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The EU Savings Tax Directive

By Lowtax Editorial
14 July, 2015

If you are a resident of the European Union, and have a bank account or certain other financial interests in another Member state or certain other "third countries" or territories, then the EU Savings Tax Directive is something you should know about.

Introduction To The Savings Directive

The EU STD went into effect on July 1, 2005. As originally drafted, the directive aimed at a uniform 'information exchange' regime to apply across the Union, with all countries agreeing to report interest on savings paid to the citizens of other member states to those States' tax authorities.

Because of resistance from EU member states with strong traditions of banking secrecy, the Commission had to allow Austria, Luxembourg and Belgium to apply a withholding tax (see below). Many of the UK's offshore financial centres have been forced to join the STD, along with the Netherlands Antilles, Aruba and some European centres (Andorra, Monaco, Liechtenstein, San Marino and Switzerland). Most of these places took the withholding tax route, as did Switzerland.

The STD applies to many types of return on savings instruments, all loosely described as interest, when received by individuals, but does not affect interest paid to companies. Under the information exchange system, the identity of recipients is known to their home tax authorities; when tax is withheld, the identity of the recipient is not reported, thus preserving confidentiality.

The savings tax directive has applied in 39 jurisdictions since July 1, 2005. These include 25 member states (a figures which excludes Bulgaria and Romania, which joined in the EU in 2007, and Croatia, which joined in 2013), the five non-EU "third countries" and 10 dependent and associated non-EU territories (Anguilla, Aruba, the British Virgin Islands, the Cayman Islands, Guernsey, the Isle of Man, Jersey, Montserrat, the Netherlands Antilles and the Turks and Caicos Islands). the directive has applied in Bulgaria and Romania since January 1, 2007 and in Croatia since July 1, 2013.


The directive does not apply to persons (including EU Nationals) who are resident outside the EU or the Crown Dependencies of the UK (Jersey, Guernsey and the Isle of Man). Any new countries joining the EU will be obliged to accept the information-sharing variant of the directive, and their residents will be caught by the STD as and when those countries accede to the EU.

If you are an individual (natural person) who is resident in an EU member state, and earn bank interest or other savings income on deposits or investments held in your own name in another EU Member state, third country or territory included in the directive, then it is likely that you will be affected by the STD.

Definition Of Savings Income

There are four main categories of savings income under the scheme:

  • Interest paid out on debt-claims or credited to accounts;
  • Interest rolled-up and paid out when a debt-claim is repaid or sold;
  • Distributions made by certain unit trusts and other collective investment funds which have invested more than 15 percent of their investments in debt-claims; and
  • Accumulated income paid out when units in certain collective investment funds that have invested more than 25 percent of their investments in debt-claims are redeemed or sold.

In simpler language, savings income is therefore essentially interest earned on bank deposits, interest from, and proceeds on the sale or redemption of, certain bonds and income from certain types of investment funds (principally open-ended money market retail funds).

Most other types of income (for example, dividends on ordinary or preference shares of companies, salary and pension payments) fall outside the definition and are therefore outside the scope of the STD.


You are paid the interest on your savings gross, i.e. without deduction of tax, but the bank or other financial institution which you patronise (known as a 'paying agent') will require you to provide details of your tax residence.

You may be asked for your Tax Identification Number (TIN). This is your tax registration number in your country of residence. The STD requires banks and other paying agents to obtain customers' TINs where possible. Whatever information the banks have, they will pass on to the tax authorities in your country of residence, along with information about the income you have received (as defined above).

The minimum amount of information that 'paying agents' (banks and other financial institution - see definition above) are required to pass on to the 'competent authorities' of member states consists of: identity and residence of the beneficial owner; name and address of the paying agent; account number of the beneficial owner; and interest payment data including the amount of interest income earned, plus information regarding any proceeds from sale, redemption or refunds.

If someone claims to be resident in a country different to that on his or her passport or I.D. card, the rules stipulate that "residence shall be established by means of a tax residence certificate issued by the competent authority of the third country in which the individual claims to be resident."

Some countries or territories have issued sets of regulations to their financial institutions which may define the extent of the information you are required to give. In the absence of this local legislation, there is no obligation placed on banks or other paying agents to request the TIN; agents are permitted to rely on passports or identity cards, or other documentary proof of identity that is in their possession.

