Chapter 2. How countries tax savings
This chapter investigates how countries tax household savings. Broad trends in design approaches are identified and a summary of the key design features adopted by countries is provided. The chapter finds wide variation in approaches to taxing household savings both across and within countries, and across different asset types.
2.1. Introduction
Countries adopt a range of approaches to taxing household savings. This chapter provides a summary of the general design features adopted by the 40 countries covered in this study. The magnitude of taxes that are imposed is not discussed in this chapter; this is the focus of Chapter 3, which combines the impact of the various features of savings taxation to calculate marginal effective tax rates.
This chapter focuses on the following assets / savings vehicles, which can be expected to cover the majority of household savings in most countries:
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Bank deposits
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Corporate and government bonds
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Equities (purchase of corporate shares)
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Investment fund assets (marketable collective investment vehicles)
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Private pensions
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Deposits in individual tax-favoured savings accounts
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Residential property
The chapter proceeds as follows: Section 2.2 first frames the discussion by presenting, in a stylised manner, the types of approaches that countries take to taxing household savings; Section 2.3 then summarises the broad trends in the approaches that countries take, before Section 2.4 examines the taxation of each asset / savings vehicle individually.
2.2. Approaches taken to taxing household savings
Based on current capital income tax systems in OECD countries, it is possible to distinguish several “stylised approaches” to taxing savings that are useful in comparing and contrasting the ways different countries tax household savings, both in a broad sense and with regard to specific assets / savings vehicles. The list below focuses is on taxation at the individual level and does not, for example, consider the integration of personal and corporate level taxation (which is however briefly discussed in Chapter 3).
We distinguish seven broad approaches: a comprehensive income tax, a flat rate capital income tax; an expenditure tax, a tax exempt savings approach; a tax deferral approach; a rate of return allowance approach; and a deemed return approach. Most countries implement a combination of these approaches.
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Under a comprehensive income tax (CT) approach, labour and capital income are taxed together at progressive rates. No tax relief is provided when the saving is made. A pure CT system is based on the Schanz-Haig-Simons comprehensive definition of income, and would require all income and gains to be taxed on an accrual basis. However, in practice this is extremely rare with capital gains being taxed instead on realisation. As such we refer to such systems, where they are in place, as “broadly comprehensive”.
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Under a flat rate capital income tax approach, labour and capital income are taxed separately, with capital taxed at a flat rate. Like a CT system, no tax relief is provided when the saving is made. Two subsets of this system are a dual income tax system and a final withholding tax system.
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A dual income tax system taxes labour under a progressive rate schedule and capital income at a proportional rate. In its original form, labour and capital income are taxed together at a flat rate, and then a separate progressive tax is applied on labour income only.
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A final withholding tax system applies (typically) progressive rates on labour income, and a flat rate on capital income which is withheld at source to minimise compliance costs.
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Under an expenditure tax approach, taxation only occurs when income is spent.1 An expenditure tax approach is often taken in relation to private pensions within a system that taxes labour income. In such a case, upfront tax relief tax is given for amounts saved, returns from savings are untaxed as they accrue, but both savings and returns are taxed when a pension is paid.
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Under a tax exempt savings approach, no relief is provided when savings are made. However, returns are untaxed as they accrue, and both savings and accrued returns are untaxed on distribution.
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Under a tax deferral approach, no tax relief is provided when the saving is made, returns from savings are untaxed as they accrue, but the accrued returns are taxed on distribution (either at flat rates, or together with labour income at progressive rates). This approach is typically applied when intermediaries manage the household savings on behalf of the individual.
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Under a rate of return allowance (RRA) approach, taxation occurs as with a CT or a flat rate capital income tax system except that an allowance is provided for the normal return on savings. As such, only economic rents from savings are taxed at the individual level. Any unutilised allowance amount would be carried forward to future years.
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Under a deemed return approach, the actual return on savings is not taxed but a presumptive return is taxed instead. No tax relief is provided when the saving is made, and there is also no taxation on distribution or when capital gains are realised. A single or multiple deemed return can be applied and can be taxed at a flat or progressive rates.
