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FATCA Impact on EU Tax Regulations

CubeIQ Limited
Published by in Risk & Compliance ·
Tags: EUTaxationComplianceAMLFATCA

FATCA signed into law by US President at March 18th 2010 and its implementation over the past several years has triggered creation of corresponding regulations and legislations within EU member states and European Union and non-EU jurisdictions.

Tax Information Exchanged between US IRS and Non-US Financial Institutions.
Tax information exchanged between IRS and Foreign Financial Institutions is specified by FATCA. FATCA, The Foreign Account Tax Compliance Act was enacted in 2010 to target non-compliance by US taxpayers using foreign accounts. FATCA requires Foreign Financial Institutions (FFIs) to identify and to report information about accounts held by US taxpayers or by foreign entities in which US taxpayers hold a substantial ownership interest.  FATCA guides FFIs through the steps they must take to ensure any of their clients who are US taxpayers declare all earnings or profits from offshore assets on their tax returns.

Tax Information Exchange in the European Union
European Union as of 2003 has adopted the European Union Savings Directive - EUSD, formally Council Directive 2003/48/EC of 3 June 2003 on taxation of savings income in the form of interest payments which is enacted to implement the European Union withholding tax, requiring member states to provide other member states with information on interest paid to achieve effective taxation of the payments in the member state where the taxpayer is resident for tax purposes.

The so-called European Union withholding tax is a withholding tax which is deducted from interest earned by European Union residents on their investments made in another member state, by the state in which the investment is held. The aim of the tax is to ensure that citizens of one member state do not evade taxation by depositing funds outside the jurisdiction of residence and so distort the single market. The tax is withheld at source and passed on to the EU Country of residence. All but three member states (Austria, Belgium and Luxembourg*) disclose the recipient of the interest concerned. Most EU states already apply a withholding tax to savings and investment income earned by their nationals on deposits and investments in their own states. The Directive seeks to bring inter-state income into the same arrangement, under the Single Market policy.

EU withholding tax applies only to bank interest, bond interest, bond funds, money markets funds, loans, mortgages and analogous income of the residents of the 28 European Union Member States.

The EU withholding tax does not apply to interest paid to companies. A separate EU directive, the Interest and Royalties Directive, Council Directive 2003/49/EC of 3 June 2003, applies to interest (or royalties) paid by a company in one member state to an associated company in another member state. Such interest is exempt from withholding tax, although in many cases interest paid is in any event exempt from withholding tax under the terms of double tax treaties between member states.

Tax authorities in the EU have agreed to cooperate more closely so as to be able to apply their taxes correctly to their taxpayers and combat tax fraud and tax evasion. Exchange of information between EU member states is covered by Council Directive 2011/16/EU as regards administrative cooperation in the field of taxation. The 2011 Directive established all the necessary procedures for better cooperation between tax administrations in the European Union - such as exchanges of information on request; spontaneous exchanges; automatic exchanges; participation in administrative enquiries; simultaneous controls; and notifications to each other of tax decisions. It also provided for the necessary practical tools, such as a secure electronic system for the information exchange.

The European Union Council adopted on March 24th, 2014 a new Directive, Council Directive 2014/48/EU of 24 March 2014, amending Directive 2003/48 regarding mandatory automatic exchange of information in the field of taxation.

The main changes are:
  • The communication by competent authorities of information from 1 January 2016 about dividends, capital gains, accounts and other income.
  • The obligation for an EU Member State which provides wider cooperation to a third country (e.g. U.S. FATCA IGA) to provide the same wider cooperation to any other EU Member State. This is the main impact of FATCA on EU Tax Regulations.

Also, Council Directive 2011/16/EU was amended by Council Directive 2014/107/EU which extended the cooperation between tax authorities to automatic exchange of financial account information.

Tax Information Exchange between European Union and non-EU jurisdictions
The five Finance Minister of France, Germany, Italy, Spain and United Kingdom (the G5) announced at the  April 28th, 2014 Paris meeting that 44 jurisdictions (including Countries and territories of E.U. members) will sign before end of October 2014 an automatic tax information exchange agreement between and with the European Union member states. The first information exchange will start in 2017 related to information collected after December 31st, 2015.

* On the publishing date of the article:
  • Luxembourg has switched from the withholding tax system to the automatic exchange of information system since January 1st, 2015.
  • Belgium has replaced the withholding tax system with the automatic exchange of information system partially since January 1st, 2010 and in full since January 1st, 2011.
  • Austria is still maintaining the withholding tax option. However, has committed to exchange information with the other EU Menber States starting on September 2017.

EU Directives:

Related Information

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