Luxembourg tax: Changes made to administrative practice regarding EU Savings Directive

The Luxembourg tax authorities issued a circular letter on 12 October 2009 announcing that it is eliminating an administrative practice that treats certain recipients of interest as being outside the scope of the EU Savings Directive.

According to current administrative practice, Luxembourg paying agents are allowed to consider payments of interest made to "resident non-domiciled" persons as falling outside the scope of the Directive if income is not remitted to the state of residence. Amongst others, U.K. resident non-domiciled persons benefit from this interpretation. The European Commission considers that this interpretation is incompatible with the principles of the EU Savings Directive and has requested that Luxembourg amend its legislation.

According to the circular letter, the above practice will be abolished with effect from 1 January 2010. As from this date, U.K. resident non-domiciled persons (and persons under a similar regime) will be considered as within the scope of the Savings Directive, so that – as a default – a savings withholding tax of (currently) 20% will need to be applied on interest paid or attributed to the individuals. Such persons will be entitled to opt for an alternative procedure to savings withholding tax (i.e. exchange of information and/or the tax certificate procedure). Additionally, even if savings withholding tax is applied as from 2010, a credit or deduction of the withholding must always be available in the state of residence.