In practice, no country implements any one of these approaches consistently across all potential assets / savings vehicles. Furthermore, the exact implementation of each stylised approach tends to vary across countries. For example, two countries can apply a broadly similar approach but with significantly different magnitudes of taxation.
Tax systems also get more complicated in practice due to the cumulative impact of additional taxes on different bases. For example, in addition to taxes on income and capital gains, transaction taxes, net wealth taxes, and recurrent property taxes may apply to certain assets. These additional taxes may also be contingent on income/wealth levels. The next section summarises the approaches to taxing savings that have been taken in the 40 countries considered in this study, drawing on the above classifications.
2.3. Overall trends in countries’ approaches to taxing savings
Most countries tax the majority of savings vehicles broadly following either a comprehensive income tax or flat rate capital income tax approach. However, even within these two broad approaches there can be significant differences in taxation, particularly in relation to the size of statutory tax rates on income and the tax treatment of capital gains (which are often taxed at concessionary rates, potentially subject to a holding period requirement).
The greatest degree of consistency in approach is across savings in bank accounts, bonds and shares. Residential rental property is typically also taxed consistently with other assets on a comprehensive basis or flat rate capital tax basis, but is generally also subject to recurrent property taxes, and often transaction taxes.
Irrespective of the broad approach applied to most assets / savings vehicles, private pensions and owner-occupied residential property are typically taxed very differently. Private pensions are almost always taxed following an expenditure tax approach, with the degree of concessionary treatment relative to other assets varying depending on the country. Meanwhile, capital income from owner-occupied residential property is typically exempt but, as with rental property, recurrent property taxes and in many cases transaction taxes are applied. Unlike other savings vehicles, tax relief is often also provided for interest expenses incurred in relation to residential property.
There is less consistency across countries with respect to tax-favoured savings accounts and investment funds. 17 of the 40 countries considered in this study provide some type of tax-favoured savings account. Tax treatment varies from a tax exempt approach (but with a limit on contributions), to a comprehensive income tax approach with concessionary rates, to an expenditure tax approach in a small number of countries. There is no clear link between the general approach to savings taxation that a county applies and the approach applied to tax-favoured savings accounts.
Regarding investment funds, in some countries there is consistency with the broader approach taken – e.g. some countries that apply broadly comprehensive approaches for other assets do so also for investment funds. However, in many cases there is less consistency across assets. For example, a tax deferral approach is often adopted for investment funds when a comprehensive or flat rate capital tax approach is taken for other assets. A tax exempt approach is also sometimes followed for investment funds.
Broad trends in approaches across the majority of assets / savings vehicles are highlighted in Table 2.1. Broadly comprehensive approaches with progressive rates applying to capital income, though not necessarily to capital gains, are applied in 11 countries. In another 21 countries, flat rates are applied to capital income either as part of a dual income tax or a final withholding tax system. In these countries, tax rates are almost always at a significantly lower level than the top marginal rate applying to labour income.
In three countries, a mixed approach is broadly adopted – with low income taxpayers subject to flat final withholding taxes on most capital income, but higher income taxpayers subject to progressive rates.
Finally, there are a range of less common approaches. The Netherlands applies a deemed return approach to most assets / savings vehicles (excluding private pensions and owner-occupied residential property). In Argentina, only a net wealth tax (which implicitly taxes a deemed return on savings) is applied to most savings. Norway applies a dual income tax system, but for equity investment a rate of return allowance is applied. In Estonia and Hungary, personal income tax rates are broadly applied, but as they have flat rate personal income tax systems, the impact on capital income is the same as if a flat rate capital income tax approach was applied.
Again, for each of these groupings in Table 2.1, private pensions tend to follow an expenditure tax approach; owner –occupied property tends to be only subject to recurrent property and transaction taxes; while the tax treatment of investment funds and tax-favoured savings accounts varies considerably.
