Proposal for a Council Directive to ensure a minimum of effective taxation of savings income in the form of interest payments within the Community (98/C 212/09) COM(1998) 295 final - 98/0193(CNS)

(Submitted by the Commission on 4 June 1998)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community, and in particular Article 100 thereof,

Having regard to the proposal from the Commission,

Having regard to the opinion of the European Parliament,

Having regard to the opinion of the Economic and Social Committee,

(1) Whereas Council Directive 88/361/EEC of 24 June 1988 for the implementation of Article 67 of the Treaty (1) has allowed the complete liberalization of capital movements, including direct investment, taking place in the Community between residents of Member States since 1 July 1990; whereas the free movement of capital has, since 1 January 1994, been enshrined in Articles 73b to 73g of the Treaty;

(2) Whereas savings income, in the form of interest payments, from direct investment is taxable income for residents of all Member States;

(3) Whereas, by virtue of Article 73d(1) of the Treaty, Member States have the right to apply the relevant provisions of their tax law which distinguish between taxpayers who are not in the same situation with regard to their place of residence or with regard to the place where their capital is invested, and to take all requisite measures to prevent infringements of national law and regulations, in particular in the field of taxation;

(4) Whereas, in accordance with Article 73d(3) of the Treaty, the provisions of Member States' national tax law designed to counter abuse or fraud should not constitute a means of arbitrary discrimination or a disguised restriction on the free movement of capital and payments as established by Article 73b of the Treaty;

(5) Whereas, in the absence of any coordination of national systems for the taxation of savings, particularly as far as the treatment of interest received in each Member State by non-residents is concerned, residents of Member States are currently able to avoid any form of taxation on interest they receive in a Member State other than the one in which they are resident;

(6) Whereas this scope for tax avoidance is creating, in capital movements between Member States, economic distortions which are incompatible with the existence of the internal market;

(7) Whereas, at the Ecofin Council meeting of 1 December 1997 concerning taxation policy (2), the Council in its conclusions relating to the taxation of savings approved the objective of guaranteeing a minimum of effective taxation of savings income within the Community and preventing undesirable distortions of competition; whereas to that end it agreed on a certain number of points which form the basis for this Directive;

(8) Whereas, in accordance with the principles of subsidiarity and proportionality set out in Article 3b of the Treaty, the objective of this Directive, which is that of the effective taxation of savings income within the Community, cannot be sufficiently realized by the Member States and can therefore be better achieved by the Community; whereas this Directive, as a first step towards such an objective, limits itself to the minimum required and does not go beyond what is necessary to achieve this objective, inasmuch as it applies only to interest paid by a paying agent established in one Member State to individuals who are resident in another Member State;

(9) Whereas, in the same way, the scope of this Directive should be limited to interest from the investment of capital; whereas the problems relating to the taxation of pensions and insurance benefits will consequently be the subject of separate consideration leading, where appropriate, to specific legislative initiatives;

(10) Whereas the objective pursued can be achieved thanks to the coexistence model, whereby Member States would choose either to operate a withholding tax on interest paid in their territory to non-residents (withholding-tax system) or to allow the Member State of residence for tax purposes of the beneficial owner of the interest to tax that interest through the communication of relevant information by the Member State of the paying agent (information system);

(11) Whereas, in the interests of legal certainty and transparency, Member States should be required to apply one and the same system to all interest paid within their territory to non-residents for tax purposes;

(12) Whereas, when opting for one of the two systems envisaged by this Directive, Member States should take the necessary measures to enable paying agents established within their territory to carry out the tasks required by this Directive;

(13) Whereas it should be specified that, when interest is not paid directly to the beneficial owner by the debtor of the capital which produces the interest, the paying agent of the Member State responsible for carrying out the tasks envisaged above is the economic operator responsible for the payment of interest for the immediate benefit of the beneficial owner;

(14) Whereas Council Directive 77/799/EEC of 19 December 1977 concerning mutual assistance by the competent authorities of the Member States in the field of direct and indirect taxation (3), as last amended by the Act of Accession of Austria, Finland and Sweden already allows Member States some opportunity for securing appropriate taxation through a procedure for exchange of information;

(15) Whereas the automatic provision of appropriate information between Member States on the interest payments covered by this Directive constitutes a conditio sine qua non for the establishment of an information system; whereas it should be stipulated that Member States applying that system cannot rely on the right to limit the exchange of information referred to in Article 8 of Directive 77/799/EEC;

