Proposal for a Council Directive to ensure a minimum of effective taxation of savings income in the form of interest payments within the Community
Date: 1998-05-20
Institutions: European Commission
Subjects: direct tax, fiscal policy, restriction on competition, savings, tax on investment income

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COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 20.05.1998 
COM(1998) 295 final 

98/0193 (CNS) 

Proposal for a 
COUNCIL DIRECTIVE 

to ensure a minimum of effective taxation of savings income in 
the form of interest payments within the Community 

(presented by the Commission) 

EXPLANATORY  MEMORANDUM 

I. 

INTRODUCTION 

General 

1. 

2. 

3. 

In  its  Communication  of  5 November  1997  entitled  "A  package  to  tackle  harmful 
tax  competition  in  the  European Union"1  the  Commission  stressed  the  need  for 
coordinated  action at a European  level to tackle harmful  tax competition  in order to 
help  achieve  certain  objectives  such  as  reducing  the  continuing  distortions  in  the 
internal  market,  preventing  excessive  losses  of  tax  revenue  and  encouraging  tax 
structures  to  develop  in  a more  employment-friendly  way.  The  Ecofin  Council  of 
1 December  19972 held a wide-ranging debate on the basis of that  Communication, 
agreed  to a Resolution  on a code of conduct  for  business taxation,  approved  a text 
on the  taxation  of  savings  as the  basis  for  a  Directive  in this  field  and  considered 
that  the  Commission  should  present  a  proposal  for  a  Directive  on  interest  and 
royalty  payments  between  companies.  In  line  with  the  agreement  of  1 December, 
the Commission adopted on 4 March  19983 a proposal for a Directive on a common 
system  of  taxation  applicable  to  interest  and  royalty  payments  made  between 
associated  companies  of  different  Member States.  This  Memorandum  deals  with 
the  proposal  for  a  Directive  to  ensure  a minimum  of  effective  taxation  of  savings 
income in the form of interest payments within the Community. 

The  difficulty  of  ensuring  a  minimum  of  effective  taxation  of  interest  payments 
in the  Community  has  been  felt  more  and  more  acutely  as  progress  has  been 
achieved  in  the  field  of  liberalization  of  capital  movements.  As  provided  for  by 
Council Directive 88/361/EEC of 24 June  19884, which enabled capital  movements 
to  be  completely  liberalized,  the  Commission  presented  on  10 February  1989  a 
proposal  for  a  Council  Directive  on  a  common  system  of  withholding  tax  on 
interest income5. This proposal, which was aimed at introducing a single system of 
withholding  tax throughout  the Community,  did  not, however,  win the  unanimous 
agreement  of Member States within the Council. It is being withdrawn  at the same 
time as this new proposal  is being presented. 

The  scope  for  non-taxation  of cross-border  interest  payments  in the  Community  is 
the  cause  of  economic  distortions  which  are  incompatible  with  the  proper 
functioning  of the single market. The European financial area, the creation of which 
was made possible by the liberalization  of capital movements, cannot deliver all its 
benefits  if  savers'  decisions  are  determined  by  the  possibility  of  avoiding  tax 
instead of being taken  in the light of a comparison between investment  alternatives 
based  on  their  intrinsic  merits.  The  need  for  joint  action  to  eliminate  these 
economic distortions is rendered all the more urgent by the start of the third stage of 
economic  and  monetary  union,  which  will  further  facilitate  the  cross-border 
investment of savings. 

COM(97) 564 final,  5.11.1997. 
OJC2,  6.1.1998, p. 1. 
COM(1998) 67 final, 4.3.1998, and OJ C  123, 22.4.1998, p. 9. 
OJL178,  8.7.1988, p. 5. 
COM(89) 60 final and OJ C  141, 7.6.1989, p. 5, 

4. 

The budgetary  discipline  required  of Member States also means that the  erosion of 
tax  bases  linked  to  the  absence  of  guarantees  concerning  a  minimum  of  effective 
taxation  on  the  cross-border  investment  of  savings  is  becoming  less  and  less 
acceptable.  Against  this  background,  the  absence  of  guarantees  concerning  a 
minimum  of  effective  taxation  on  the  cross-border  investment  of  savings  is  also 
hindering  Member States'  efforts  to  restore  the  balance  in  terms  of  the  burden  of 
taxation  between  the  different  factors  of  production  and  thereby  to  achieve  a 
reduction  in  the  level  of  total  taxation  on  income  from  employment,  something 
which  would  be  certain  to  have  a  favourable  impact  on job  creation  and  the fight 
against  unemployment. 

