Commission staff working document accompanying the Proposal for a Council Directive amending Council Directive 2003/48/EC on taxation of savings income in the form of interest payments - Impact assessment summary {COM(2008) 727 final} {SEC(2008) 2767}
Date: 2008-11-13
Institutions: European Commission
Subjects: interest, savings, tax on income, tax system

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COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 13.11.2008 
SEC(2008) 2768 

COMMISSION STAFF WORKING DOCUMENT 

Accompanying the 

Proposal for a  

COUNCIL DIRECTIVE  

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

IMPACT ASSESSMENT SUMMARY 

{COM(2008) 727 final} 
{SEC(2008) 2767} 

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1. 

INTRODUCTION 

The Taxation of Savings Directive (EUSD) 

Council  Directive  2003/48/EC  on  the  taxation  of  savings  income  in  the  form  of  interest 
payments  (EUSD)  was  adopted  in  2003.  The  EUSD  provisions  started  to  be  applied  by 
Member States (MS) on 1 July 2005 at the same time that Andorra, Liechtenstein, Monaco, 
San Marino and Switzerland began to apply equivalent measures under Agreements with the 
EC. From the same date 10 dependent or associated territories of the Netherlands and the UK 
began to apply the same measures as those of the EUSD. 

The ultimate aim of the EUSD is to allow each MS to apply its domestic tax rules on interest 
payments that its resident individuals receive from paying agents established in other MS.  

In  order  to  achieve  this  ultimate  aim,  the  EUSD  provides  for  an  automatic  exchange  of 
information  on  such  payments.  However,  during  a  transitional  period,  three  MS  (Austria, 
Belgium  and  Luxembourg)  apply  a  withholding  tax  and  share  the  revenue  with  the  MS  of 
residence of the beneficial owner, instead of providing information.  

The  Commission  proposal  for  amendments  to  the  EUSD  is  based  on  the  first  of  the  reports 
that the Commission has to present to the Council every three years on the operation of the 
EUSD in accordance with its Art. 18. This Article also provides that the Commission shall, 
where appropriate, propose to the Council any amendments to the EUSD that prove necessary 
in  order  better  to  ensure  effective  taxation  of  savings  income  and  to  remove  undesirable 
distortions of competition. 

Following  the  first  revelations  in  February  2008  about  fraud  cases,  involving  EU  residents 
and foundations in Liechtenstein, there was a debate at the Council on 4 March 2008, and the 
Council  "…called  on  the  Commission  to  accelerate  preparation  of  a  report  on  the 
implementation of the Directive 2003/48/EC since its entry into force on 1 July 2005… ". On 
29  April  2008,  and  prior  to  the  presentation  of  the  Article  18  report,  a  Commission  Staff 
Working  Document  [SEC(2008)  559]  entitled  "Refining  the  present  coverage  of  Council 
Directive  2003/48/EC  on  taxation  of  income  from  savings"  served  as  the  basis  for  an  oral 
presentation  by  the  Commission  to  the  Council  on  14  May  2008.  This  working  document 
highlighted the main problems identified and raised a number of issues needing clarification 
with a view to possible refinements to the scope of the EUSD.  

The report under Art. 18 of the EUSD was adopted by the Commission on 15 September 2008 
[COM(2008) 552] and presented to the Council.  

The  report  was  accompanied  by  a  Commission  Staff  Working  Document  "presenting  an 
economic  evaluation  of  the  effects  of  Council  Directive  2003/48/EC  on  the  basis  of  the 
available data" [SEC(2008) 2420]. This working document provides quantitative approaches 
to evaluate  the functioning of the EUSD.  It analyses the evolution of certain proceeds  from 
investments. In addition, the analysis looks at the effects of the implementation of the EUSD 
on some investment patterns. The last section of the document offers a statistical analysis of 
the impact of the introduction of the EUSD on savings and on bank deposits.  

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2. 

REVIEWING THE EUSD 

The  report  and  the  amending  proposal  are  the  result  of  a  long  process  of  analysis  and  open 
consultation.  This  process  was  launched  in  2005  when  Commission  staff  started  examining 
the operation of the EUSD and its interpretation with experts from the tax administrations of 
MS  in  two  working  groups,  Working  Party  IV  on  Direct  Taxation,  and  the  Working  Group 
"Administrative Cooperation in the field of Direct Taxation". The first group has concentrated 
on  the  legal  and  practical  issues  related  to  the  substantive  content  of  the  EUSD,  whilst  the 
latter  group  has  helped  to  ensure  a  monitoring  of  the  correct  implementation  of  the  EUSD 
concerning exchange of information and transfer of funds relating to the revenue sharing. It 
has also helped to develop the format for information exchange. 