(16) Whereas it is important to ensure that Member States having opted for the withholding-tax system apply that withholding tax at a minimum effective rate, and to ensure that withholding tax is charged only in the Community;

(17) Whereas when interest is paid by a paying agent established in a Member State which has opted for the withholding-tax system, the beneficial owner of the interest should, where he is resident for tax purposes in another Member State, be allowed the possibility of presenting a certificate to the paying agent so that the latter does not withhold tax;

(18) Whereas, to that end, the competent authorities of the Member States should be required to provide such a certificate within a reasonable period of time;

(19) Whereas the objective of allowing the effective taxation of interest paid between two or more Member States places a corresponding obligation on Member States to eliminate any double taxation of that interest;

(20) Whereas, where a withholding tax has been applied to interest, the Member State of residence for tax purposes of the beneficial owner should take account of that withholding tax up to the level of the tax due in its territory on such interest; whereas any difference should be reimbursed by the Member State where the paying agent is established;

(21) Whereas the same principle should be applied with regard to interest from certain collective investment undertakings; whereas it would be advisable to provide suitable procedures to ensure the elimination of all double taxation borne by the interest concerned;

(22) Whereas the Council, in its conclusions of 1 December 1997 regarding the taxation of savings, emphasized the need to preserve the competitiveness of European financial markets, and stated that the basic principles of any Directive on the subject should be adopted as widely as possible; whereas, to this end, the Community must enter into negotiations with its main third country commercial partners, either on a bilateral or on a multilateral basis, in order to ensure the effective taxation of income from savings covered by this Directive which is paid to residents for tax purposes of the Member States by paying agents established in such third countries;

(23) Whereas provision should be made for a review of the situation by the Council, on the basis of a report by the Commission, three years after the date by which Member States are required to transpose the Directive, with the aim of determining to what extent further progress would be conceivable in order to ensure better effective taxation of savings income,

HAS ADOPTED THIS DIRECTIVE:

Article 1

Aim

1. Member States shall take the necessary measures to allow a minimum of effective taxation of interest paid to individuals who have their residence for tax purposes in a Member State other than the one where payment is made by a paying agent.

2. Member States shall take the necessary measures to ensure that the tasks necessary for the implementation of this Directive are carried out by the paying agent paying the interest established within their territory, irrespective of the place of establishment of the entity which is the debtor of the capital producing the interest.

Article 2

Coexistence model

1. Member States shall opt either for the transmission of information to the Member State of residence for tax purposes of the beneficial owner of the payment (hereinafter referred to as the 'information system`) or for the levy of a withholding tax (hereinafter referred to as the 'withholding-tax system`) in accordance with the rules set out in Articles 7 and 8.

2. Each Member State shall apply one and the same system to all interest payments made by a paying agent established within its territory to individuals who are resident for tax purposes in other Member States.

Article 3

General definitions

For the purpose of this Directive:

(a) 'beneficial owner` means any individual who receives an interest payment for his own benefit;

(b) 'paying agent` means any economic operator who is responsible for the payment of interest for the immediate benefit of the beneficial owner, whether he be the debtor of the capital which produces the interest itself or the operator charged with the payment of interest by the debtor or by the beneficial owner, in cases where the economic operator is established within the Community outside the Member State in which the beneficial owner is resident for tax purposes;

(c) Where there is a difficulty between two or more Member States in determining the 'residence for tax purposes` of a beneficial owner, the following criteria shall apply:

(i) the beneficial owner is deemed to be a resident of the Member State where he has his permanent home; if he has a permanent home in several Member States, he is deemed to be a resident of the Member State with which his economic and personal links are closest (centre of vital interests);

(ii) if the Member State where the beneficial owner has his centre of vital interests cannot be established, or he does not have a permanent home in any Member State, he is deemed to be a resident of the Member State where he usually resides;

(iii) if the beneficiary usually resides in several Member States or if he does not usually reside in any Member State, he is deemed to be a resident of the Member State of his nationality;

(iv) in the event of difficulty in determining the residence for tax purposes of a beneficial owner between two or more Member States on the basis of the criteria set out in points (i), (ii) and (iii), the Member States concerned shall agree, within a reasonable period of time, on a single place of residence;

(d) the 'competent authority` of a Member State means one of the authorities referred to in Article 1(5) of Directive 77/799/EEC.