Regarding the application of specific taxes a number of common themes are also apparent. As already noted, income taxes are applied on either a progressive or flat rate basis depending on the broad approach adopted to taxing savings. That said, a degree of progressivity is also applied in several countries through the application of basic allowances or exempt amounts for a specified level of savings income (typically interest or dividend income).
Capital gains are more commonly taxed at flat rates, even in broadly comprehensive systems. Furthermore, countries often provide concessionary treatment for capital gains that have been held longer than a specified minimum holding period. Capital gains are almost universally taxed on a realisation rather than an accrual basis.2
Transaction taxes are applied almost exclusively to residential property, though a small number of countries apply them to bank accounts, bonds and shares. They are generally applied at flat rates, but occasionally can depend on the value of the asset.
Recurrent taxes on immovable property, by definition apply only to immovable property. They are typically implemented at a sub-central level and can consequently vary substantially within a country. In the majority of countries they are levied on a tax base closely linked to the value of the property, though in many cases these valuations lag behind the real value of the property and often remain significantly out of date. Meanwhile the tax base in a small number of countries is based on characteristics of the property, such as size of property or location, rather than value.
Net wealth taxes are rare, being applied in only six countries. In general they exclude private pensions, and have a considerable minimum wealth threshold before a positive rate or rates apply.
2.4. Results across asset types
This section examines the taxation of each asset type in more detail. Tables 2.2 to 2.9 present key features of the tax treatment of each asset across the three broad stages at which savings may be taxed: acquisition; holding; and disposal. Categories are signified as Y for yes; N for no; or NA if not applicable. Additional details are provided in footnotes where relevant. The tables reflect the rules in place in each country as of 1 July 2016.
Bank accounts
As noted above, most countries tax bank accounts following either a broadly comprehensive or flat rate capital income tax approach. Table 2.2 provides further detail on the design features across the 40 countries covered in this report.
Tax treatment on acquisition (i.e. on deposit of savings in a bank account) is very simple: in no country is the amount of any deposit deductible, and no country imposes a transaction tax.
At the holding stage, marginal personal income tax rates are applied to interest income as it is earned in 13 countries. In three of these countries (Chile, South Africa and the United Kingdom) an allowance or exemption is first applied to a specified amount of interest income. In 25 countries, a flat withholding tax rate applies to interest income. In three of these countries (Germany, Iceland, Lithuania) an allowance or exemption is similarly applied to a specified amount on interest income. Uniquely amongst the 40 countries, Colombia provides relief for the inflationary component of bank interest. Interest earned on bank account deposits is untaxed in Argentina and Estonia.
In Korea, a final withholding tax is applied if combined interest and dividend income is less than KRW 20 million. Otherwise marginal personal income tax rates apply. Similarly, in Mexico, the withholding tax is final if the taxpayer has other income less than MXN 400 000 and interest income less than MXN 100 000. Furthermore, if the average account balance does not exceed five times the minimum average wage (MXN 133 298 in 2016) then no tax will be applied. Otherwise, the withholding tax is provisional and personal income tax rates will be applied at the end of the year.
The Netherlands exempts the first EUR 24 437 (in 2016) of savings from tax. Beyond this amount, a 30% tax rate is applied on a deemed return of 4% of the bank balance (under the deemed return approach).3
Colombia, France, Norway, Spain and Switzerland apply net wealth taxes on bank account holdings, but with large exempt amounts or allowances so that only high wealth taxpayers are subject to them.4 Argentina has a wealth tax but does not apply it to bank account balances.
Bonds
Most countries also tax corporate and government bonds following either a broadly comprehensive or flat rate capital income tax approach. Table 2.3 provides further detail on the design features across the 40 countries covered in this report.
Tax treatment on acquisition (i.e. purchase of a bond) is again very simple: in no country is the amount of any deposit deductible, while only in Belgium and Italy are transaction taxes payable. Meanwhile, if saving is debt-financed, the interest is deductible in Australia, New Zealand, Norway and the United States.
At the holding stage, marginal personal income tax rates are applied to interest income on bonds as it is earned in 15 countries. In two of these countries (South Africa and the United Kingdom) an allowance or exemption is first applied to a specified amount of interest income. In 22 countries, a flat withholding tax rate applies to interest income. In three countries (Germany, Iceland, Lithuania) an allowance or exemption is similarly applied to a specified amount of interest income.
