End of the Luxembourg withholding tax system in the frame of the EU Savings Directive

Olivier Hermand 1 December 2014


The Luxembourg parliament voted the draft Law n°6668 enacting the automatic exchange of information for interest payments within the EU as from 1 January 2015, in the frame of the EU Savings Directive (“the EUSD”). Such draft Law has become the Law of 25 November 2014, published in the memorial dated 27 November 2014.

The EUSD applied in Luxembourg via the transitional period under which interest payments are subject to a withholding tax will end up 31 December 2014.

Automatic exchange of information for interest payments

  1. Overview of the EU Savings Directive n°2003/48/EU 
    • The aim of the EUSD is to enable savings income in the form of interest payments made in one Member State to beneficial owners who are individuals resident for tax purposes in another Member State to be subject to effective taxation in accordance with the laws of the latter Member State.
    • To achieve this effective taxation, the EUSD introduced the automatic exchange of information regarding payments of interest made to individuals residents of another Member State.
    • Luxembourg obtained during a period of transition the right not to exchange information. Instead, a withholding tax (“WHT”) was levied on the interest payments by the paying agent.
  2. Situation in Luxembourg up to 31 December 2014 
    • Currently, account holders can opt between the exchange of information or the application of the system of WHT at a rate of 35% on interest income covered by the EUSD. The tax withheld is then transferred anonymously by the Luxembourg paying agent to the tax authorities.
    • During a European Council held on 20 March 2014, in a context where international pressure was growing stronger on tax transparency, the Luxembourg government decided to replace the WHT by the automatic exchange of information.
    • The WHT system will therefore be applied until 31 December 2014.
  3. Situation in Luxembourg as from 1 January 2015 
    • From 1 January 2015, Luxembourg will apply the automatic exchange of information on interest payments made by a paying agent established in Luxembourg to individuals resident in another EU Member State.
    • Concretely, the paying agent shall report the following information regarding the beneficial owner of the payment:

      1. identity and residence of the beneficial owner;
      2. name and address of the paying agent;
      3. account number of the beneficial owner or, where there is  none, identification of the debt claim giving rise to the interest;
      4. total amount of the interest payment or similar income.
    • Paying agents must disclose this information until 20 March following the year in which the payment of interest has occurred.
    • If communication is late or inaccurate, the paying agent may incur a maximum administrative penalty of 0.5% of the amount that should have been communicated.
    • The Luxembourg tax authorities then automatically transmit that information to the competent authority of the Member State where the recipient is established. Communication should be done at least once a year and no later than June 30 following the end of the calendar year.
  4. Conclusion 
    • The first information exchange will take place in early 2016 with respect to interest payments made in 2015.
    • The end of the transitional period in the frame of the EUSD is another step made by Luxembourg towards more tax transparency.
    • A first step was made in 2010 with the introduction of an exchange of information upon request in the frame of the amendments of Double Tax Treaties concluded with other jurisdictions. Luxembourg then implemented the US FATCA model as from 1 July 2014. Finally, a last step will be made in 2017 with an automatic exchange of information on all kind of income in the frame of the OECD Common Reporting Standard.