The European Directive 2003/48/EC of 3 June 2003 put in place an automatic information exchange mechanism between the Member States of the European Community concerning savings income in the form of interest payments. This mechanism applies when a paying agent established in a Member State of the European Community pays interest to a beneficiary resident in another Member State.
For three States, the 'Savings' Directive introduced a withholding tax system which constitutes an alternative to exchanging information. When they pay interest to residents of another Member State, paying agents established in Belgium, Luxembourg or Austria apply a withholding tax the rate of which increases every three years (15 % for the three first years, 20 % from 2008 and 35 % from 2011).
The same withholding tax has been applied in Monaco since 1 July 2005, in accordance with the agreement between the Principality and the European Community laying down measures equivalent to those established by the 'Savings' Directive, signed in Brussels on 7 December 2000. Essentially, withholding income is paid back each year to the States of residence of the beneficiaries of interest.
This withholding tax is also deducted by paying agents established in certain associated or dependent territories of Member States such as Jersey and Guernsey and in other States applying, as does the Principality of Monaco, measures equivalent to those of the 'Savings' Directive (the Swiss Confederation, the Principality of Liechtenstein, the Republic of San Marino, the Principality of Andorra).
If they wish to do so, however, residents of Member States of the European Community can avoid tax being withheld on interest paid in Monaco. In this case, the beneficiary of interest requests that the paying agent established in Monaco communicate the corresponding information to the tax office in the Principality. This information is then sent by the Ministry of Finance and Economy of the Principality of Monaco to the competent authority of the State of residence of the beneficiary of that income.