Coexistence model 

the  agreement 

5.  Having  regard  to  the  principles  of  subsidiarity  and  proportionality  and  in 
the  Ecofm  Council  on 
accordance  with 
1 December  1997, the  proposal  is based  on  the  "coexistence  model",  under  which 
each Member State  applies  a withholding  tax  at  source  or provides  information  on 
income  from  savings  to  other  Member States.  The  advantage  of  the  coexistence 
model  is that  Member States which  are prepared  to apply  one of these  systems can 
encounter  difficulties  in  applying  the  other  one  and  this  makes  the  adoption  of  a 
common system for the whole of the Community very  difficult. 

reached  by 

6. 

7. 

The  possibility  of  allowing  those  Member States  which  apply  the  withholding-tax 
system to implement,  moreover,  any information  exchange  measures  which are set 
in  place  by  national  provisions  or  bilateral  agreements  concluded  with  other 
Member States has also been catered  for. 

The scope of the proposal has been limited to interest paid in each Member  State to 
individuals  resident  in  another  Member State.  All  cross-border  interest  payments 
made to individuals within the Community are covered,  irrespective  of the place of 
establishment of the debtor. 

8.  As  the  objective  is  to  allow  a  minimum  of  effective  taxation  on  cross-border 
interest  payments  received  by  residents  of  each  of  the  Member States,  it  was 
necessary  to  require  those  Member States  which  apply  the  information  system  to 
communicate  information  to all the other  Member States, with  each  of the  latter of 
course receiving only information  on its own residents. 

9.  Given  the  differences  in  the  level  of  taxation  borne  by  residents  of  the  various 
Member States, however, it is difficult  to determine a minimum rate of withholding 
tax  which  satisfies  the  requirement  of  a minimum  of  effective  taxation  of  income 
from  savings in the case of all the Member States. It would not be appropriate to set 
the rate of withholding tax at too low a level  since, although the withholding  tax is 
not intended to be in full  discharge of tax liability, it could become so in practice if 
the beneficiary  does not declare the income in question  in his country  of residence. 
Consideration  must  also  be  given  to  the  competitiveness  of  European  financial 
markets  and  to  the  risk  that  setting  the  rate  of  withholding  tax  at  too  high  a  level 
could trigger an outflow  of savings from  the Community. 

10.  The  Commission  has  come  to  the  conclusion  that  a  balanced  solution  to  the 
problem of setting the rate of withholding tax would be to adopt a minimum rate of 
20%,  together  with  a  corrective  mechanism  enabling  the  beneficiary,  at  his  own 
initiative and without encroaching on the confidentiality  of banking  information,  to 
be  taxed  according  to  the  rules  of  his  Member State  of  residence.  This  corrective 
mechanism  is  based  on  the  issue,  by  the  tax  authorities  of  the  Member State  of 
residence,  of  a  certificate  proving  that  the  beneficiary  has  informed 
those 
authorities of the amount of interest to be received. 

11. 

In  brief,  the  coexistence  model,  as  presented  in  the  proposal,  foresees  that  each 
Member  State  has  the  choice  between  two  systems,  the  information  system 
(provision  of  information  to  all  other  Member  States  in  which  the  beneficiary  is 
resident) and the withholding-tax system  (levying a withholding  tax  of 20%).  Each 
Member  State  may  choose  one,  but  only  one,  of  the  two  systems  and  apply  that 
system  to  all  payments  of  interest  in  its  territory  to  residents  of  all  other 
Member States.  Moreover,  it  is  possible  for  the  beneficial  owner  receiving  a 
payment in a Member State which has chosen the withholding-tax  system, to obtain 
a modification  of this  system  by the certificate  process; the beneficiary  can  ensure 
that  he  is  taxed  exclusively  in  the  Member  State  where  he  is  resident  for  tax 
purposes as if he were receiving a payment in a Member  State which had opted  for 
the information  system. 

12.  The  efficacy  of  any  measure  intended  to  ensure  effective  taxation  of  savings 
income  cannot  be  guaranteed  without  the  cooperation  of  market  operators.  In  the 
context  of this Directive, in which the withholding-tax  system and the  information 
system  coexist  and  the  scope  of  the  provisions  is  limited  to  interest  paid  to 
non-resident  individuals,  the  paying  agent  is  clearly  the  market  operator  most 
capable of implementing effectively  the measures required by the Directive. 

13.  The paying agent can check, using simple procedures  and at little cost, whether the 
interest  is  paid  to  an  individual  and  to  request  that  he  provides  proof  of  his 
residence  for  tax  purposes.  Except  in  the  case  of  interest  produced  by  bank 
accounts  and  deposits,  the  debtor  is  rarely  in  contact  with  the  beneficiaries  and 
would  have  difficulty  in  distinguishing  between  them.  The  lack  of  contact  with 
beneficiaries  would  also  make  the  role  of  the  debtor  more  difficult  and  costly  in 
Member States opting for the information  system. 

