EU Savings Directive
Two important reforms of the taxation of savings in the European Union (EU) are about to be enacted. The combination of these two evolutions, one of which being EU driven, whereas the other is purely domestic, is likely to materially impact the Luxembourg financial sector.
First, the Luxembourg Prime Minister Xavier Bettel confirmed during the European Council meeting on 20 March 2014 that Luxembourg will endorse the proposal made by the Commission in 2008 to revise and extend the scope of the EU Savings Directive. Second, with the submission to the Parliament of the bill of law 6668, Luxembourg is now about to abolish as from 2015 the withholding tax option it has been authorized in 2005 to offer to individuals resident of another EU Member State and deriving interest income from Luxembourg source as an alternative to exchanging information.
Prime Minister Bettel has just confirmed his approval on the principle of the extension of the scope of the EU Savings Directive during the European Council meeting in Brussels.
This decision can be considered as the most significant event since the endorsement in 2005 of the first version of the EU Savings Directive.
A long process
The proposal to revise and extend the scope of the EU Savings Directive is not new since it has originally been issued by the EU Commission in November 2008.
In a legitimate effort to preserve the competitiveness of their own industry, some Members States including Austria and Luxembourg confirmed that they would only consider an extension of the scope of the EU Savings Directive in case a level playing field was maintained in Europe.
In practical terms, this statement means that, from the perspective of Austria and Luxembourg, the taxation of savings agreements concluded in 2004 or 2005 between the EU, on the one hand, and Switzerland and four other third countries, on the other hand, (i.e. Liechtenstein, Monaco, Andorra and San Marino) must be updated to reflect the extended scope of the EU Savings Directive. At several occasions, Luxembourg actually confirmed that it will not accept to discuss the extension of the scope of the EU Savings Directive as long as no significant progress has been made in the negotiations with (in particular) Switzerland.
After several months of standstill, the negotiations started in January 2014. Having acknowledged that significant progress had effectively been made in these negotiations according to a report submitted to the Member States by EU Commissioner Šemeta, Prime Minister Bettel confirmed on 20 March 2014 that the Grand-Duchy now agrees on the general principle to update the EU Savings Directive.
The main impact: extension of the scope of the Directive
Under the initial version of the EU Savings Directive enacted in 2005, the scope was limited to the taxation of savings income in the form of interest payments on debt claims, to the exclusion, inter alia, of the issues relating to the taxation of insurance benefits.
With a view to closing existing loopholes in its current scope and better preventing tax evasion, the scope of the new EU Savings Directive has been broadened to cover the following points :
- certain non-UCITS investment funds (e.g. SICAV-Part II) and certain structured products that are currently out of scope of the Directive will be covered in the future;
- certain insurance contracts (unit linked insurance contracts) whose benefits are, to some extent, derived from debt claims;
- a look-through approach to certain EU and non-EU entities or legal arrangements (including Trusts, transparent entities…);
The upcoming milestones
The road ahead is still long before the formal and final adoption of the updated Directive. Indeed, the latter must still be enacted at European Union level and then transposed into the national legislation of EU Member States.
In view of these elements, the entry into force of the extended scope of the EU Savings Directive in not expected to take place in Luxembourg prior to 1 January 2017.
Former Prime Minister Jean-Claude Juncker had announced on 10 April 2013 that as from 2015, Luxembourg would abolish the withholding tax system it has been authorized in 2005 to offer to account holders falling within the scope of the EU Savings Directive as an alternative to the automatic exchange of information.
This has just been formalized by the voting by the Luxembourg Government Council of the bill of law 6668 and its submission to the Luxembourg Parliament on 18 March 2014.
End of the transitory period
Luxembourg has unilaterally decided to apply the automatic exchange of information in the context of the new EU Savings Directive.
By doing so, Luxembourg will in practice put an end to the transitory period started in 2005. During the latter, individuals resident in another EU Member State receiving interest income from Luxembourg source had the possibility to opt for the application of a 35% withholding tax or the automatic exchange of information.
Abolishment of the withholding tax option
In accordance with the provisions of the bill of law 6668, the option to individuals resident in another EU Member State receiving interest income from Luxembourg source to elect the withholding tax is abolished. The exchange of information will now apply automatically in all cases.
The entry into force of this major reform is expected on 1 January 2015.
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