1. Does this refer to me?
This note applies to individuals
and holders of joint accounts who are residents of European Union
(EU) Member States. Individuals resident outside EU are generally
not affected, although if you hold a passport issued by an EU
Member State, you should also read on.
2. What is the European Union
Savings Tax Directive?
The EUSD is an agreement between
the EU Member States to automatically exchange information with
each other about customers who earn savings income in one EU Member
state but reside in another. It was approved by the EU Council of
Ministers on 3rd June 2003 and came into effect from 1st July
The Directive can be applied in two
Exchange on information:
This means that for example, where
a resident of France holds a bank account in Germany, the German
bank will provide to the German Tax Authorities details of the
customer and interest payments on that account. The German Tax
Authorities will then in turn provide that information to the
French Tax Authorities. This in known as "automatic exchange of
information" and enables the French Tax Authorities to compare the
amount of income declared by that individual on his or her own
French personal tax return with the information provided under the
Although the EUSD is centred on
"automatic exchange of information", three EU Member
States (Austria, Belgium and Luxembourg) have opted to apply a
withholding tax instead. Under the withholding tax option, banks
automatically withhold tax (initially at a rate of 15%) from
interest paid to individuals resident in other EU Member States
(but no information regarding individuals is provided to the Tax
Authorities in either the State in which the individual is resident
or the State in which the bank account is located). It is the
Bank's responsibility to pay the withholding tax on behalf of the
customer. Under the withholding tax option the jurisdiction must
also offer to customers the automatic exchange of information and/
or a system whereby the customer obtains from their local tax
authority a certificate which details the source from which the
interest payment arises.
3. How does the EUSD affect Jersey,
Guernsey and the Isle of Man?
Although these islands are not part
of the EU, they have agreed (along with Switzerland and a number of
jurisdictions) to apply similar provisions. They have each decided
to follow the same withholding tax option as adopted by Belgium,
Luxembourg and Austria. Switzerland has also followed the
withholding tax option.
The withholding tax is known in
Jersey, Guernsey and the Isle of Man as a 'retention tax'.
This is to distinguish the Islands from the member States to
reflect the fact that they are not part of the European Union and
are not subject to the EUSD.
4. When does the EUSD take
The EUSD came into force on 1st
5. So will it affect me?
If you are an individual resident
in an EU Member State (e.g. the UK or Spain) and you earn bank
interest on an account held with a bank located in the Isle of Man,
Jersey or Guernsey, then you will be affected by the EUSD. If you
are resident outside the EU then you should fall outside the scope
of the EUSD even if you hold a passport issued by an EU Member
State. However, you may be asked to provide proof that you are
resident outside the EU.
If you are resident in the UK but
were born elsewhere you may be non-domiciled for tax purposes on
income not remitted into the UK.
6. How will it affect me?
If you are affected by these rules,
then interest accrued and paid to you after 1st July 2005 will be
paid net of 15% retention tax, unless you elect for the exchange of
information option. The rate of retention tax will increase to 20%
from 1st July 2008 and 35% from 1st July 2011. If you elect for
exchange of information, then no tax will be deducted from interest
payments made to you.
7. How do these changes affect
customer confidentiality rules?
These changes will have no impact
upon customer confidentiality unless you elect for the exchange of
information option. If you elect for exchange of information then
relevant details regarding you, the account and the interest
payment will be provided to the Isle of Man, Jersey or Guernsey Tax
Authorities who in turn will provide that information to the tax
authorities of the EU Member State in which you are resident.
8. Does the EUSD just relate to
No, the EUSD also extends to a
number of other forms of "savings income". These other
areas are: interest from, and the proceeds of sale or redemption
of, certain bonds and income from certain types of investment
The Directive will affect:
- Interest paid or credited to accounts
- Interest rolled up when the balance is repaid
- Interest paid out on debt-claims (this would include all UK
Government securities and certain other types of bonds)
- Interest accrued and paid out on (c) above when such
debt-claims are sold (e.g. when a UK Government security is sold
the accrued interest portion of the sale proceeds will be savings
income for the purposes pf the Directive)
- Distributions made by certain unit trusts and other open ended
collective investment funds which have invested more than 15% of
their investments in debt claims
- Accumulated income paid out when units in certain collective
investment funds that have invested more than 40% of their
investment in debt claims are redeemed, repaid or sold (this
percentage will reduce to 25% from 2011).
9. Examples of investments NOT
creating savings income
- Insurance policies and payments from them
- Personal pensions
- Purchased life annuities
- Winnings from betting including the national, European and
other lotteries, but note that Premium Bond prizes DO arise from
- Ordinary and preference shares and dividends from them
- Rents from real estate property
- Shares in OEICs and units in Unit Trusts (subject to the limits
on the funds investment into debt claims)
If you would like free confidential
advice on how to plan your finances without obligations, contact us.