The European Union member states confirmed last week that the implementation of the Directive to allow effective taxation of interest income from cross-border investment of savings that is paid to individuals within the EU has been postponed until July 1, 2005. The EU’s Council of Ministers have now adopted an earlier decision establishing this application date.

The EU says agreement has been reached on all matters of substance with Member States’ dependent and associated territories and with Switzerland, Andorra, Liechtenstein, Monaco and San Marino on the application of measures equivalent to or the same as those in the savings directive, and that the necessary conditions exist to enable the Savings Tax Directive’s provisions to be applied in the EU.

*”I am delighted EU Member States have finally been able to agree on the date of application of a Directive to ensure the effective taxation of savings income within the EU”*, said European Commissioner for Taxation Frits Bolkestein. *”While the Directive will now start to apply six months later than originally planned, the agreement reached today represents a remarkable achievement for the EU.”*

**Taxation of savings**

Under the Directive, each Member State ultimately will be expected to provide information to other Member States on interest paid from that Member State to individual savers resident in those other Member States.

For a transitional period, Belgium, Luxembourg and Austria will be allowed to apply a withholding tax instead, at a rate of 15% for the first three years (2005-2007), 20% for the subsequent three years (2008-2010) and 35% from 1 July 2011 onwards. The Council of Ministers maintains that the exchange of information on as wide a basis as possible is the ultimate objective of the European Union — in line, it says, with international developments.

**Third countries and dependent and associated territories**

The Commission has conducted negotiations with Switzerland, Liechtenstein, Monaco, Andorra, San Marino to ensure the adoption of equivalent measures in those countries in order to allow effective taxation of savings income paid to EU residents.

Insofar as Switzerland is concerned, the parties reportedly intend to apply the agreement from 1 July 2005, on the understanding that Swiss constitutional requirements will be met by that date. Also, the four key elements of the agreement with Switzerland will constitute the basis for the forthcoming agreements with Liechtenstein, Andorra, Monaco and San Marino. The EU says the texts of these agreements have been agreed with the respective Authorities and are expected to be initialled soon.

Last month, the Council reported that all matters of substance with the dependent and associated territories of the Netherlands and the United Kingdom had been resolved – and that Model agreements had been drawn up. These models are being used to conclude bilateral savings tax agreements between Member States and each of these territories.