EU Savings Tax Directive

An Increase Directive

The European Union Savings Tax Directive (STD), which went into effect on 1st July, 2005, had the original aim that all counties 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 Jersey, Guernsey, Cayman Islands, Andorra, Turks & Caicos, British Virgin Islands, Monaco, Liechtenstein, Switzerland, and many others thus agreed to implement similar or transitional arrangements (see below).

There will be two systems: 'information exchange' and 'withholding tax'.

Information Exchange: Under the information exchange system, the identity of recipients will be known to their home tax authorities; when tax is with held, the identity of the recipient will not be reported, thus preserving confidentiality.

This proposal is at odds with the tradition of banking secrecy well-established in a number of Member States - e.g. Austria, Luxembourg, Belgium and Switzerland.

Withholding Tax: The Commission has had to allow some countries to apply a 'withholding tax' (of 35% from 2011). When tax is 'with held', the identity of the recipient will not be reported, thus preserving individual confidentiality.

Under the withholding tax option, banks and other paying agents will automatically deduct tax from interest and other savings income earned and pass it to their local tax authority, indicating how much of the total amount relates to customers in each Member State. The local tax authority will then keep 25% of the total amount collected and remit 75% to the various tax authorities within the Member States. The rate of withholding tax will be 15% from July 2005, 20% from 1stJuly 2008, and 35% from July 2011.

Caymans and Anguilla opted for the exchange of information regime, and BVI opted for the withholding tax option.

The countries “caught”
The following chart shows which countries / territories have opted for the 'exchange of information' regime, and which places have opted instead for the 'withholding tax' option:

See table of jurisdictions »

The EU Savings Tax Directive does not apply to offshore centres or other jurisdictions not connected to the EU, like Cape Verde.

To Escape the Savings Tax Directive
It's fairly obvious that the most effective ways to escape the effects of the Savings Tax Directive (STD) is to be a resident of a country which has not signed up to the STD or having your investments in a Bank of a country that do not caught by the STD. By no means all offshore financial centres fall within the ambit of the STD; there are a number of other low-tax territories, which have significant banking sectors, and home of investment funds, which escape the STD.

A lot of Europeans have either looked for investments which don't attract the STD; or have invested through an entity which doesn't fall under the STD. Neither technique will help you to avoid legitimate taxation, and it is not the purpose of this site to do that. And, from 2008, there are proposals to avoid the implementation of the STD through vehicles (companies, partnerships, foundations and trusts) or investments (like 'grand fathered bonds', offshore life assurance-based product, and equities or their derivatives).