14.  The allocation  of tasks to the paying agent  has, furthermore,  the effect,  if payment 
is made in one Member  State to an individual resident in another Member  State, of 
including  in  the  scope  of  the  Directive  interest  from  securities  issued  by  debtors 
who  are  established  outside  the  Community.  The  issuing  activities  of  European 
businesses, in competition  with issuers outside the Community,  are thus much less 
affected  than  if the determinant  role was assumed  by the debtor as was the case in 
the  Directive  presented  by  the  Commission  on  10 February  1989.  The  new 
approach  based  on  the  responsibility  of  the  paying  agent,  and  the  application  of 
the Directive  only  to  payments  destined  for 
in  other 
Member States,  strongly  limits  the  impact  of  the  proposed  measures  on  the 
Eurobond  Market.  It  should  be  noted  that  this  Market  appears  principally  to  be 
sustained by institutional  investors and the part sustained  by individual  investors by 
those  who  are  not  resident  in  the  Community.  The  Commission  believes  that  this 
new direction  of the Directive no longer justifies  the exclusion  of Eurobonds from 
its scope, as was an option in the  1989 Directive. 

individuals  resident 

in 

the  Member  States  by  paying  agents  established 

15.  The  Council,  in  its  conclusions  of  1 December  1997  on  the  taxation  of  savings, 
considered that the provisions of the Directive should take into account the need to 
preserve  the  competitiveness  of  European  financial  markets  and  indicated  that  the 
basic  principles  should  be  adopted  as  widely  as  possible.  To  this  end,  the 
Community  should  enter  into  negotiations  with  its main  third  country  commercial 
partners,  either  bilaterally  or  multilaterally,  to  allow  it  to  ensure  the  effective 
taxation  of  savings  income  covered  by  this  Directive  paid  to  residents  for  tax 
purposes 
those 
third countries. Moreover,  Member  States must undertake, towards  the  same ends, 
to  promote  the  application  of  provisions  equivalent  to  those  of  the  Directive  in 
territories  which  do  not  fall  within  the  scope  of  the  Directive.  In  particular, 
Member States  which  have  dependant  or  associated  territories  or  which  have 
particular  responsibilities  or  taxation  prerogatives  in  respect  of  other  territories 
must  undertake,  where  appropriate  within  the  framework  of  their  constitutional 
arrangements, to ensure that  measures equivalent  to those  of  the  Directive  may  be 
applied  in those territories. These  undertakings  should be effected  by means  of the 
adoption,  in  parallel  with  the  discussion  of  this  Directive,  of  a  decision  of  the 
Representatives  of  the  Governments  of  the  Member  States  meeting  within  the 
Council on the basis of the model proposed jointly with the proposal for a Directive 
(see Annex). 

in 

II.  COMMENTARY  ON  THE  ARTICLES  OF  THE  PROPOSAL  FOR 

A DIRECTIVE 

Article 1 

1. 

2. 

This  Directive  is  aimed  at  allowing  a  minimum  of  effective  taxation  of  income 
from savings. It applies to interest received by individuals who have their residence 
for tax purposes within the Community, but  in a different  Member  State to the one 
where the interest is paid. 

The  Directive  applies  to  interest  paid  in the  territory  of  Member States,  regardless 
of  the  place  of  establishment  of  the  capital  debtor.  Each  Member  State  must  take 
measures  to  ensure  that  agents  established  within  its  territory  which  pay  interest 
perform  the  tasks  which  have  been  assigned  to  them  for  the  purpose  of 
implementing the Directive. 

Article 2 

The Directive is based on the coexistence of two systems, namely the information  system 
and  the  withholding-tax  system.  Each  Member State  in  which  the  interest  is  paid  must 
opt either for one system or the other and the system chosen be applied to all interest paid 
in its territory to residents of all other Member States. 

(a)  Definition  of beneficial owner 

Article 3 

The beneficial  owner  is any individual  who receives  interest  in his  own right.  This 
excludes  from  the scope of the Directive  interest  payments  made  for  the benefit  of 
legal persons or companies, as well as those made to individuals  who receive them 
in a professional  capacity as agent, trustee or nominee for another person. 

