A new EC savings directive regulating tax on interest payments entered into force this month. We examine its impact on expats in Belgium.

The EC Savings Directive formally entered into force on 1 July 2005.

The 'residency state levy' gives expats some 'grace'.

The ultimate aim of the directive is to ensure savings income in the form of interest payments made by a financial institution of one EU member state to a beneficiary living in another state is subject to taxation in that other state.

This is generally achieved via a basic mechanism known as the 'automatic exchange of information': the financial institution must report to its local tax authority any payments of interest to investors.

Tax authorities then pass on the information to the country of residence of the individual.

However, privacy concerns mean a withholding tax is applicable in some countries instead of the automatic exchange of information for a transitional period, but the investor still has the option to allow the information exchange.

This mechanism is known as the 'residency state levy' (prélèvement pour l'Etat de residence or woonstaatheffing) and is applicable in Belgium.

The levy amounts to 15 percent of the gross interest received during the first three years of the transitional period.

This rises to 20 percent for the three subsequent years (1 January 2008) and 35 percent thereafter (1 January 2011).

A total of 75 percent of the levy must be transferred to the residence state.

The EC savings directive only applies to cross-border transactions and determining the correct state of residence of an investor is an important step in deciding if a transaction is cross-border and if it falls within the scope of the directive.

The general rule is that the residence of the investor is said to be in the country where he or she has a permanent address.

Transfer into Belgian domestic legislation

EU member states must comply with the directive, but it only comes into effect when that country has enacted its own domestic law.

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