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The EU Savings Tax Directive – and what it means to you.

Since 2005 there has been an agreement between the 27 EU members states regarding exchange of information on interest earnings from banks.

Many of you will already be familiar with the effects of this agreement, which provide that if you have an account with a bank in another EU state, that details of your interest earnings from that account are sent to the tax authorities here in the Czech Republic (or in whatever EU state you reside for tax purposes).

This directive was designed to combat tax evasion.  However, while it was no doubt well-intentioned, it has so far been largely ineffective in achieving that result.  It has been much too easy to simply avoid or to by-pass.  In fact it could be argued that the main effect of the directive so far has been to ensure that the 'small investors' (who were probably already declaring their earnings anyway) pay up, while leaving the big players – who typically use more sophisticated structures – basically immune.

That's why in 2008, and then again in 2011, amendments were made to the directive which gave it real teeth. That includes full disclosure of information and an extension beyond simple bank deposits to all manner of more complex instruments including structured products, funds, bonds, and insurance schemes.  They also extend the directive to catch people using 'intermediate' structures such as offshore companies, custodians, and trusts, and extend its reach far beyond the borders of the EU – meaning the directive will even catch for example investments made through the Singapore or Nassau branches of EU banks

So now it's 2013, and these changes are in force, right?  Well, actually, no.  Not yet.  Until very recently Belgium, Austria and Luxembourg had been blocking implementation of these changes.

Their logic has been very sound and would be explained as follows: 'As countries that have traditionally offered banking secrecy, we cannot agree to these changes as they would unjustly penalise us when compared to other states that are not covered by the directive' Specifically here they were referring to Switzerland and to some of the UK's numerous associated offshore centres such as Jersey, Guernsey, The Isle of Man, British Virgin Islands etc.

So for the past few years both the EU and individual member states have been working hard on negotiations with traditional tax havens – with a good measure of success.  At the same time the three 'rebels' have been coming under immense pressure to fall into line.  The extra revenue that the amendments will generate is desperately needed in these times of financial austerity.

In the last few months, that pressure has stated to have an effect.  Belgium had already agreed to the amendment and now Luxembourg and Austria have essentially caved in as well.  There are a few hurtles to overcome, but it now looks possible that the amendments will take effect later this year.

What does this mean for you?

If you are a Czech-based expat, paying Czech tax, then now is the time to double-check to make sure that you are fully declaring all your income, from all your investments, wherever they are held.

There is nothing wrong in itself with having an offshore account and, provided the income is declared, you have nothing to fear.  On the other hand, if you have not been declaring your interest income to the Czech tax authorities, you are soon going to have a problem. This advice applies especially if your investments are held within Europe (including Switzerland) or if they have any sort of connection with Europe (for example in an offshore branch of an EU bank).

If the amounts involved are substantial, and if you have not declared income in the past, then you now need to start talking, on an urgent basis, with your tax advisers to see what can be done to 'put things right'.

In summary, if you have undeclared offshore assets then the time has come for action.  Taking a proactive approach could well involve some financial 'pain', but based on what we have seen happen in other jurisdictions, if you do nothing, you will be caught, and the consequences will then be much worse.

About the Author: James Turnbull is enrolled as a barrister and solicitor of the High Court of New Zealand, and has had more than 20 years of legal and financial services experience. 


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