(b)  Definition  of paying  agent 

The  object  of  this  definition  is  to  guarantee  the  identification  of  a  single  paying 
agent in the following  situations: 

where  the  interest  payment  for  the  benefit  of  the  beneficial  owner  is  made 
directly by the debtor, he is identified  as the paying agent; 

if,  on  the  other  hand,  the  debtor  charges  another  economic  operator  with 
making  the  payment  to  the  beneficial  owner,  that  operator  is  identified  as the 
paying agent; 

Any  party  which,  in  connection  with  a  business  or  professional  activity,  pays 
its  customers  interest  arising  from  management  of  their  property  is  also 
identified  as a paying agent. 

Where  the  interest  payment  is  made  via  a  number  of  intermediaries,  possibly 
established  in  different  countries  or territories,  "interest  payment"  means  only  the 
transaction  whereby  the  interest  is paid  for  the  immediate  benefit  of the  beneficial 
owner, and "paying agent" means only the last party established within the territory 
of the European Community which carries out that transaction. 

(c)  Definition  relating to residence for  tax purposes 

To  allow  the  resolution  of  any  dispute  between  two  or  more  Member  States  in 
determining  the  residence  for  tax  purposes,  the  Article  foresees  the  application  of 
successive criteria for identifying  tax residence for the purposes of the Directive. 

(d)  Definition of competent authority 

The  competent  authorities  are 
in  Article  1(5)  of  Council 
Directive 77/799/EEC6  of  19 December  1977 concerning  mutual  assistance  by the 
competent authorities of Member States in the field of direct and indirect taxation. 

those  defined 

Article 4 

In keeping  with  the principle  of  subsidiarity,  it  is for  Member States to  choose  the most 
suitable  practical  arrangements  for  identifying  beneficial  owners  and  determining  their 
place  of  residence  for  tax  purposes.  The  identification  procedures  laid  down  by  each 
Member State are to be applied by market operators: it is therefore  desirable that - at least 
for  the  most  common  transactions  and  those  which  are  least  open  to  abuse  -  these 
identification  procedures  should  not  be  too  cumbersome,  while  retaining  a  level  of 
effectiveness  that enables the objective pursued by the Directive to be achieved. 

in  OJ 

Published 
by 
Council  Directives 79/1070/EEC  of  6.12.1979  (OJ  L  331,  27.12.1979,  p.  8)  and  92/12/EEC  of 
25.2.1992  (OJ  L 76, 23.3.1992,  p.  1) and  most  recently  by the  Act  of  Accession  of  Austria,  Finland 
and Sweden (Decision  95/1 /EC, OJ L 1, 1.1.1995,  p. 1). 

subsequently 

27.12.1977, 

amended 

p.  15 

336, 

and 

L 

6 

Article 5 

(a)  The  term  "debt-claims  of  any  kind"  clearly  encompasses  cash  deposits  and  cash 
guarantees. Bonds which carry a right to participate  in the debtor's  profits  are to be 
regarded  as producing  interest  and  not  dividends,  unless  the  funds  loaned  actually 
bear a share of the risks incurred  by the debtor. 

(b)  Although  the  extremely  broad  definition  in  point (a)  leaves  no  doubt  that  income 
from  zero-coupon  bonds  and  similar  debt-claims  is  included  in  the  scope  of  the 
Directive,  it  is  useful  to  emphasize  that  any  increase  in  the  value  of  these 
debt-claims  constitutes  income  for  the purposes  of this  Directive.  This  increase  in 
value  comes within  the  scope  of the  Directive  when  it  is paid  by the  paying  agent 
on reimbursement of the debt-claim or of the corresponding  security. 

(c)  This point provides  similarly that savings income received  indirectly, via collective 
investment  undertakings, from  securities representing  debt-claims  is to be regarded 
as  interest  for  the  purposes  of  the  Directive.  In  order  to  identify  the  collective 
investment  undertakings  involved, a uniform  criterion  has been  laid down, in terms 
of  the  composition  of  the  assets  invested,  for  defining  the  collective  investment 
undertakings  that  produce  income  which  is  regarded  as  interest  when  received  by 
unit-holders. 

(d) 

In  order  to  prevent  distortions  of  competition  between  comparable  financial 
instruments,  the  capitalized  income  of  collective  investment  undertakings  which 
have  invested  more than  50% of their assets  in bonds  and  similar  securities  is also 
regarded  as interest  of which  unit-holders  can  receive the  benefit  when  their  units 
are redeemed. 

Article 6 

The scope of the Directive is the territory to which the provisions of the EC Treaty apply, 
having due regard to Article 227 of that Treaty. 

Article 7 

1.  When  applying  the  information  system,  a  Member State  must  communicate  the 
information  provided  for  in  the  Directive,  without  there  being  a  need  for 
reciprocity,  to  any  other  Member State  in  which  the  beneficial  owner  has  his 
residence for tax purposes. 

2. 

3. 

4. 

