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Luxembourg Slammed For Tax Treatment Of Savings Income

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

09 July 2007


The European Commission on Thursday formally requested Luxembourg to amend its tax legislation on savings income paid in the form of interest to individuals resident in Luxembourg.

In 2005, the Grand Duchy of Luxembourg introduced an act which provides for deduction at source of 10% of the interest paid by a paying agent (bank, stock exchange, etc.) established in Luxembourg. This provision does not apply to interest paid by paying agents established in other Member States of the European Union, which is subject to the general rate of (Luxembourg) income tax, and is added to the taxpayer's other income, as a result of which the tax rate is usually more than 10%.

According to the Commission, the effect of this provision is to dissuade taxpayers resident in Luxembourg from placing their savings with paying agents established in other Member States. It therefore restricts the freedom of paying agents to establish themselves in another Member State. In addition, it restricts the scope for paying agents established in other Member States to provide their services to taxpayers in Luxembourg.

The Commission therefore considers that the legislation breaches the EC Treaty, as it constitutes an obstacle both to the free movement of capital and to freedom to provide services. The request is in the form of a reasoned opinion, which is the second stage of the infringement proceedings provided for in Article 226 of the Treaty.

If Luxembourg does not provide a satisfactory reply to this reasoned opinion within two months, the Commission may refer the matter to the Court of Justice of the European Communities.


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