ECONOMY

EU directive will effectively end banking havens from 2005

The implementation from January 1, 2005 of European Union Directive 2003/48/EU on the taxation of interest from individuals’ bank accounts will bring about far-reaching changes. Besides the usual form of deposits, the regulation also includes bonds, repos, swaps and other financial instruments. The directive, adopted in June 2003 during Greece’s six-month rotating presidency of the EU, enshrines the principle of taxing the individual at his or her place of residence, regardless of which country he/she has opened the accounts. The directive makes exchange of information obligatory, not only among the 25 EU members, but also with third countries and dependencies of EU member states, such as France, the Netherlands and the UK, many of which are tax havens. In order to implement the directive, a total of 250 bilateral agreements must be signed. The majority have already been signed: for example, Switzerland has already signed an information exchange agreement with the EU, as have the principalities of Andorra, Lichtenstein and Monaco. Three EU member states, Austria, Belgium and Luxembourg, have been excluded from the information exchange system for a transitional period during they will be withholding the tax at source, like all the other countries, but will not transfer all of it to the state the individual is resident of. The official announcement of the bilateral agreements will be made at the next session of the EU council of finance ministers (Ecofin) at the end of May or the beginning of June. According to information, Greece has also signed most of the necessary bilateral agreements. To implement the directive, the EU has been engaged for months in talks with the European Banks Association as well as bank associations of individual member states. Next Monday, a Brussels meeting of representatives of EU finance ministries will prepare the ground for the Ecofin and iron out any differences. The aim of this directive is to ensure that all interest gained by EU residents is taxed. Member states are obliged to ensure that banks and other financial firms in their state undertake to withhold the tax irrespective of the account holder’s place of residence. The directive defines interest as the interest paid or included in an account from all sorts of obligations, whether accompanied by guarantees or are mortgaged to some third party. Compound interest is not included, since it is considered a penalty. The banks are obliged to reveal the identity of the account holder, including name and address and account number. The states that will not immediately implement the automated information exchange system are obliged, if they have signed bilateral agreements with member states, to withhold 25 percent of the tax and transfer the rest to the member state concerned within six months after the end of the year. At a later date, a similar agreement will be signed between the EU and the United States. It will likely be part of a wider agreement, which will also bridge disputes concerning the World Trade Organization.