This  paragraph  indicates  the  type  of  information  which  must  always  be  given  by 
Member States which  apply the information  system. These  Member States are also 
free to communicate other  information. 

The provision of information  on request only would not be compatible with the aim 
of the  Directive,  since  it would  not  give the assurance that  the  interest  in  question 
could be taxed. 

It is stipulated that Article 8 of Directive 77/799/EEC does not apply to  information 
which  must  be  supplied  under  this  Directive.  The  fact  is  that  any  reliance  on 
that Article  by  Member States  applying  the  information  system  would  be  certain 
to undermine  achievement  of  the  aim  of  this  Directive.  The  provision  of 
information  on  a  reciprocal  basis  only  (a  possibility  allowed  by  Article 8(3)  of 

Directive 77/799/EEC)  would 
residents  of  certain 
Member  States (those which are unable to communicate information)  to escape any 
form  of taxation on cross-border interest payments they receive. 

in  particular  enable 

Article 8 

1. 

2. 

3. 

The  fact  that  a minimum  rate  of  20% is  set  does  not  prevent  Member States  from 
applying a higher rate if they so wish. The prohibition on any other withholding tax 
on  interest  payments  covered  by  the  Directive  applies  to  all  Member States 
(including those which have opted for the information  system under this Directive). 

From  the  point  of  view  of  this  Directive,  the  withholding  tax  levied  by  the 
Member State  in  which  the  interest  is  paid  is  not  normally  a  definitive  deduction 
and  does  not  fully  discharge  the  beneficiary's  tax  liability  in  his  country  of 
residence.  The  deduction  of  withholding  tax  is  regarded  as  a  practical  means  of 
allowing  a minimum  of  effective  taxation  of  cross-border  interest  payments  in the 
Community.  That  objective  is  also  achieved  when  the  beneficiary  can  prove,  by 
means of a certificate, that he has informed  his own tax authorities of the income he 
is  receiving  in  another  Member State:  the  deduction  of  withholding  tax  is  not 
considered necessary in such cases, as it is possible that the income will be taxed in 
the beneficiary's  Member State of residence. 

Those  Member States  which  apply  the  withholding-tax  system  are  allowed  to 
arrange  for  information  on  the payment  of  interest  subject  to  withholding  tax  also 
to  be  made  available  to  the  Member State  in  which  the  beneficiary  is resident  for 
tax  purposes.  The provision  of  such  information,  which  may  be  based  on  national 
provisions  or  bilateral  agreements,  is  not  regulated  by  this  Directive,  although  its 
compatibility with the Directive is explicitly recognized. 

Article 9 

This Article is intended to specify  the information  which must feature  in the certificate  to 
be  issued  by the  tax  authorities  of  Member States  to  a beneficial  owner  of  interest  who 
requests  it.  The  beneficial  owner  can,  of  course,  request  more  than  one  certificate  from 
his authorities, not only when he has invested in a number of Member States which apply 
the withholding-tax  system, but  also when  interest payments are made to him by several 
different  entities within the same Member State. 

Article 10 

1. 

2. 

Paragraph  1  recalls,  within  the  Directive,  the  obligation  to  eliminate  double 
taxation on the interest received. 

Paragraph  2  lays  down  the  basic  principle  that  each  Member State  must,  when 
establishing  the  income  tax  liability  of  its  residents,  take  account  of  any 
withholding  tax  which  has  been  applied  in  another  Member State  pursuant  to 
this Directive. 

The  basic  approach  adopted  is  the  "normal  imputation"  system,  which  involves 
granting tax relief not exceeding the lower of the following  two amounts: 

- 

the amount of withholding tax which the beneficiary  can demonstrate that he has 
effectively  incurred in the Member State where the interest was paid; 

8 

- 

the  portion  of  the  beneficiary's  income  tax  liability,  which,  in  accordance  with 
the  national  law  of  the  Member State  in  which  the  beneficiary  is  resident, 
corresponds to the interest in respect of which the withholding tax was deducted. 

Only  the  Member State  of  the  paying  agent  is  required  to  refund  any  amount  of 
withholding tax in excess of that which can be utilized  in this way by the  beneficial 
owner in the Member State in which he is resident. 

3. 

Paragraph  3  indicates  the  special  rules  to  be  followed,  both  in  the  Member State 
where  the  interest  is  paid  and  in  the  beneficiary's  Member State  of  residence,  in 
order to take account  of withholding  taxes  and other direct  taxes already  levied on 
the  income  of  collective  investment  undertakings  corresponding  to  the  same 
interest.  These  special  rules  are  aimed  at  ensuring  neutrality  in  treatment  as 
between the direct investment of savings and investment via a collective  investment 
undertaking.  It is for  Member States to establish  the criteria  - which  should  not too 
onerous - to allow beneficial  owners and paying agents established  in their territory 
to  prove  the  effective  taxation  borne,  through  collective  investment  undertakings, 
by income corresponding to interest paid. 

