EU Savings Tax Directive Update - January 2014

Taxation of Savings Income

The EU Saving Tax Directive of June 2003 has been in force across the EU since 1st July 2005. The aim of the Directive is to ensure the proper operation of the market within the EU, to limit tax competition between member states and to tackle tax evasion. The Directive applies where interest on an individual’s savings is paid in one Member State to that individual who is resident in another Member State.

In November 2008, three years after in implementation of the Directive, an amending proposal was adopted by the European Commission with the intention to take steps to prevent evasion and to close various lacunae that had become apparent in years following the implementation of the original Directive.

As part of the procedure an agreement was reached between the European Commission and ECOFIN (Economic and Financial Affairs Council) on the terms of a mandate to permit the Commission to negotiate amendments to agreements that have been entered into with third party states under the Savings Tax Directive. By following this route the EU wishes to ensure that any revisions to the agreements are in accordance with the intended amendment of the Savings Tax Directive.

The Commission has, therefore, been given the green light to pursue discussions with Andorra, Lichtenstein, Switzerland, San Marino and Monaco to ensure compatible agreements are in place with these third party, non-EU Member States.

Within the EU the proposed amendments to the Savings Tax Directive, to curb tax avoidance and increase transparency in international banking, are broadly supported by the Member States. However, late last year Austria and Luxembourg both indicated that they were prepared to block the amendments until ‘tax havens’ including Switzerland had also agreed to the changes to their agreements with the EU. The Luxembourg Minister of Finance has been quoted as saying that the proposed amendments to the Directive should not be passed until at least equivalent measures have been agreed with Andorra, Lichtenstein, Switzerland, San Marino and Monaco, in the interests of ensuring a level playing field with the third party countries.

Official negotiations started earlier this month with Switzerland, with initial meetings to assess the present situation and to set out the technical basis for further discussions. The meeting followed on from the Swiss Federal Council's adoption on 18 December 2013 of the negotiation mandate to revise the taxation of savings agreement with the European Union (EU). We understand that one aspect that is being considered is taking steps against the practise by individuals who interpose companies or financial instruments to evade the taxation of savings income. The negotiating parties have agreed to hold regular meetings in the first half of 2014.