As with bank interest, in Mexico the withholding tax is only final if the taxpayer has other income less than MXN 400 000 and interest income less than MXN 100 000. As with bank interest, the Netherlands exempts the first EUR 24 437 (in 2016) of savings from tax, and beyond this amount the deemed return approach applies.
Argentina, Colombia, France, Norway, Spain and Switzerland apply net wealth taxes on bonds, but typically with large exempt amounts or allowances so that only high wealth taxpayers are subject to them.
On disposal, capital gains (derived when bonds have been issued below par) are taxed in 36 of 40 countries. However, in Chile, the Czech Republic, Hungary and Luxembourg, concessionary rates (or even exemptions) apply for bonds held longer than a minimum period or for capital gains of less than a specified amount. In Iceland, Lithuania, South Africa and the United Kingdom, an allowance or exempt amount applies to both interest and capital gains.
In a number of countries (e.g. Belgium, Korea, Mexico, Slovenia), capital gains on bonds are taxed on realisation as interest income, rather than being subject to a separate capital gains tax. In Belgium, while accrued interest is subject to taxation, there is no other taxation of capital gains. In Korea, as with bank interest, a final withholding tax is applied if combined interest and dividend income is less than KRW 20 million. Otherwise marginal personal income tax rates apply.
In New Zealand, capital gains on bonds are also taxed as interest income on a realisation basis as long as the difference in the person’s annual income on a cash basis and on an accrual basis does not exceed NZD 40 000, and either the taxpayer has less than NZD 100 000 of income from financial arrangements or less than NZD 1 million held in financial arrangements. Otherwise they are taxed on an accrual basis.
Differential treatment is applied for government bonds in five countries. In Greece both interest and capital gains from government bonds are exempt. Capital gains on government bonds are exempt in Chile and Ireland, and subject to a reduced rate in Italy. Government bonds are not subject to the wealth tax in Argentina.
Equities (purchase of corporate shares)
Shares are also taxed following either a broadly comprehensive or flat rate capital income tax approach in most countries. Table 2.4 provides further detail on the design features across the 40 countries covered in this report.
Tax treatment on acquisition (i.e. purchase of a share) is very simple: in no country is the amount of any share purchase deductible, while only in Belgium, Ireland and Italy are transaction taxes payable. Meanwhile, if saving is debt-financed, the interest is deductible in Australia, New Zealand and the United States.
At the holding stage, marginal personal income tax rates are applied to dividend income in 15 countries. In two of these countries (Finland and Switzerland) only part of the dividend is exempt; while in the United Kingdom an allowance is first applied. In Norway a rate of return allowance is applied before income is subject to tax.
In 18 countries a flat withholding tax rate applies to dividend income. In Germany a tax-free allowance is first applied; while in Turkey 50% of dividends are exempt. In Japan the taxpayer has the choice whether to apply a flat rate or marginal personal income tax rates. In Korea, as with bank accounts and bonds, a final withholding tax is applied if combined interest and dividend income is less than KRW 20 million. Otherwise marginal personal income tax rates apply. Once again, the Netherlands exempts the first EUR 24 437 (in 2016) of savings from tax, and beyond this amount the deemed return approach applies.
In some cases publicly listed and non-publicly listed shares are treated differently. For example, in Argentina, dividends from publicly listed shares are exempt, but dividends from non-public offer shares are taxed.
Argentina, Colombia, France, Norway, Spain and Switzerland apply net wealth taxes on shareholdings, but typically with large exempt amounts or allowances so that only high wealth taxpayers are subject to them.
On disposal, capital gains on shares are taxed in 33 of 40 countries. However, in many countries concessionary rates (or even exemptions) apply for shares held longer than a minimum period or for capital gains of less than a specified amount. Greece applies a transaction tax on sale. In Estonia, while dividends are exempt from tax, capital gains are taxable.