(a)  Subparagraph (a) concerns payments of interest in Member States which have 

opted for the information  system; 

(b)  Subparagraph 

rules 

specific 

(b)  provides 

for  payments  made 

in 
Member States  which  have  opted  for  the  withholding-tax  system.  Having 
regard  to the  fact  that  the taxes  which  have  already  been  paid  are taken  into 
account  by  the  Member State  of  residence  according  to  the  system  of 
"ordinary  imputation" (see the  description  in paragraph 2 above),  application 
of  the  withholding  tax  at  the  normal  rate,  added  to  the  taxes  borne  by  the 
collective  investment  undertakings,  would  have  the  effect  of  multiplying 
cases  where  taxes  paid  could  not  be  wholly  deducted  in  the  Member State 
of residence. 

4. 

Paragraph  4  recognizes  that  bilateral  conventions  for  the  avoidance  of  double 
taxation often  grant a right to levy tax, in the form of a withholding tax, to the State 
where  the  debtor  is  established,  which  is  not  necessarily  the  Member  State  where 
the  interest  is  paid.  While  Article 8 prohibits  the  levying  of  withholding  taxes  on 
such a basis in relations between Member States, the same situation does not apply 
to  relations  with  non-member  countries  with  regard  to  securities  issued  in  their 
territory. In order to avoid cases of double taxation, a mechanism  has been devised 
for  taking  account  of  withholding  taxes  already  incurred  when  calculating  the 
amount  of withholding tax to be deducted  under this Directive. It is for  each of the 
Member States  applying  the  withholding-tax  system  to  specify,  as  far  as  interest 
payments  made  in  its  territory  are  concerned,  the  proof  to  be  presented  by  the 
beneficiary  so  that  the  paying  agent  can  take  account  of  withholding  taxes 
already incurred. 

Article 11 

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 

Paragraph  1 lays  down  the  timetable  for  transposing  the  Directive  into  Member States' 
national laws. In view of the need to allow paying agents time to adapt their procedures in 
line  with  the  arrangements  adopted  by  Member States  pursuant  to  the  Directive,  it  was 
deemed  appropriate  to  stagger  the  deadlines  for  the  adoption  and  the  entry  into  force  of 
national  measures.  The  obligation  to  communicate  to  the  Commission  the  national 
provisions  adopted,  prior  to  their  entry  into  force,  is  intended  to  ensure  correct 
implementation of the Directive. 

Paragraph  2  confirms  the  standard  requirements  regarding  the  communication  by 
Member States  of  the  national  provisions  they  adopt  for  the  purpose  of  transposing 
the Directive. 

Article 13 

The  Commission  considers that, as established  in the conclusions  of the  Ecofin  Council 
on  1 December  1997,  the  coexistence  model  constitutes  a  first  step  towards  effective 
taxation of savings  income throughout  the Community  and that a review of the  situation 
should  be  planned  with  the  aim  of  determining  to  what  extent  further  progress  would 
be conceivable. 

10 

Proposal for a 
COUNCIL  DIRECTIVE 

to ensure a minimum of effective  taxation of savings income in 
the form of interest payments within the Community 

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 Commission7, 

Having regard to the opinion of the European  Parliament8, 

Having regard to the opinion of the Economic and Social Committee9, 

(1)  Whereas Council  Directive 88/361/EEC of 24 June  1988 for  the implementation  of 
Article  67  of  the  Treaty10  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(l) 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 73 b of the Treaty; 

7  OJC 
8  OJC 
9  OJC 
10 

OJL  178, 8.7.1988, p. 5. 

11 

(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 
policy11, 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; 

n  O J C 2,  6.1.1998, p. 1. 

12 

(13)  Whereas it should be specified  that, when interest, is not paid direct to the  beneficial 
owner by the debtor  of the capital  which produces the  interest, the  paying  ageiu 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 taxation12, 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 

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; 

information 

appropriate 

(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 once 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; 

12  OJL  336, 27.12.1977, p. 15. 

13 

(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 purposes of this Directive: 

(a) 

"beneficial  owner"  means  any  individual  who  receives  an  interest  payment  for  his 
own  benefit; 

14 

(b) 

"paving 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) 

(ii) 

the beneficial  owner is deemed to be a resident of the Member State where he 
has  his  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); 

if  he  has  a  permanent  home 

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; 

15 

(b) 

(c) 

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; 

income  distributed  by  undertakings  for  collective  investment  in  transferable 
the  meaning  of  Council  Directive 85/611/EEC13  which 
securities  within 
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. 

