On 10 April 2013 Luxembourg announced that it will end its banking secrecy as of 1 January 2015. In doing so it follows Belgium, which ended its (limited) banking secrecy in 2010. This action by Luxembourg can be seen in the light of the current debate on tax evasion and aggressive tax planning. Unlike in the other European countries (both EU and non-EU) that have banking secrecy – Austria, Switzerland, Liechtenstein, San Marino – this decision can be seen as a charm offensive. But what are the tax effects of this decision?
In the past years several EU Member States took action to uncover foreign savings accounts that were not reported by residents in their income tax returns. I recall the fiches of the Kredietbank Luxembourg (KB-Lux) or the CDs that were bought by the German government from the Swiss bank UBS. Unreported savings accounts held by EU residents in other European countries are no longer safe. The goal of the EU is a transparent European banking system with an automatic exchange of information between Member States.
The EU Savings Directive states that one EU Member State provides the other EU Member State with information on the bank accounts of the residents of the first Member State, without taxation in the first state. Most EU Member States do not have banking secrecy and thus the resident’s country can tax the foreign savings in those countries. This is not possible if the non-resident EU Member State has banking secrecy. One of the essentials of the EU in tax matters is the fiscal sovereignty of its Member States. The EU Savings Directive anticipates herein: these Member States can levy a withholding tax on interest payments on the savings.
Luxembourg will levy this withholding tax until 2015. But as of 1 January of that year, Luxembourg will provide the other EU Member States with information on bank accounts held by EU residents in Luxembourg. From this date onwards the withholding tax, based on the EU Savings Directive, will end as well and the resident EU Member State can levy (income) tax on the foreign savings of its residents.
In my opinion, the main reason that the Luxembourg government has agreed to end its banking secrecy is that the EU, OECD and G20 have been granted a mandate to fight tax evasion internationally. Now Luxembourg has surrendered, the remaining question is: who will be next?