Investment funds
A range of approaches are taken to the taxation of investment funds across countries. Some countries apply a broadly comprehensive approach; many apply a tax deferral approach; while a tax exempt approach is also applied in some countries. Table 2.5 provides further detail on the design features across the 40 countries covered in this report.
On acquisition (i.e. purchase of a share in an investment fund), France is the only country to provide tax relief – and then only in relation to savings placed in specified funds and subject to a ceiling. No country imposes transaction taxes on investment funds. If saving is debt-financed, the interest is deductible in Australia, New Zealand and the United States.
At the holding stage, 10 countries tax income as it accrues in the investment fund. This is either achieved by treating the fund as a pass-through entity (as in Australia, Canada, the United Kingdom and the United States); by deeming a distribution to have occurred each year if income has not been actually distributed (as in Germany); or by requiring distribution each year (as in Korea). Eight of these countries impose progressive personal income tax rates and the other three impose flat rates. The Netherlands applies its exempt savings amount and deemed return method. In Argentina, no tax is imposed in the fund if returns are dividends from publicly listed companies. In contrast, tax is only imposed on the fund in Bulgaria if it receives dividend income.
Argentina, Colombia, France, Norway, Spain and Switzerland apply net wealth taxes on investment fund holdings, but with typically large exempt amounts or allowances so that only high wealth taxpayers are subject to them.
Six countries impose tax at both the fund level and on distribution. Meanwhile, 19 countries only tax income accrued in the fund upon distribution – either as interest, dividends or capital gains, depending on the fund and the form of the return. In many cases, distributions are tax preferred, especially capital gains.
Private pension funds
Private pensions are taxed following an expenditure tax approach in most countries, though the exact degree of concessionary treatment (as compared to a comprehensive or flat rate capital income tax approach) varies significantly. Exceptions include Argentina which follows a tax exempt approach; Sweden and the Slovak Republic that follow tax deferral approaches; and New Zealand and Turkey that follow broadly comprehensive approaches. Table 2.6 provides further detail on the design features across the 40 countries covered in this report.
At the acquisition stage, 35 of 40 countries provide tax relief for contributions made to private pension funds. In most countries relief is provided as a deduction, although in several countries a tax credit is provided instead. Limits are placed on the size of the tax relief in all but two countries (Chile and Greece). Transaction taxes are not imposed in any country.
At the holding stage, income accruing in the pension fund is only taxed in six countries, and generally at flat rates. Colombia applies its net wealth tax to assets in pension funds, but the remaining countries with net wealth taxes do not.
On distribution, both contributions and accumulated returns are taxed in most countries, though often at concessionary rates. Distributions are exempt in countries following a comprehensive approach (New Zealand, Turkey). Additionally, several countries that provide tax relief up front also exempt distributions resulting in highly concessionary tax treatment. For example, Austria exempt distributions if an annuity is paid out; Lithuania exempt distributions if retirement age has been reached; and Argentina exempt distributions unconditionally.
Tax-favoured savings accounts
Tax-favoured savings accounts are present in 17 out of 40 countries covered in this study, with the type of concessionary treatment (as compared to a comprehensive approach) varying across countries. Some countries apply a tax exempt approach; some a broadly comprehensive approach but with concessionary rates at the holding stage, while a small number of countries apply an expenditure tax approach. Table 2.7 provides further detail on the design features across the 17 countries with such accounts.
On acquisition (i.e. deposit in a tax-favoured savings account), five countries provide tax relief. Deposits are deductible up to a specified limit in Colombia, Finland and Luxembourg, while tax credits are applied in Austria and Norway, again up to a specified limit. Transaction taxes are not imposed in any country.
At the holding stage, no tax is imposed in 12 out of the 17 countries, while the remaining five impose taxes at concessionary rates. Net wealth taxes are applied in Colombia, France and Spain. On distribution, no tax is imposed in 14 out of the 17 countries.
To receive tax relief, various requirements are often imposed (as specified in footnotes to the tables). Austria, Colombia, Finland, Hungary and Spain impose minimum holding period requirements, while distributed funds can only be used for specified purposes in Israel, Luxembourg, Norway and the United States. Meanwhile, contribution limits are applied in Canada, Japan, Korea, the United States5 , South Africa and the United Kingdom.
