THE European Union is planning to clamp down on the tax-free income from non-resident savings accounts in other countries.

Draft legislation tabled yesterday proposed that either a minimum 20% withholding tax is levied in all 15 member states on the income non-residents receive from the interest on their savings or that the relevant financial details be passed to the account holder's national tax authorities.

Arrangements vary from country to country. With the exception of Greece and Portugal no EU member state levies a tax on income from savings lodged by a non-resident. Luxembourg, Denmark and the Netherlands also apply similar tax-free concessions to savings by their nationals.

The Chancellor of the Exchequer, Gordon Brown, indicated earlier this week that he would study the proposals, but made clear he would not sign up to any measures which would damage UK interests. The Government, which supports international co-operation to tackle tax evasion, is opposed to the idea of a compulsory tax. It argues this would not produce the right amount of revenue. It also fears that the restriction would only drive the money elsewhere, weakening Europe's financial base.

Similarly, Brown is expected to signal his opposition to the suggestion that the minimum 20% tax should apply to Euro bonds when the draft legislation is examined by EU finance ministers for the first time in early June.

Whatever the fate of the

Commission's proposal, it is unlikely to have much impact on tax havens such as the Channel Islands and the Isle of Man. The Commission would like member states' dependent territories to introduce similar arrangements but it cannot force them to follow suit.

The new measures are primarily aimed at Luxembourg, which has become a mecca for savers from Belgium, France and Germany.

For years, Luxembourg has vetoed any suggestion of an EU withholding tax, which must be agreed by all 15 EU members because it feared the damage this could do to its banking sector.

But there are now suggestions it may be prepared to end that opposition. The proposal is based on a package of taxation principles agreed by the Chancellor and his fellow finance ministers last

December. These involve a code of conduct on business taxation, which is now in place, and legislation on interests and royalties which is being examined by EU governments.