EUROPEAN UNION SAVINGS TAX DIRECTIVE

It is widely anticipated that, starting from July 2005, all the 25 countries of the European Union comply to EU Savings tax directive, under which all the 25 countries of EU, their territories will provide automatic exchange of information on savings accounts held by european union residents.

Affected Persons:

Natural persons resident in European union member state. It will NOT affect those

* resident in Switzerland or another third country,
* residents in an associated or dependent territory of the EU.
* legal entities

It does'nt matter where his nationality belongs to, country of residence is the sole criteria. For example, a french citizen is not affected if he lives in switzerland, similarly a swiss citizen living in France will comply.

Affected countries:

All of the current 25 EU countries: Austria, Belgium, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Hungary, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden, the Netherlands, and the United Kingdom.

The relevant dependent and associated territories of the EU: Jersey, Guernsey, Isle of Man, Anguilla, Montserrat, British Virgin Islands, Turks and Caicos Islands, Cayman Islands, Netherlands Antilles and Aruba.

The good news is switzerland, liechtenstein, austria, luxembourg, andorra, monaco, san marino (jurisdictions where bank secrecy prevails) are expected to sign the agreement by the end of June 30, 2005 but with a concession that they maintain client confidentiality, but adopt withholding tax. No client information will be shared with EU (bank secrecy will be retained). Instead EU residents will be levied a 'withholding tax' on interest gained from savings accounts. This tax will be shared between switzerland and clients EU country. It would be interesting to note that, the client having bank account in switzerland will have full freedom either to waive bank secrecy or accept withholding tax by default.

EU Tax directive levied on:

1. Interest earned on deposits
2. Interest bearing debt claims, such as bonds issued after 1st of March 2001
3. Accrued or captalised interest (zero coupons)
4. Investment funds with at least 40% of the underlying investments in interest bearing instruments
5. Distributions from investment funds which relate to the interest income of the fund income from the sale, repayment or redemption of investment fund units.

EU Tax directive NOT levied on:

1. Insurance companies or insurance income from insurance policies
2. Stocks and shares.
3. currency trading
4. derivative instruments
5. bonds issued before 1st march 2001.
6. equity related structured products.
7. pension products.

Tax Rates

1. 15% (1 July 2005 to 30 June 2008)
2. 20% (1 July 2008 to 30 June 2011)
3. 35% (1 July 2011 onwards)

EU Directive Taxation example

Say, you had accrued interest of €100.- from your deposits in swiss bank account in the year 2005. As a EU resident, you have a choice of either fully report your country authorities or not to disclose your financial information. If you chose to remain shielded with bank secrecy, as per new EU directive, you are accepting withholding tax by default. Should that happen, 15% (of 100€) is 15€ will be debited from your account. Out of 15€, 75% will be anonymously directed to EU member country(where you are resident) and rest 25% will be kept by switzerland.

Thus as per the directive 3.75€ goes to switzerland and other 11.25€ goes anonymously to EU member country (3.75€ + 11.25€ = €15.00).

Prevailing Current situation

It would be interesting to note that at present, switzerland is not a country for lucrative interest rates. Currently, the banks offer only 0.25% as interest on CHF accounts, and little bit higher for EUR accounts. Again if you hold your account deposits in CHF currency, you are subjected to 35% withholding tax on the interest paid from the deposits. It does'nt matter if you are a resident or non-resident. For deposits kept in foreign currencies there is no interest paid at all (except for AUD, GBP). Lets say you accrue CHF 100.- from your swiss franc deposits, CHF 35 will be levied, and you will be paid only CHF 65.- out of the interest income.

Final Outcome of this EU Tax directive

Several popular offshore jurisdictions, like cayman islands, channel islands etc are worst affected, with the threat for exchange of clients information. The only change brought by this directive is, if you accrue interest in foreign currency deposits from your swiss bank account, then you have to pay 15% witholding tax on the interest gained.

Neverthless, bank secrecy in switzerland would be kept intact and unaffected because of this EU savings directive.

Note: Switzerland has not yet signed the agreement with EU, so as liechtenstein, andorra, belgium, austrial, san marino, luxembourg. It is expected that the swiss will sign only after getting approval from parliment. This page reflects only the current understanding and subjected to change anytime.

Links on this topic:

EU Tax Directive and Swiss bank secrecy - SwissInfo.org