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EU Agrees on Taxing Foreign-Earned Interest

Tax dodgers seeking to flee domestic revenue offices by investing abroad will be running into closed doors now that European finance ministers have agreed to tax interest earned by EU citizens outside their homeland.

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European tax evaders can no longer take the money and run across the border

It was a long time in coming, but after 14 years of tug of war, numerous exceptions and a last round of Italian pork barreling, the European Union's finance ministers finally agreed to a deal to curtail cross-border tax evasion at their meeting in Luxembourg on Tuesday.

The agreement, which becomes law in 2005, requires 12 EU member states and their overseas territories to exchange information about non-residents’ savings, thus requiring banks to air their secret accounts and enabling fiscally strapped states to cash in on citizens’ foreign interest earnings.

Originally agreed to in January, final acceptance of the deal was postponed after Italy linked passage of the bill to the unrelated issue of raising the EU production quota for its dairy farmers. Only after the EU finance ministers grudgingly withdrew their objections to Rome’s request to defer payment of penalties for overproduction of milk did Italy consent to the procedure for exchanging information on foreign savings accounts.

Silting in European tax havens

The agreement on putting an end to cross-border tax evasion is "a decisive breakthrough after 14 years," said Greek Finance Minister Nikos Christodoulakis, chairman of the EU finance meeting.

Under the transfer of information agreement, European banks will be required to inform an investor’s home country whenever interest on a savings account is paid out. Financial institutions in European offshore territories such as the Channel Islands and the United Kingdom’s Caribbean dependencies, where a good number of EU citizens are believed to hold bank accounts, will also be required to open their books on foreign investments.

Member states Luxembourg, Austria and Belgium, traditional tax havens for Europeans seeking to dodge their homeland revenue offices, have excused themselves from the EU agreement on disclosure and are planning instead to levy a general withholding tax starting at 15 percent on interest earned on foreign investors’ savings beginning in 2005. The tax will then be raised to 20 percent in 2008 and 35 percent in 2011. Three-quarters of the tax revenue will then be transferred to tax authorities in the investor’s home country.

A stumbling block

By insisting on retaining their banking secrecy laws, Luxembourg, Austria and Belgium are following Switzerland’s course. The alpine banking mecca has repeatedly refused to comply with banking disclosure standards and has offered to pay the EU 75 percent of returns generated from a withholding tax in exchange for not having to reveal the identity of its investors.

Other non-EU member states in Europe, such as Liechtenstein, Andorra, Monaco and San Marino, must also levy a tax on EU citizens' savings and pay three-quarters of it to the home country.

The inclusion of Switzerland and other non-EU states in the EU finance ministers’ deal was a stipulation for securing the approval of Luxembourg, Austria and Belgium. The Swiss arrangement, however, is still awaiting a final go-ahead from the EU finance committee.

Germany supports EU plan

Germany’s deputy finance minister, Caio Koch-Weser, applauded the EU agreement. "The first step on the way to a European tax on interest is a success," he said on Wednesday, stressing that it was time to begin working on levying a tax on the national level.

Despite earlier uncertainty about when Germany would implement the tax at the national level, German Finance Minister Hans Eichel told members of the national parliament's Finance Committee on Wednesday that the country would implement the interest tax beginning in January 2005.

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