EU funds in flight

A European Union directive aimed at harmonising tax regimes of membervens. countries could see #100bn of funds flow out of Luxembourg, the UK and Eire.

The Channel Islands and the Isle of Man would be most likely to gain from this flight of capital. The largest amount is likely to pour out of Luxembourg if a directive from Ecofin, the council of EU finance ministers, is followed through.

A steady trickle of funds is also expected to come out of Eire. Tomorrow, EU ministers will make a first assessment of a 20% withholding tax on the savings of residents of EU states.

If this initial steering meeting gives the concept the go-ahead, a second meeting, scheduled for October, will vote on its acceptance.

While it is unclear whether it would require unanimity or a two-thirds majority, the concept is understood to be aggressively backed by Germany, with strong French support.

Maurice Fitzpatrick, head of economics at Chantrey Vellacott, said the German tax authorities have pursued the sizeable percentage of deutschmarks in the #86bn held in Luxembourg funds. He said the money was placed in Luxembourg to avoid having to register it as savings and to dodge future tax payments.

He said the policy could be part of a wider strategy to harmonise the tax/GDP ratios prior to monetary union, that currently range from 37% in Spain to 50% in Finland. Fitzpatrick said that if the UK were to achieve the 45% ratio target a #50bn a year tax burden would need to be imposed.

Although the UK is not in the initial group of countries participating in monetary union, chancellor Brown will be a voting member of Ecofin.

The present position for savers is that they can avoid tax and gain interest by deploying their finances in financial institutions in Luxembourg, Eire and non-EU states.

If the directive gets the go-ahead, Jersey, Guernsey and the Isle of Man would stand to benefit from the outflow of funds. Under protocol 3 of the Treaty of Rome they are not recognised as EU members.