Owner-occupied residential property
The tax treatment of owner-occupied residential property is complicated. While capital income is typically untaxed, recurrent property taxes and in many cases transaction taxes are applied. Table 2.8 provides further detail on the design features across the 40 countries covered in this report.
On acquisition, while purchase costs are never deductible, 21 out of 40 countries provide tax relief (either a deduction or tax credit) for the interest expense incurred in purchasing a property with debt, though in many cases the available tax relief is capped. Meanwhile, transaction taxes are applied in 30 out of 40 countries.
At the holding stage, only four countries (Denmark, Greece, the Netherlands and Switzerland) tax imputed rental income (generally at low rates, and only when at least partially debt-financed in the case of the Netherlands). A net wealth tax is imposed on owner-occupied property in all six countries with net wealth taxes (Argentina, Colombia, France, Norway, Spain and Switzerland), but a 30% rate reduction applies in France and only 25% of the property value is subject to the tax in Norway. Spain applies a specific exemption threshold to the main residence of up to EUR 300 000, which is additional to the EUR 700 000 general exemption threshold. Meanwhile, recurrent property taxes are imposed in all 40 countries, though not all sub-central areas apply a tax in some countries (e.g. Hungary, Switzerland).
At disposal, only 14 countries tax capital gains. Furthermore, these taxes are often imposed at concessionary (or zero) rates, often subject to a minimum holding period test.
Rented residential property
A broadly comprehensive approach is typically applied to rented residential property. In addition, recurrent property taxes and in many cases transaction taxes are also applied. Table 2.9 provides further detail on the design features across the 40 countries covered in this report.
On acquisition, while purchase costs are never deductible, 27 out of 40 countries provide tax relief (either a deduction or tax credit) for the interest expense incurred in purchasing a property with debt. In many cases, though less frequently than with owner-occupied property, the available tax relief is capped. In addition, Belgium provides tax relief for mortgage principal repayments (but not for interest payments). Transaction taxes are again applied in 30 out of 40 countries.
At the holding stage, 34 out of 40 countries tax rental income, while two (Belgium and the Netherlands) apply a tax on imputed rather than actual rental income. Rental income is typically taxed at progressive rates, but at flat rates in four countries (Denmark, Iceland, Italy and Slovenia). That said, in some cases rates are applied at concessionary levels, or on a reduced base (e.g. Latvia, Spain, Iceland, Italy). There are also income-based exemptions applied to rental income in Korea and the Slovak Republic.
A net wealth tax is imposed on rented property in all six countries with net wealth taxes (Argentina, Colombia, France, Norway, Spain and Switzerland), but only 80% of the property value is subject to the tax in Norway. Recurrent property taxes are imposed in all countries, though as with owner-occupied property, not all sub-central areas apply a tax in some countries (e.g. Hungary, Switzerland).
At disposal, at least some capital gains are taxed in 34 out of 40 countries. However, concessionary (or zero) rates are often applicable, often subject to a minimum holding period test.
Notes
← 1. An expenditure tax can be implemented either by taxing consumption directly (e.g. with a VAT) or indirectly by taxing income but exempting savings from the tax base.
← 2. In the United States, capital gains in the lowest brackets (currently 10% and 15%) are taxed at a zero rate. Capital gains in the middle brackets are taxed at 15%. Capital gains of the highest income taxpayers are taxed at 20%. As of 2017, capital gains of high income taxpayers are also subject to a 3.8% tax on net investment income.
← 3. Note that, as of 2017, the deemed return applied on net assets increases with the net value of the assets. The tax rate applied continues to be 30%.
← 4. Note that exemption thresholds can vary across asset types. For instance, Spain provides a general threshold (which covers all assets, including bank account balances), and a specific threshold for the main residence. Both thresholds are compatible.
← 5. The United States has a number of limited purpose savings accounts for education and health expenses which have limits on contributions.