Article 4

Identification of beneficial owners

Each Member State shall, within its territory, adopt and ensure the application of the procedures necessary to allow the paying agent to identify the beneficial owners and their place of residence for tax purposes for the purpose of Article 1.

Article 5

Definition of interest

For the purposes of this Directive, 'interest` means:

(a) income from debt-claims of any kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor's profits, and in particular income from public debt securities or bonds, including premiums and prizes attaching to the latter. Penalty charges for late payment shall not be regarded as interest;

(b) the increase in value of debt-claims in respect of which the income, by contract, consists, wholly or partly, of that increase in value, irrespective of the nature of that increase. The interest to be taken into consideration in such circumstances is the difference, paid by the paying agent on redemption, between the capital reimbursed and the issue price of the corresponding securities;

(c) income distributed by undertakings for collective investment in transferable securities within the meaning of Council Directive 85/611/EEC (4) which invest directly or indirectly more than 50 % of their assets in debt-claims or corresponding securities;

(d) the difference between the redemption price of units in undertakings referred to in point (c) and the issue price of those units or, if the units are purchased by the beneficial owner after issue, the purchase price.

Article 6

Territorial scope

This Directive shall apply to interest paid by a paying agent established within the territory to which the Treaty applies by virtue of Article 227 thereof.

Article 7

Information system

1. The Member State of the paying agent shall, where it has opted for the information system, communicate to the Member State in which the beneficial owner of the interest is resident for tax purposes the information referred to in paragraph 2 which is necessary to establish the amount of the beneficial owner's income tax liability with regard to that other Member State.

2. The information transmitted by the competent authorities of the first Member State to those of the second Member State shall include at least the amount of interest paid, the date of payment, and the identity of, and residence declared by, the beneficial owner of the payment.

3. The provision of information shall be automatic and shall take place at least once a year, within six months of the end of the preceding calendar year, for all interest payments made during that calendar year.

4. Article 8 of Directive 77/799/EEC shall not apply to the information to be provided pursuant to this Directive.

Article 8

Withholding-tax system

1. Where the Member State of the paying agent has opted for the withholding-tax system, it shall apply a withholding tax at a minimum rate of 20 % to interest paid by that paying agent to the beneficial owner. No other withholding tax shall be levied within the Community on interest paid to beneficial owners.

2. The withholding tax shall not be levied where the beneficial owner concerned presents to the paying agent a certificate drawn up in his name by the competent authority of the Member State in which he is resident for tax purposes, in accordance with the provisions of Article 9, attesting that the beneficial owner has informed that authority of the interest to be received. Where the amount of interest paid exceeds the amount mentioned in the certificate, withholding tax shall be deducted from the difference between the two amounts.

3. This Directive shall not prevent Member States which have opted for the withholding-tax system from also providing information in accordance with national provisions or bilateral agreements with other Member States.

Article 9

Issue of certificates

The competent authorities of each Member State shall issue a certificate based on the information provided to them by their residents for tax purposes who are the beneficial owners of interest to be paid by a paying agent. The certificate shall indicate the identity of the beneficial owner and of the paying agent, the amount of the interest to be received and the date of payment. This certificate shall be issued to any beneficial owner who has requested it, within two months following such request.

Article 10

Elimination of double taxation

1. Member States shall take the necessary measures to eliminate all double taxation on the interest covered by this Directive.

2. If interest received by a beneficial owner has incurred withholding tax in the Member State of the paying agent, the Member State of residence for tax purposes of the beneficial owner shall grant him a tax credit equal to the amount of the tax withheld up to the amount of tax due on such interest in its territory. Where the amount of tax withheld in the Member State of the paying agent is higher than the tax credit granted to the beneficial owner by his Member State of residence for tax purposes, the Member State of the paying agent shall reimburse the difference directly to the beneficial owner.