In parallel with the groups involving the tax administrations of MS, a special Expert Group on 
Taxation  of  Savings,  with  tax  experts  from  banking,  insurance,  investments  funds,  asset 
management and related sectors in the EU, was set up in early 2007. This group provided the 
Commission with the viewpoint of EU market operators on the application of the EUSD and, 
at  the  same  time,  facilitated  a  first  scrutiny  of  the  possible  impact  on  markets  of  any 
amendments  to  the  EUSD  which  could  come  up  for  consideration  as  a  result  of  the  review 
process.  

More detailed information on the review process can be found on the following webpage: 

http://ec.europa.eu/taxation_customs/taxation/personal_tax/savings_tax/savings_directive_rev
iew/index_en.htm 

Despite  the  efforts  made  by  MS  and  market  operators  to  provide  the  Commission  with 
statistics,  the  quality  and  quantity  of  the  statistics  received  are  not  sufficient  to  make  a 
detailed  quantitative  analysis.  However,  the  lack  of  quantitative  data  is  not  "per  se"  an 
obstacle to make a proper analysis of the problems identified during the consultation process 
or  to  propose  adequate  solutions.  Furthermore,  there  is  a  need  to  anticipate  developments 
based on the input of the stakeholders, which clearly recognise the need for improvements in 
the system. 

3. 

IDENTIFIED PROBLEMS AND NEED FOR SOLUTIONS 

The consultations with business and national administrations have shown that the coverage of 
the  EUSD  is  not  as  wide  as  in  principle  intended  according  to  the  unanimous  Council 
conclusions  of  27  November  2000  on  which  the  EUSD  is  based,  and  also  that  the  EUSD 
provisions  contain  loopholes.  Such  loopholes  are  detrimental  to  the  effectiveness  of  the 
EUSD, whether it is applied in the form of automatic information exchange or, transitionally, 
through  the  levying  of  a  withholding  tax.  They  are  also  a  potential  source  for  market 
distortions because they hinder a consistent treatment of comparable situations. 

There is evidence that, for payments made within the EU, the EUSD can be circumvented by: 

1. 
making use of intermediate investment vehicles (legal persons or arrangements) which 
are  not  covered  by  the  current  formal  definition  of  beneficial  owner  (that  refers  only  to 
individuals) and which are not currently obliged to act themselves as paying agents, and/or 

2. 
rearranging one’s investment portfolio in such a way that income remains outside the 
definition  of  interest  payments  of  the  EUSD,  whilst  benefiting  from  limitations  of  risk, 
flexibility and agreed return on investment that are equivalent to debt claims. 

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A balanced solution to close the loopholes needs to take into account all of the three essential 
elements  of  the  EUSD,  namely  “beneficial  owner”,  “paying  agent”  and  “savings  income  in 
the form of interest payments”, as well as the administrative burden on paying agents and on 
MS,  the  need  to  safeguard  MS'  tax  revenue  and  the  competitiveness  of  the  EU  financial 
sector. 

Any  delay  in  finding  solutions  for  ensuring  fairer  and  more  consistent  coverage  of  the 
measures, could result in future more evident market distortions between comparable products 
and investment vehicles. 

For the three MS operating the transitional regime (as well as for those non-EU territories and 
countries  cooperating  in  the  form  of  a  withholding  tax)  the  time  constraint  is  of  particular 
importance since the risk of distortion between comparable products will increase in parallel 
with the increase of the rate of the withholding tax to 35% from 1 July 2011. 

Besides  the  loopholes  mentioned  above,  the  consultation  with  market  operators  has  also 
revealed that the application of the provisions of the EUSD by paying agents may in certain 
cases  be  burdensome  because  of  lack  of  clarity.  "This  is  the  case  of  (i)  the  definition  of 
'interest payment' and 'paying agent', (ii) the definition of 'residual entities' (to be considered 
as paying agents on receipt of an interest payment) and (iii) the formulae that may be used in 
different Member States to determine whether a fund or a particular fund event falls under the 
Directive",  as  it  has  been  pointed  out  by  the  European  Banking  Federation  (EBF),  which 
represents most of the paying agents already involved in the application of the EUSD. 

