This directive can be applied in one of two ways;

“Automatic exchange of information”

This means that an individuals identity, address, the bank or investment house where their affected assets are held, the level of savings income received and the period over which it has been received, will all be passed on automatically to the tax authority in the country in which the money is “housed” and in turn on to the tax authority in the country in which the individual resides.

e.g.: Where a resident of Spain holds a bank account in the UK, the UK bank will provide to the UK Tax Authorities details of the customer and interest payments on that account. The UK Tax Authority will in turn pass on this information to the Spanish Tax Authority. This automatic exchange of information enables the Spanish Tax Authorities to compare the amount of income declared by that individual on their own Spanish tax return with the information provided under the EUSTD.

“Withholding tax” (Also known as Retention Tax)

Under this option the bank will be responsible for retaining and paying the withholding tax on behalf of the customer (initially at 15% rising gradually to 35% from July 2011). They must also offer to their clients the automatic exchange of information and / or the opportunity to present the relevant documentation to prove tax exemption and thus prevent withholding tax being levied.

However, whilst the only EU member states to have signed up to this option, namely Belgium, Luxemburg and Austria, they will have to apply the Automatic Exchange of Information by 2009.

While Jersey, Guernsey and the Isle of Man are not in the EU they along with Switzerland and Liechtenstein have also adopted this Withholding Tax option.