmarks are (1) the 1964 US imposition of withholding tax on interest that immediately led to the capital flight of hundreds of million of dollars and the corresponding creation of the London euro-dollar bond market; (2) the 1984 US exemption of withholding tax on portfolio interest that immediately led to the capital flight from Latin America of US$300 billion to US banks; and (3) the 1989 German imposition of withholding tax that led to immediate capital flight to Luxembourg and other jurisdictions with banking secrecy of over a billion DM, so substantial that the tax was repealed but four months after imposition.  Please refer to my earlier blogticles for further information about this topic.

Please contact me with any comments or follow up research materials.

Prof. William Byrnes wbyrnes@tjsl.edu

[1] COUNCIL DIRECTIVE 2003/48/EC of 3 June 2003 on taxation of savings income in the form of interest payments.

[2] The directive does not apply to Bermuda, but Bermuda has entered into agreements that have equivalent measures.

One Response to “Historical Anecdotes Regarding the European Union Savings Directive”

  1. […] Prof. William Byrnes [1] Report on the Economic, Socio-Economic, and Regulatory Impact of the Tax Savings Directive and EU Code of Conduct for Business Taxation upon Selected Offshore Financial Centers as well as a […]


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