The following table provides a list of the identified problems according to the need for action: 

Table 1: Hierarchy of identified problems 

1.  Use  of  intermediary  structures  not  covered  by  the  present  scope,  notably  some  legal 
arrangements , and lack of clarity on the “paying agent on receipt” rule (Art. 4(2));  

2.  Different  treatment  of  investment  funds  which  are  not  authorised  UCITS  in  accordance 
with Directive 85/611/EEC ("non-UCITS"), depending simply on the legal form of these non-
UCITS (incorporated always excluded from the scope of the EUSD whilst non-incorporated 
are always included)  

3.  Use  of  comparable  products  to  debt  claims  (certain  structured  products  and  certain  life 
insurance contracts) 

4.  Deficiencies  in  the  rules  for  identification  of  beneficial  owners,  notably  concerning  the 
determination of their residence for the purpose of the EUSD; 

5.  Coping  with  the  use  of  conduit  vehicles  established  in  third  countries  in  a  way  which  is 
coherent with freedom of capital movements (parallel need to replace the certificate procedure 
to  avoid  the  withholding  tax  with  the  simplest  procedure  of  voluntary  disclosure  of 
information to the tax authorities) 

6. Lack of statistics from MS. Too limited use of the Tax Identification Number of beneficial 
owners  which  make  the  information  more  difficult  to  be  used  by  the  MS  where  they  are 
resident. 

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4. 

POSSIBLE SOLUTIONS 

When assessing the various options, it should be kept in mind that the EUSD essentially relies 
on paying agents for the execution of its provisions. Therefore, due account has to be taken of 
the Lisbon Strategy and the better regulation initiative, which involves, for example, limiting 
administrative  burdens  and  unnecessary  costs  for  businesses,  as  well  as  of  the  principle  of 
proportionality.  MS  should  therefore  be  prepared  to  agree  on  solutions  whereby  any 
additional administrative burden for making the provisions of the EUSD more effective would 
be placed as far as possible on the tax administrations, which would benefit from an increase 
in  tax  revenue,  or  on  market  operators  that  are  currently  less  involved,  rather  than  on  those 
market  operators  (such  as  banks  and  asset  managers)  that  already  make  a  significant 
contribution to the functioning of the EUSD.  

Another constraint is the relatively limited territorial coverage of the EUSD as well as of the 
Agreements  providing  for  the  same  or  equivalent  measures.  It  is  difficult  to  make  a  proper 
assessment of the effects that any extension of the scope of the EUSD could have on capital 
flight to third countries. Even if the examination of the available data does not establish that 
the application of the Directive led to any change in the geographical composition of interest-
bearing  savings,  any  option  for  strengthening  the  effectiveness  of  the  EUSD  should  take 
careful consideration of the international aspects. 

The Commission continues to pursue the objective of promoting the application, by important 
non-EU financial centres, of measures equivalent to those applied by the MS. However, it is 
also relevant to consider, while having due regard to the free movement of capital laid down 
in the EC Treaty, whether provisions should be added aimed at tackling the attempts of EU 
resident individuals to circumvent the EUSD  by  channelling  interest  payments,  made  in  the 
EU, through untaxed “shell” entities or arrangements located outside the territory of the EU or 
that of the jurisdictions applying equivalent or the same measures to those agreed at EU level.  

Taking this into account, the Commission services have identified the following four options 
with  their  respective  advantages  and  disadvantages  (the  impact  of  the  different  options  is 
summarised in table 2 at the end of this document): 

Option 1 – No action  

Option 1 

Action 

No action 

Maintaining the status quo, i.e. "Do nothing" 

Option  2  –  Amendments  to  ensure  a  better  implementation  of  the  unanimous  agreement 
reached by the Council on 27 November 2000 about what should be the substantial content 
and aim of the EUSD  

Option 2 basically means using the 27 November 2000 Council conclusions on what should 
have  been  the  content  of  the  then  future  EUSD  as  a  benchmark,  seeking  to  close 
unintentional loopholes.  

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Option 2 

Action 

Amendments 
coverage 
conclusions of 27.11.2000 

to 
according 

ensure 

better 
to  Council 

- Extension to all collective investments vehicles 

- Extension of paying agent on receipt rule to legal 
arrangements (trusts) 

Limiting the administrative burden for 
paying  agents  in  respect  of  the  same 
conclusions 

- "Home country rule" and solution to the "passive 
receipt" issue 

Option  3  –  The  same  amendments  as  those  under  option  2,  in  combination  with 
amendments to close as far as possible all loopholes and extend the coverage to all products 
which can be assimilated to interest-bearing instruments 

This option involves extending the scope of the EUSD to benefits from those life insurance 
contracts  which  are  competing  with  debt  claims  and  investment  funds.  It  also  involves 
extending  the  scope  to  income  from  those  securities  which  are  equivalent  to  debt  claims, 
because  virtually  all  of  the  capital  invested  is  protected  at  the  end  of  the  duration  of  the 
contract, and because the return on capital is defined at the issuing date although the product 
is not formally composed of debt claims. 

The  'look-through  approach'  for  beneficial  owners  would  only  apply  to  payments  to  certain 
structures established in selected non-EU jurisdictions which are not effectively taxed there. 