2. 

3. 

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. 

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. 

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. 

13  OJL375,  31.12.1985, p. 3. 

16 

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 
direct 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 

17 

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 

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. 

for 

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 
Transposai 

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. 

18 

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. 

This Directive is addressed to the Member States. 

Article 15 

Done at Brussels, 

For the Council 
The President 

19 

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  in  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. 

20 

FINANCIAL  STATEMENT 

This  proposal  for  a  Council  Directive  has  no  financial 
Community budget. 

implications  for  the 

21 

IMPACT ASSESSMENT  FORM 

Impact of the proposal on business, with special reference to small and 
medium-sized  enterprises (SMEs) 

Title of proposal: 

Proposal  for  a Council  Directive to ensure  a minimum  of  effective 
taxation  of savings income in the form  of interest payments within 
the Community 

Business impact assessment reference number: 98006. 

The proposal: 

1.  Given  the principle  of subsidiarily,  why  is Community  legislation  required  in this 

area and what are its main aims? 

The  aim  of  this  proposal  for  a  Directive  is to  allow  a  minimum  of  effective  taxation  of 
interest  paid  in  each  Member State  to  individuals  who  are  resident  for  tax  purposes  in 
another Member State. 

In  the  absence  of  any  coordination  of  national  systems  for  the  taxation  of  savings, 
individuals  who  are residents  of  Member States  are  currently  able  to  avoid  any  form  of 
taxation on interest paid to them in a Member State other than the one in which they live. 
This is causing distortions  in the operation of the single market  and losses in tax revenue 
for the Member States. 

The  European  financial  area,  the  creation  of  which  was  made  possible  by  the 
liberalization  of  capital  movements,  cannot  deliver  all  its  benefits,  which  are  linked  to 
keener competition  between  service providers, if savers'  decisions  are determined  by the 
possibility  of  avoiding  tax  instead  of  being  taken  in  the  light  of  a  comparison  between 
investment alternatives based on their intrinsic merits. 

Impact on business: 

2.  Who will be affected by the proposal? 

Which sectors of business? 
Which sizes of business (what is the concentration of small and medium-sized 
firms)? 
Are  there  particular  geographical  areas  of  the  Community  where  these 
businesses are found? 

No  increase  in  the  burden  of  taxation  on  business  income  is  to  be  anticipated,  for  all 
business  sectors, as a result  of the  introduction  of this  Directive. To avoid  any  obstacles 
to cross-border  economic activities which would be incompatible  with the single market, 
interest  flows  between  banks  and  more  generally  between  parties  that  are  not  private 
individuals  are  excluded  from  the  scope  of  the  Directive.  As  far  as  sole  proprietorships 
are concerned, the cross-border  interest  payments they receive  fall  within  the scope of the 
Directive,  but  the  existence  of  a  corrective  mechanism  enabling  them  to  avoid 
withholding  tax  being  deducted  from  income  notified  to  the  tax  authorities  of  their 
Member State of residence shields them from  any double taxation. 

22 

of 

impact 

The 
the 
supplementary administrative  responsibilities  asked  of  paying  agents  who  are  generally 
financial  businesses. 

proposal 

centred 

thus 

cost 

the 

the 

on 

of 

is 

The  implementation  of  the  measures  is  entrusted  to  paying  agents,  who  are  established 
within  the  territories  of  all  the  Member  States  of  the  Community.  All  those  who,  not 
acting as an individuals  in a private capacity, make payments in respect of their own debt 
or the debt  of a third  party,  might,  in theory,  fall  within  the category  of  paying  agent. In 
practice, however, paying agents are very rarely small or medium-sized  enterprises. 

For the purposes of this Directive, the role of paying agent is assumed  only by businesses 
or professionals  who pay interest  to  individuals: the majority  of  issuers  of  securities  and 
of market operators will suffer  no additional  administrative costs. 

3.  What will business have to do to comply with the proposal? 

The  parties  which  will  be  regarded  as  paying  agents  are  normally  already  under  an 
obligation to identify  the beneficiaries  of their payments and often  also have to  discharge 
tax  collection  or  declaration  responsibilities  on  behalf  of  their  own  national  tax 
authorities.  The  extra  obligations  placed  on  them  for  the  purpose  of  carrying  out  the 
measures  introduced  by  this  Directive  will  probably  require  them  to  adapt  their 
administrative procedures and computer programs, but the measures have been devised in 
such  a  way  that  the  cost  of  these  adaptations  and  the  additional  administrative  burden 
should  be  relatively  limited.  When  transposing  the  Directive  into  their  national  law, 
Member States  should  take  account  of  the  need  to  keep  costs  and  extra  burdens  to  a 
minimum. 

