Report Highlights Contrast In Savings Taxes Between 'New' And 'Old' EU

by Ulrika Lomas, Tax-News.com, Brussels

08 September 2008

A new report commissioned by the European Policy Foundation, an independent international research institute, has shed light on the marked difference between how savings are taxed in the 12 'new' EU member states in Central and Eastern Europe compared with the 'old' member states of the original EU15.

The report, entitled 'Taxation of Income From Capital In The EU' examined tax on savings income across Europe and concluded that, on the whole, countries in the new EU12, which joined in the 2004 and 2008 expansions of the bloc, tend to have much less burdensome systems of withholding tax on interest than their counterparts in the old EU15.

This is because the new member states almost without exception have adopted a 'final withholding tax' system in which tax - usually at a flat rate - is deducted from the interest payment by the bank or other paying agent concerned, with little additional input needed by the taxpayer themselves. Indeed, some EU 12 countries, such as Bulgaria, Estonia, Latvia, Lithuania and Romania, exempt some or all types of interest from tax altogether.

By contrast, most of the EU's previous 15 member states tend to insist that interest income is included as part of a taxpayer's overall income which is then subject to progressive income tax rates, which tend to be higher than the tax rates imposed by the new member states.

The report painted a similar picture with regard to dividend taxation, with all 12 new member states applying a final withholding system to dividend income. Over in the old member states, 7 out of the 15 countries apply a final withholding tax on dividends (Austria, Belgium, Italy, Netherlands, Portugal, Spain and Sweden). However, the study concluded that in general, dividends receive more favourable tax treatment than interest in the EU15, whereas in the EU12 dividends do not tend to receive more favourable tax treatment than interest income.

The report also highlights that in the older member states, there are pressures to harmonise the taxation of interest income in an upwards direction within the context of the EU Savings Tax Directive. This contrasts sharply with the prevailing trend among governments in the newer member states to lower tax rates where possible, including corporate and personal income taxes, as well as savings taxes.

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