Luxembourg In Court Over Savings Tax Directive

by Ulrika Lomas, for LawAndTax-News.com, Brussels

29 June 2009

The European Commission has announced its decision to refer Luxembourg to the European Court of Justice over its incorrect application of certain provisions of the Savings Tax Directive.

The case regards interest payments made to beneficial owners who benefit from "non-domiciled resident" status in their country of residence.

Because Luxembourg has not (or in the EC’s eyes, “refuses”) to apply the Directive to beneficial owners who benefit from the non-domiciled resident status in their country of residence, Luxembourg paying agents do not levy withholding tax on interest payments to such beneficial owners.

According to Luxembourg legislation, beneficial owners are considered to benefit from the "non-domiciled" status, if they are generally exempt from income tax in their state of residence for tax purposes or if the interest payments, as long as they are not transferred to the state of residence, are not subject to tax in that state.

According to the Commission, Luxembourg cannot provide for an exemption from withholding tax in situations other than those expressly provided by article 13 of the Directive. This lays down the rules for the "voluntary disclosure" procedure which allows the beneficial owner expressly to authorize the paying agent to report information to the tax authorities of his state of residence and the "certificate procedure" which ensures that withholding tax is not levied when the beneficial owner presents to his paying agent a certificate drawn up by his member state of residence for tax purposes.

“The Commission is of the opinion that the paying agent has the obligation to establish the residence of the beneficial owner on the basis of minimum standards, as provided by article 3(3) of the Directive,” the EC stated.

“If the beneficial owner is a resident of another member state in accordance with these standards, the member state of the paying agent must ensure that the latter applies the Directive and, in the case of Luxembourg, that the paying agent levies a withholding tax on interest payments to such a beneficial owner,” the Commission added.

“Consequently, the Commission considers that Luxembourg's legislation, in its current state, is not compatible with articles 2, 3, 10 and 11 of the Directive.”

In December 2008, the Commission sent a ‘reasoned opinion’ to the government of Luxembourg setting out its stance on the matter. This was the second stage in infringement proceedings and gave Luxembourg two months to respond to the Commission’s arguments.

The EU savings tax directive went into effect in July 2005. It seeks to ensure that paying agents (banks, financial institutions etc) either report interest income received by taxpayers resident in other EU member states or levy a withholding tax on the interest income received. Rather than providing information to the citizens' home tax authorities, Luxembourg opted to apply a withholding tax to the returns on the savings of citizens of EU member states, initially at the rate of 15%, but this increased, in 2008, to 20%. A further increase to 35% is scheduled for 2011.

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