The European Savings Tax Directive (ESD)
The European Savings Tax Directive (ESD) was implemented in the UK with effect from 1 July 2005.
The ESD is an agreement between the member states of the EU to exchange information or impose a retention tax on individuals who earn interest in one country but reside in another. Anyone whose current permanent residential address is in an EU member state and has savings or investments in the EU or its members' dependent or associated territories is likely to be affected by the ESD.
The original aim of the ESD was that all countries 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 the Isle of Man, Jersey, Guernsey, Cayman Islands, Andorra, Turks & Caicos, British Virgin Islands, Monaco, Switzerland, and many others thus agreed to implement similar or transitional arrangements (see below). The transitional arrangements involved the payment of a withholding tax whilst bank secrecy remained protected.
Countries providing for the exchange of information. All EU Member States with the exception of Austria have agreed to exchange information with each other. In Luxembourg clients can choose between exchange of information and withholding tax retention. Gibraltar is deemed to be part of the UK for the purposes of the EU Savings Directive and thus will exchange information with other EU countries such as Spain and the UK. Residents of Gibraltar will either suffer withholding tax on interest arising overseas, or have that income reported to the UK who will pass it on to Gibraltar authorities. Among the third countries signatories there are also, Anguilla, Cayman Islands, Montserrat and Aruba who have agreed to exchanging information.
The transitory provisions of the Withholding Tax. The Countries that would be applying the transitory provisions, instead of exchanging information will retain withholding tax as follows:
- 15% in the first three years (2005-07-01 – 2008-06-30),
- 20% in the next three years (2008-07-01 – 2011-06-30), and
- 35% after 2011-07-01.
With regard to the distribution of their withholding tax, the Directive provides that all Countries that are withholding it will retain 25% of all receipts at their end and will transfer the remaining 75% to the Member State where the beneficiary owner is resident.
Individuals and accounts which are not affected. The EU withholding tax is levied only on individuals and not on companies, discretionary trusts, foundations, stiftungs, anstalts, investment funds, etc., except in very special circumstances, e.g. a "bare trust". The EU withholding tax is not deducted from individuals who reside outside the European Union. Thus, for example, a resident of Jersey or of Switzerland, would not pay the tax, even though these countries have signed the agreement with the EU. Neither Jersey nor Switzerland is in the European Union.