4.  What economic effects is the proposal  likely to have 

-  On employment, 
-  On investment and the creation of new businesses, 
-  On the competitive position  of businesses ? 

The  fact  that  all  interest  paid  in the  Community  is taken  into  consideration,  irrespective 
of the  place  of establishment  of the  debtor,  will  mean  that  businesses  established  in the 
Community  are  not  placed  at  a  disadvantage  in  relation  to  their  competitors  in 
non-member countries when borrowing  funds.  The risks of relocation  of the  debt-issuing 
activities  of European  businesses to countries  outside the  Community,  with the  sole aim 
of escaping tax, are thus reduced. 

The  scope  of  the  Directive  is  limited  to  interest  payments  made  to  individuals  who 
are resident  in  Member States  other  than  the  one  in  which  the  interest  is  paid. 
Businesses'  financing  costs  should  therefore  be  only  marginally  affected  by  the 
withholding tax on interest. 

As far  as dividends are concerned, Member States'  legislation  is already up to the task of 
ensuring  a minimum  of effective  taxation,  irrespective  of the  place  where  the  dividends 
are  paid.  The  fact  of  allowing  a minimum  of  effective  taxation  of  cross-border  interest 
payments  too  cannot  but  help  remove  distortions  of  competition  between  the  different 
< instruments used  by businesses  to raise  the finance they  need,  namely  equity  capital  and 

23 

debt  financing.  The  financing  of  businesses  by  means  of  equity  capital  will  furthermore 
be  placed  on  an  equal  footing  with  financing  of  the  public  sector  through  the  issue  of 
debt securities. 

The non-taxation  of cross-border  interest payments not only results  in a direct  loss of tax 
revenue from  those interest payments but also forces  some Member States to reduce their 
rate  of  taxation  of  domestic  interest  payments  to  below  the  level  they  would  otherwise 
have chosen, in order to avoid the risk of a massive outflow  of savings. 

Allowing  a  minimum  of  effective  taxation  of  savings  invested  across  borders  can  also 
contribute to Member States' efforts  to restore the balance between the burden of taxation 
on the  different  factors  of  production  and  thereby  to  achieve  a  reduction  in the  level  of 
total taxation  on income from employment,  something  which would be certain to reduce 
businesses'  operating  costs and to have a favourable  impact on job  creation and the fight 
against  unemployment. 

5.  Does  the proposal  contain  measures  to  take  account  of  the  specific  situation  of 

small and medium sized firms? 

The impact of this proposal  on business  is predominantly  on paying agents who are very 
rarely small and medium-sized  enterprises. 

Consultation 

6.  Organizations  which  have  been  consulted about  the proposal  and  outline  of their 

main views. 

to 

reacted 

in  May  1997 

that  publication.  However, 

The principles  underlying the proposal  were agreed  by the Ecofin  Council  at its meeting 
in  Official  Journal  C  2  of  6 January 1998. 
on  1  December  1997  and  published 
No organization  has 
the 
Confederation Fiscale Européenne (CFE) published a study identifying  major  differences 
in  the  taxation  of  interest  and  dividend  income,  and  concluded  that  the  elimination  of 
such  differences  is  indispensable  for  the  creation  of  a uniform  European  capital  market. 
The  European  Mortgage  Federation, 
the  Commission's  report 
"Taxation in the  European  Union"14,  feared  that  harmonizing  capital  income  taxation  at 
European  level  could  prove  problematic  and  might  divert  capital  to  areas  outside  the 
EU where the tax regime is more favourable.  In May  1997 the Banking Federation of the 
European  Union, in  reaction  to  the  same  Commission  report,  expressed  its  fear  about  a 
relocation  of  deposits  and  investments  to  outside  the  European  Union  as  a result  of  the 
introduction  of  a  common  minimum  withholding  tax.  The  European  Savings  Banks 
Group,  in  June  1997,  recognized  the  need  for  harmonization  of  the  taxation  of  income 
from  savings  and  favoured  a  smooth  transition  to  a common  withholding  tax  with final 
effect  at a moderate tax rate. 

in  response 

to 

14  COM(96) 546 final, 22.10.1996. 

24 

ISSN 0254-1475 

COM(98) 295 final 

DOCUMENTS 

EN 

10  09  08 

Catalogue  number  :  CB-CO-98-354-EN-C 

ISBN  92-78-36850-4 

Office  for Official  Publications of the European Communities 

L-2985 Luxembourg 

25