ABBL

Taxation of savings for Luxembourg residents

Since 2006, a final flat rate withholding tax of 10% is levied on the interest income of Luxembourg resident individuals. The income liable to fall under this withholding tax is the same as that defined in the EU Savings Directive (exept UCI income).

The EU Savings Taxation Directive

In the EU, the taxation of individual non-residents' income received from savings falls under the Savings Taxation Directive 2003/48/EC. 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 the following concepts:

• Withholding tax

Austria, Belgium and Luxembourg have opted to introduce a non final withholding tax on income on products falling under the scope of the directive. The rate of this tax increased gradually: 15% from July 2005 until July 2008, 20% until July 2011. Since then, the taxe rate is 35%. 75% of the tax collected is transferred to the state where the saver is a resident, while the remaining 25% go to the state collecting the tax. The member state of residence grants a tax credit or a refund of the full amount of this specific withholding tax if properly declared by the client in his tax return.

Exemption certificate: The foreign client can avoid the 35% withholding tax by delivering to his Luxembourg bank a withholding tax exemption certificate.

• 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.

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

Exchange of information mandate: For Luxembourg clients, there is also another procedure to obtain relief from the EU withholding tax on interest, namely the exchange of information procedure (article 9 (1) a) of the Savings Directive. This procedure leads to a double exchange of information:

1. the Luxembourg paying agent will inform the Luxembourg tax administration about the interest (subject to the Savings Directive) received by the client during a given year.
2. the Luxembourg tax authorities will share this information with the tax administration of the country of residence of the client.

Since in Luxembourg paying agents (banks) need to ask customers beforehand whether they agree to such a kind of of information exchange, the paying agent (bank) can only proceed with the exchange of information if the client has given an explict and unconditionnal  mandate to the paying agent to transfer information to the foreign tax authority. Below you will find models for such a mandate in French, German and English. Please note that this is only a model, the mandate proposed to clients by the banks established in Luxembourg may slightly differ in wording.
 

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.

Amending Proposal

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, in certain life insurance products or certain companies as well as via an UCI fulfilling certain conditions.

The Council has not yet unanimously agreed to this proposal as there is still a lack of political conensus.

Related files: 

Mandate for the exchange of information (EN)

Mandate for the exchange of information (FR)

Mandate for the exchange of information (DE)

Loi du 31 mars 2010 portant approbation des conventions fiscales

Council Directive 2003/48/EC of 3 June 2003 on taxation of savings income in the form of interest payments

European Commission's Proposal for a Council Directive amending Directive 2003/48/EC

The European Commission's report on the Savings Directive