3. As far as payments of interest within the meaning of Article 5(c) and (d) are concerned:

(a) where the Member State of the paying agent has opted for the information system, the Member State of residence for tax purposes of the beneficial owner shall grant him, up to the amount of tax due on such interest in its territory, a tax credit equal to the effective level of taxation incurred by the collective investment undertakings on the income corresponding to the interest paid to the beneficial owner;

(b) where the Member State of the paying agent has opted for the withholding-tax system, the paying agent shall reduce the withholding tax provided for by Article 8 by the effective level of taxation incurred by the collective investment undertakings on the income corresponding to the interest paid to the beneficial owner. In that event the Member State of residence for tax purposes of the beneficial owner shall grant him a tax credit which covers the entire taxation effectively borne by the interest, up to the amount of tax due in its territory on such interest.

4. If a withholding tax has already been deducted, without there being any possibility of its being refunded, in a third country from interest paid via a paying agent established in a Member State to a beneficial owner resident for tax purposes in another Member State, the Member State of the paying agent shall, where it has opted for the withholding-tax system, reduce the amount of the withholding tax on that interest by the amount of tax which has already been withheld.

Article 11

Negotiations with third countries

The Community shall enter into negotiations with its main third-country commercial partners either on a bilateral or on a multilateral basis, in order to ensure the effective taxation of income from savings covered by this Directive which is paid to residents for tax purposes of the Member States by paying agents established in such third countries.

Article 12

Transposal

1. Member States shall adopt and publish no later than 31 December 1999 the laws, regulations and administrative provisions necessary to comply with this Directive. They shall forthwith inform the Commission thereof.

They shall apply the provisions from 1 January 2001.

When Member States adopt the provisions as envisaged in the first subparagraph, these shall contain a reference to this Directive or shall be accompanied by such reference at the time of their official publication. The procedure for making such reference shall be adopted by Member States.

2. Member States shall communicate to the Commission the texts of the main provisions of national law which they adopt in the field covered by this Directive. In that communication they shall provide a correlation table showing the national provisions which exist or are introduced in respect of each Article of this Directive. Member States shall also provide the details of their competent authority.

Article 13

Review

The Commission shall report to the Council on the operation of this Directive before 1 January 2004. On the basis of that report, the Commission shall, where appropriate, propose to the Council any amendments to the Directive that prove necessary in order to ensure better effective taxation of savings income and to remove undesirable distortions of competition.

Article 14

Entry into force

This Directive shall enter into force on the twentieth day following that of its publication in the Official Journal of the European Communities.

Article 15

This Directive is addressed to the Member States.

(1) OJ L 178, 8.7.1988, s. 5.

(2) OJ C 2, 6.1.1998, p. 1.

(3) OJ L 336, 27.12.1977, p. 15.

(4) OJ L 375, 31.12.1985, p. 3.

ANNEX

DECISION OF THE REPRESENTATIVES OF THE GOVERNMENTS OF THE MEMBER STATES, MEETING WITHIN THE COUNCIL of . . . on the taxation of savings

THE REPRESENTATIVES OF THE GOVERNMENTS OF THE MEMBER STATES, MEETING WITHIN THE COUNCIL,

CONFIRMING that, in order to take account of the necessity to preserve the competitivity of financial markets in a global context, it is advisable that the elements agreed in the text on taxation of savings in the conclusions of the Ecofin Council of 1 December 1997 be adopted as widely as possible;

RECALLING that the proposal for the Directive presented by the Commission on 20 May 1998 to ensure a minimum of effective taxation within the Community of savings income in the form of interest is based on such elements;

CONFIRMING the agreement reached in the Ecofin Council of 1 December 1997 on the fact that the Member States should undertake, at the same time as discussions are taking place on this Directive, to promote the adoption of measures equivalent to those of the Directive and third countries as well as in their dependent or associated territories or the territories in which the Member States have particular responsibilities or fiscal prerogatives, which do not fall within the scope of the Directive,

ADOPT THE FOLLOWING DECISION:

Article 1

Member States undertake, in accordance with their own and the Community's respective competences, at the same time as discussions are taking place on the proposal for a Directive presented by the Commission on 20 May 1998 to ensure a minimum effective taxation within the Community of savings income in the form of interest, to promote the adoption in third countries of equivalent measures relating to payments of interest to Community residents.

Article 2

Member States which have dependent or associated territories or which have special responsibilities or taxation prerogatives in respect of other territories are committed to taking appropriate measures, where appropriate within the framework of their constitutional arrangements, to ensure that provisions concerning interest payments to Community residents, equivalent to those contained in the Directive once adopted, may be applied in those territories.