The European Savings Tax Directive is one of three measures relating to tax which together are known as the EU Tax Package and came into effect on the 1st July 2005. Simply put, ESD is an agreement between the EU Member States to automatically exchange information about any customers who earn savings income in one EU State but who reside in another EU State. This is known as the ‘automatic exchange of information option’ and it is the ultimate objective of the Directive. Therefore, an individual’s identity, their address, the bank or investment house where their affected assets are held, the level of ‘savings income’ received and the period over which it has been received will all be passed automatically by the tax authority in the country in which the money is ‘housed’ to the tax authority in the country in which the individual resides!

Whilst automatic exchange of information is the ultimate objective of the ESD, three EU Member States (Austria, Belgium and Luxembourg) have opted to apply alternative arrangements during a transitional period. Under these arrangements, tax will be deducted at source from income earned by EU resident individuals on savings held in other EU countries (the withholding tax option). See the bottom of this page.

The purpose of the EU Savings Tax Directive is to ensure that interest earned on bank accounts held by EU residents is fully taxed. This is intended to eliminate a common form of tax evasion whereby those living in the European Union avoided tax on their interest income by holding their personal bank accounts in a different member State.

Like most European taxes, the EU saving tax directive is a tax on residency not citizenship so if you are an expat living permanently outside of Europe, you fall outside the scope of this legislation, regardless of the location of your bank account(s).

It is also worth remembering that a retention tax provision has also been adopted by some European countries and territories that are not themselves EU member states, such as the Isle of Man, Guernsey, Jersey, Switzerland, Liechtenstein and Andorra. The EU savings tax directive is also being applied to the bank accounts of European Union citizens in the more exotic tax haven locations of the British Virgin Islands and the Turks and Caicos Islands.

Many other countries and territories, have arrangements with the Europe Union to exchange information relating to bank accounts.

     Countries who exchange information                             Countries who apply a withholding tax