Part 1 - AL-Tax

Chapter 10of either providing tax information or applying a nonresident withholding tax ata minimum rate of 20%. Member States opting for a withholding tax were to retainall revenue from taxing nonresident savings income. The distributional effects ofthe directive were a sticking point in the negotiations between the EuropeanCommission and its Member States. The UK and its AD territories would lose,whereas France and Germany would gain.The Feira agreement of June 2000 modified the 1998 proposal by requiringMember States (except for the three bank secrecy jurisdictions) to automaticallyexchange tax information. The three bank secrecy jurisdictions would be allowedto operate a withholding tax regime during a seven-year transition period. A withholdingtax rate of 15% would apply during the first three years and a rate of 20%during the remaining four years. In July 2001, the European Commission issueda revised proposed directive, which formed the basis of a political agreement inJanuary 2003.10.4.2 General principlesIn January 2003, the EU Council reached political agreement on a proposed savingstax directive, the final text of which was determined in June 2003. The savings taxwas supposed to take effect in January 2005. After half a year delay, on 1 July 2005,two taxation regimes became effective. The first regime consists of 22 EU MemberStates (The 12 old Member States that have committed to information sharing and10 new EU Member States that joined in May 2004) that exchange tax informationautomatically – that is, without the need for any specific request from the residencecountry – to all other Member States about the cross-border interest payments toindividuals within the European Union. Interest for that purpose means interestincome from debt claims of every kind, such as savings deposits, corporate andgovernment bonds, other negotiable debt securities, and income from investmentfunds (as long as the portfolio share of bonds exceeds 40%). The information 14 iscollected from interest-paying financial institutions, typically commercial banks,and passed to the domestic fiscal authority. The latter in turn transmits it to the foreignfiscal authorities (at least once a year), which allows the residence country tocharge the domestic tax on the foreign savings income of its residents, giving, ifapplicable, a credit for nonresident withholding tax paid abroad. Under the EU savingstax, information is thus collected on interest income (a flow), so that the directivedoes not touch upon the individual’s savings position (a stock).In the second taxation regime, the three EU countries with a bank secrecy tradition(Austria, Belgium, and Luxembourg) apply a nonresident withholding253