Withholding Tax

Under the withholding tax option, banks and other paying agents 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 then keeps 25 percent of the total amount collected and remits 75 percent to the various tax authorities within the member states.

The receiving country gets a bulk payment which is not broken down in terms of the individuals who are covered.

The rates of withholding tax are 15 percent from July 2005, 20 percent from July 2008, and 35 percent from July 2011.

Those EU member states which were initially permitted to apply a withholding tax include Austria, Luxembourg and Belgium. It was intended that all jurisdictions would eventually switch to information exchange, but the initial timetable was vague. Automatic exchange of information has in any event been bundled together with the proposed amendments to the STD which were approved in March 2014 and which are summarised below. Some jurisdictions covered by the STD have already dropped the withholding tax option for bank clients and have switched to an information sharing regime in anticipation of these changes. These include the Isle of Man, Guernsey and Jersey. Luxembourg has committed to exchange information under the directive after holding out for a number of years against EU pressure after signing up to the expanded STD in March 2014. Austria is expected to follow suit even though it has not expressly said so.

Proposed Changes To The Directive

Indications are that the directive is a paper tiger, largely because its provisions are so easy to circumvent, a fact confirmed by weaker-than-expected withholding tax collections. The EU knows this, which is why the European Commission drew up proposals to widen its remit in 2008 following the first three-yearly review of the legislation.

The Commission proposal seeks to improve the directive, so as to better ensure the taxation of interest payments which are channelled through intermediate tax-exempted structures. It is also proposed to extend the scope of the directive to income equivalent to interest obtained through investments in some innovative financial products as well as in certain life insurance products.

The Commission proposes extending the scope of the directive to income from:

  • Securities which are equivalent to debt claims (of which the capital is protected and the return on investment is pre-defined); and
  • Life insurance contracts whose performance is strictly linked to income from debt claims or equivalent income and have less than 5 percent risk coverage.

In addition, the Commission proposal seeks to ensure a level playing field between all investment funds or schemes (be it undertakings for collective investment in transferable securities authorized in accordance with the UCITS Directive or not), independently of their legal form. This means that income obtained from those investment funds by individuals resident in the EU will be subject to effective taxation.

Just like the first time around, it has been a long, hard slog for the Commission, however. While most EU member states backed the changes, Austria and Luxembourg felt threatened by the proposals because banking secrecy laws in those two countries underpin their successful banking industries, and they feared being placed on worse terms under the new STD than the five non-EU territories, especially Switzerland. Therefore, because the proposed amendments had to be supported by all member states before they could be adopted and made law, Austria and Luxembourg were easily able to block them.

A breakthrough occurred in May 2013 when the European Council finally reached an agreement on a mandate to allow the Commission to negotiate amendments to agreements under the STD following two years of discussions. This gave the go-ahead for Brussels to proceed with negotiations with Switzerland, San Marino, Andorra, Lichtenstein and Monaco. The talks with Switzerland opened in January 2014, and are expected to be concluded by the end of this year.

The proposed amendments to the Savings Directive were finally adopted by the European Council on March 24, 2014.

The current timetable for the introduction of the new requirements is not clear, but it is thought that member states will be required to transpose the amendments into national law by January 1, 2016, and that the updated STD will apply from January 1, 2017.

However, under a separate agreement between the EU and Switzerland, initialled on March 19, 2015, account data will be collected from 2017, with the first exchange scheduled for 2018. The agreement will replace the savings tax agreement that has been in force since 2005 and extends to all 28 EU member states.

Assessing The Proposed Changes

The European Commission has invested a lot of time and energy in ramming through its proposals, and it wouldn't have done so if it thought it wasn't worthwhile. However, it is debatable whether the expanded STD will produce the sorts of sums of extra tax revenue that Brussels and many member states are hoping for. Studies suggest that the STD has been expensive for revenue authorities and banks to implement, and that information exchange is a cumbersome tool to enforce tax law in practice. The same studies conclude that in cases where withholding tax has been applied extra revenue was raised for EU governments much more efficiently. Given that automatic information exchange will be the standard in the future, the results therefore are unlikely to be much different, unless the process is drastically refined. Savers also retain the option of course, to shift their money to other parts of the world that the directive cannot reach.


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