The European Commission has referred Luxembourg to the European Court of Justice (ECJ) for failing to amend its practice in relation to taxing at source the interest received by non-residents on savings held in Luxembourg. The Savings Tax Directive provides for exchange of information between EU Member States relating to interest on savings held by non-residents. Through a separate treaty, a similar system has been agreed upon with Switzerland. In practice this means that, for example, the Netherlands will notify the French tax authorities of interest payments received by a French resident on a Dutch savings account. It is then up to the French Government to decide whether or not to tax this interest.
Austria, Belgium, Luxembourg and Switzerland have opted not to exchange this type of information. Instead, these countries have committed to tax such interest payments at source and pass the proceeds (partially) on to the relevant countries, without giving more detailed information about the individual non-resident.
Luxembourg, however, refuses to apply this tax at source to individuals benefiting from "non-domiciled resident" status in their country of residence (mainly Ireland, Malta and the United Kingdom). This seriously erodes the basic principles that underlie the Savings Tax Directive.
This discussion may be overtaken by changes to bank secrecy legislation. Belgium and Luxembourg were included in the Organisation for Economic Co-operation and Development tax havens "grey list" in April 2008. Belgium has already announced it will change its bank secrecy legislation and Luxembourg is expected to follow suit shortly.