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EC Tells Luxembourg To Amend Savings Tax Laws

by Ulrika Lomas,, Brussels

01 December 2008

The European Commission has formally requested that Luxembourg amend legislation which incorrectly transposes certain provisions of the European Union (EU) savings tax directive.

The request takes the form of a reasoned opinion (the second step of the infringement procedure) and if no satisfactory reaction is received from Luxembourg within two months, the Commission may decide to refer the matter to the European Court of Justice.

The EU savings tax directive went into effect in July 2003. 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.

According to the Commission, Luxembourg cannot provide an exemption from withholding tax in situations other than those expressly provided by Article 13 of the directive. This is the so-called "voluntary disclosure" procedure which allows the beneficial owner expressly to authorise the paying agent to report information to tax authorities 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.

However, Luxembourg also gives an exemption from withholding tax to interest payments made to beneficial owners who benefit from "non-domiciled resident" status in their country of residence. This status is granted by some member states to residents who are generally exempt from income tax in their state of residence or provided the interest payments, in the absence of a transfer to the state of residence, are not subject to tax in that state.

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. Therefore, 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.

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 and will have to take the necessary steps to amend their legislation.

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