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The Obligation to Submit Information About the Payment of Interest to Natural Persons

The obligation to submit information about the payment of interest was imposed on persons who pay interest on the basis of section 572 (1) of the Income Tax Act of Estonia from 1 July 2005. On the basis of said provision, a resident legal entity that has paid interest to a natural person residing in another European Union Member State during a calendar year is required to submit a declaration concerning the payment of interest to the Tax and Customs Board. The interest declaration must set out the details of the recipient of the interest (name, address in the state of residence, personal identification code, data on the residency of the person), the payer of the interest and the money or debt obligation that is the basis for the payment of interest and the amount of the interest paid.

The basis for the obligation to submit information is Council Directive 2003/48/EC on Taxation of Savings Income in the Form of Interest Payments and Related Matters (hereinafter the Savings Income Directive) which required all European Union Member States to introduce the relevant changes in their legislation from 1 January 2004. The Savings Income Directive stipulates that if interest is paid to a natural person who is the resident of another member state, the payer of the interest must submit the data that identify the payer, the recipient of the interest and the basis on which interest is paid to the tax authority. The tax authority of each interest payer’s state submits these data to the tax authority of the interest recipient’s country of residence. Such an obligation to submit information is imposed on all legal entities operating in European Union Member States (except for Austria, Belgium and Luxembourg, for which a transition period was established), incl. banks. This means that all Estonian banks also perform this obligation.

The banks submitted interest declarations for the first time by 10 April 2006 and they concerned interest paid to non-residents in the second half of 2005. The following interest must be declared:

  1. Interest paid on loans, securities or other debt obligations;
  2. Amounts paid in the repurchase, retrieval or redemption of debt obligations;
  3. Payment made out of interest payments received from: (a) a UCITS; (b) an association deemed a UCITS upon the payment of interest; (c) an investment fund established in a third country.
  4. Payments received at the repurchase, retrieval or redemption of the shares or units of a UCITS or an association deemed a UCITS upon the payment of interest or an investment fund established in a third country, provided that more than 40% of its assets have been invested in debt obligations either directly or through the aforementioned investment fund or association or another investment fund.

Since the obligation to submit information is effective in all European Union Member States, it also applies to the interest received by Estonian natural persons from other Member States. However, it must be kept in mind that Austria, Belgium and Luxembourg, which have been granted a transition period instead of the requirement to submit information, withhold income tax from interest payments made to other Member States. The rate of the income tax withheld in the first three years is 15%, which rises to 20% in the subsequent three years and thereafter to 35%. 75% of the withheld tax is transferred to the interest recipient’s country of residence.

A number of bilateral agreements have also been entered into between Member States and certain dependent or associated territories of the United Kingdom and Holland on the basis of the directive. The territories that withhold tax during the transition period are Guernsey, Jersey, the Isle of Man, the overseas territory of the British Virgin Islands, the overseas territory of the Turks and Caicos Islands and the Dutch Antilles. Anguilla, Aruba, the overseas territory of the Cayman Islands and the overseas territory of Montserrat are territories that submit information immediately. Five bilateral agreements have also been entered into where one of the parties is the European Union and the other party is the Principality of Andorra, the Principality of Liechtenstein, the Principality of Monaco, the Republic of San Marino and the Swiss Confederation. In said countries, income tax is withheld on the interest paid to persons residing in EU Member States.

All countries that withhold income tax from interest must guarantee the recipient of interest the opportunity to avoid the withholding of tax. For this purpose, the recipients of interest must give their consent to the data concerning their person and the interest payment being submitted to their country of residence.

If an Estonian resident natural person has received interest from which income tax has been withheld arising from the Savings Income Directive or from an agreement entered into on the basis of this directive, then the withheld income tax may be deducted from the income tax payable on the income of the same taxation period in Estonia (section 45(8) of the Income Tax Act. The part of income tax not deducted shall be returned.

Further information is available on the website of the Ministry of Finance and the website of the Estonian Tax and Customs Board.

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