ABBL

Taxation of savings for Luxembourg residents

Since 2006, a final flat rate withholding tax of 10% is levied on the savings income of Luxembourg residents. The income liable to fall under this withholding tax is the same as that defined in the EU Savings Directive.

The EU Savings Taxation Directive

In the EU, the taxation of non-residents' income received from savings falls under the Savings Taxation Directive. The latter applies to the income from Interest on capital paid to individuals resident in an EU member state other than the one where the Interest is paid. It has been applicable since July 2005.

In order to ensure that cross-border payments of Interest in savings are properly taxed no matter where these payments have been made, the directive currently proposes two main concepts:

• Withholding tax

Austria, Belgium and Luxembourg have opted to introduce a withholding tax on income on products falling under the scope of the directive. The rate of this tax is gradually increasing: 15% until July 2008, 20% until July 2011, and 35% thereafter. 75% of the tax collected is transferred to the state where the saver is a resident, while the remaining 25% goes to the country collecting the tax.

Luxembourg also provides information if foreign clients opt for voluntary disclosure in order not to be subject to the withholding tax.

• Automatic exchange of information

This means that member state's paying agents will report, through their competent authorities to the tax administrations of the country of origin of their clients a list of all non resident savers who received an Interest income during the calendar year, as well as the amount of income paid to each of them individually. The majority of member states have opted for this option.

Geographical scope

In order to avoid an excessive flow of capital out of the European Union, the European Commission also negotiated with third countries (Switzerland, Liechtenstein, Monaco, Andorra, San Marino) and dependent or associated territories (British Virgin Islands, Gibraltar, Guernsey, Isle of Man, Jersey, Netherlands Antilles, Turks and Caicos Islands, Montserrat, Cayman Islands, Anguilla, Aruba). These countries now apply the same or equivalent provisions to the directive.

The European Commission, on the request of the Ecofin Council, is also negotiating with a number of important financial centres, like Hong Kong or Singapore, in order to extend the geographical scope of the directive.

Amendments

On 13 November 2008, the European Commission adopted an amending proposal to the Savings Taxation Directive. Amongst other things, the amendments propose to extend the scope to income that is equivalent to Interest obtained via investments in certain innovative financial products as well as in certain life insurance products.