Option 3  

Action 

Amendments  to  close  as  far  as 
possible  all 
to 
prevent distortions 

loopholes  and 

- Extension not only to all investment funds, but also 
to securities equivalent to debt claims and to those life 
insurances  with  low  biometric  risk  investing  in  debt-
claims, funds and equivalent securities 

- Extension of the “paying agent on receipt” rule not 
only  to  arrangements  (trusts)  but  also  to  untaxed 
entities  with 
(such  as  many 
foundations) 

legal  personality 

-  “Look  through  approach”  for  payments  to  certain 
untaxed  structures  established 
third 
countries  or  jurisdictions.  Eliminating  the  certificate 
procedure for avoiding the withholding tax. 

in  certain 

-  Making  more  use  of  the  available  information  for 
establishing the residence of the beneficial owner.  

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Option 4 – Amendments to enlarge the scope of the EUSD to include all legal persons and 
all savings income  

At  the  Ecofin  Council  in  March  2008,  a  number  of  MS  expressed  their  wish  to  extend  the 
scope  of  the  EUSD  far  beyond  the  Council  conclusions  of  27  November  2000.  However, 
there are certain constraints to be considered: 

—Withholding tax (even if transitional for three MS) is a suitable mechanism only if the net 
income is known. This is rarely the case for forms of income like capital gains. Also, the rules 
on capital gains taxation vary considerably. The levying of a withholding tax on the full sales 
proceeds would be disproportionate.  

—  Covering  dividends  and  all  investment  income  payments  to  corporate  recipients,  as 
suggested  by  at  least  one  MS,  could  lead  to  multiple  reporting  and  to  multiple  layers  of 
withholding tax. 

The general framework for administrative cooperation (Directive 77/799/EEC and its possible 
amendments),  based  only  on  information  exchange,  would  seem  more  appropriate  for  these 
income payments. 

Option 4 

Action 

Much broader scope  

Extension  to  payments  to  all  legal  persons  and  to  all 
types of investment income (dividends, capital gains, 
“out payments” from genuine life insurance contracts 
and pension schemes, etc) 

5. 

PREFERRED OPTION AND CONSEQUENT POLICY ISSUES 

After  the  analysis  and  consultation  process,  option  3  appears  to  be  the  preferable  option  at 
present.  The  first  option  (i.e.  no  action)  should  be  rejected  for  not  closing  the  current 
loopholes  in  the  EUSD  that  have  a  potential  negative  impact  on  public  revenues  and  on 
competition.  Furthermore,  some  market  operators  consider  that  some  aspects  of  the  EUSD 
need to be clarified. 

In  comparison  with  option  2,  the  costs  that  would  be  incurred  under  option  3  by  current 
paying agents and new paying agents should be outweighed by less distortion between similar 
products and by a better impact on the budget of MS.  

Option 4, although more comprehensive than option 3, would be more costly and could lead 
to  redundancies  and  double  withholding.  Therefore,  option  4  does  not  seem  to  respect  the 
principle of proportionality with regard to the objectives of the EUSD.  

Any amendments to the scope of the EUSD would make necessary a review of the agreements 
with the 10 dependent and associated jurisdictions that apply the same measures. As far as the 
5 non-EU countries that apply equivalent measures are concerned, the Council would have to 
assess whether the current  agreements  would  still provide or not for equivalent  measures to 
the amended EUSD. However, it seems that some of the proposed amendments under option 
3  (notably  concerning  the  "paying  agent  on  receipt"  mechanism)  and  definitely  most  of  the 

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proposed amendments under option 4 would make it advisable to ensure a parallel change in 
the agreements signed with these 5 non-EU countries. 

Table 2: Condensed overview of the IA analysis  

Available Options 

MS' budget 
protection 

Efficiency 

Financial Market  

Option 1 

Option 2 

- 

(risk of budgetary 
losses) 

≈ 
(no additional administrative 
burden but maintenance of 
existing one) 

- 

Poor statistics 

- 

Lack of clarity 

- 

- 

(potentially more 
distortions) 

+ 

(greater administrative 
burden) 

+ 

(better protection) 

+ 

(Less distortions between 
savings products) 

Option 3  

+ 

More clarity/ Better statistics 
- 

(better protection) 

(greater administrative 
burden) 

++ 

Horizontal equity 

+ 

More clarity/Better statistics 

Option 4 

+ 
(better protection) 

- - 
(greater administrative 
burden) 

+++ 

Horizontal equity 

- 
Redundancy of information 
and multiple layers of 
withholding tax 

+ 
More clarity/Better statistics 

++ 

(Less distortions between 
savings products with debt-
claim features and/or 
capital protection/Less 
distortions between paying 
agents already covered and 
other entities and 
arrangements) 

+++ 

(Less distortion between all 
savings products and 
intermediate structures) 

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