Euro area household savings allocation and the role of taxation

Prepared by Elena Banu, Johanne Evrard and Michael Wedow

Published as part of the Financial Integration and Structure in the Euro Area 2026

One objective of the savings and investments union (SIU) agenda is to increase retail participation in EU capital markets with a view to raising returns for savers and deepening capital markets. Taxation policies can affect both the allocation of savings across borders and savers’ investment decisions. Currently, inefficient procedures regarding withholding taxes (WHT) create frictions that act as a barrier to cross-border investment throughout the EU, contributing to home bias and limiting the efficient allocation of capital across the bloc. Addressing this issue is key to fostering deeper financial integration and more effective allocation of savings in the EU. In addition, public policies, such as introducing savings and investment accounts that are transparent and easy to use, can address some of the barriers to increased retail participation in capital markets, while providing benefits for savers and the financing of European firms. Granting capital gains tax relief may provide some incentive to shift savings towards capital markets. The literature, on the other hand, indicates that the impact is likely to be modest, reflecting the persistent strong preference of households for deposits, despite the substantial difference in yields between low-return deposits and higher-return equity investments. There are a variety of reasons for this, including the level of financial literacy, access to adequate information and the structure of pension systems. Understanding these dynamics highlights that, besides the level of tax rates, it is crucial to consider the method of taxation in order to assess the design of potential tax incentives.

Tax processes in the case of cross-border investment remain a key barrier for the integration of capital markets across the EU. Many EU Member States levy taxes on dividends and interest paid to cross-border investors, who must also pay income tax on capital income from abroad in their country of residence, leading to double taxation. Since taxation remains a national competence, bilateral treaties are used to limit double taxation. These treaties envisage two ways of addressing the issue: (i) refunds, whereby investors can claim a reimbursement to the level of the withholding tax laid down in the applicable double tax agreement; and (ii) relief at source, whereby the reduced rate or exemption is applied directly when the dividend or interest is paid. In some EU countries, domestic WHT rates for cross-border dividend or interest payments align with rates in double tax treaties (DTTs), eliminating the need for refunds. However, a large number of countries (Belgium, Denmark, Germany, Ireland, Spain, France, Italy, Austria, Poland, Portugal, Slovenia, Finland and Sweden) have higher domestic WHT rates for cross-border dividends than those in DTTs.^[1] In addition, WHT relief procedures differ greatly across Member States, making them lengthy, costly and prone to fraud.^[2] The complete elimination of double taxation would ultimately be subject to the tax legislation of the Member State where the income recipient is resident.

Addressing inefficient double taxation within the EU could enhance the allocation of savings across Member States. The academic literature generally finds that withholding taxes can have a negative impact on investment.^[3] By reducing the after-tax return on investments, withholding taxes may discourage both domestic and foreign investors, leading to lower capital flows and diminished market efficiency.^[4] Additionally, even when procedures exist to recuperate amounts that are unduly taxed, they can increase compliance costs and complexity for taxpayers, potentially deterring economic activity and investment decisions.^[5] This suggests that existing refund systems should at least be simplified, or ideally replaced by relief at source system.^[6] The Faster and Safer Tax Relief of Excess Withholding Taxes (FASTER) Directive^[7] will help to streamline and harmonise withholding tax relief procedures across the EU, reducing complexity and processing times. In its impact assessment underlying the proposal in 2022,^[8] the European Commission estimated the cost of inefficient WHT procedures to amount to €6.62 billion per year for investors. This total includes foregone tax relief as investors fail to claim refunds due to complex processes or insufficient information, opportunity costs stemming from inefficient procedures and incurred costs in refund procedures. The Directive agreed by co-legislators does not, however, require Member States to introduce a relief at source system.^[9] It also does not change the fact that taxation of cross-border investments within the EU still varies and that investing in another EU country remains more costly than investing at home, which ultimately has a negative impact on the integration of capital markets and the cross-border allocation of savings. Furthermore, with reference to digital tax residence certificate, the Directive leaves discretionary power to EU countries administration. Some non-EU countries offer a relief at source system which spares investors from reclaiming taxes where a DTT is in place. This means that WHT procedures across EU countries can be more complicated and less efficient than those in other jurisdictions such as the United States, the United Kingdom or China.^[10] Policies to incentivise retail participation in capital markets should therefore be advanced in parallel with addressing these distortions to facilitate investment within Europe. Furthermore, inefficient WHT procedures continue to be a major barrier for collateral management and mobility in particular – impeding the cross-border functioning of EU capital markets.^[11]

Introducing savings and investment accounts (SIAs) is one way to both promote the development of capital markets and increase retail participation in those markets.^[12] SIAs are simplified, user-friendly and often tax-advantaged investment platforms or products introduced under government programmes and provided by financial intermediaries, enabling individuals to invest in financial instruments such as shares, bonds and investment funds.^[13] Sweden’s Investeringssparkonto (ISK) investment savings account is often cited as a blueprint for national initiatives aimed at increasing retail participation. The ISK is designed as a simple and flexible account (e.g. there are no deposit limits, no minimum holding period and virtually no restrictions on allocation of investments), making it attractive to access and use. It has the highest take-up rate in the EU (45%).^[14] By lowering some of the barriers to retail participation, the accounts aim to increase savers’ experience of investing in capital markets and improve financial literacy.

Taxation is one of the many policies that affect the level and allocation of household savings. The institutional and social policies of a given country – including pension schemes, welfare services and social insurance – as well as personal events such as inter-generational transfers are key determinants of the saving rate.^[15] In addition, the specific tax treatment of financial products can play a role in savers’ allocation, leading to calls for beneficial tax treatment for SIAs. Despite the large difference in yields between deposit rates and equity returns, however, deposits remain a popular destination for savings in the euro area. Analysis of a recent ECB survey^[16] indicates that households mainly save due to precautionary reasons, Ricardian motives^[17] (linked to concerns about income risk, government benefits and taxes) and savings by habit, while saving for future returns through intertemporal substitution is less important. In this context, understanding how taxation can provide incentives for increased capital market participation is key.

Countries can tax investment income under the same or a different approach to labour income, with saving accounts falling typically under preferential regimes than regular investments. Taxation of personal income generally follows one of two broad approaches: (i) under a comprehensive income tax approach, labour and capital income are taxed together at progressive rates; and (ii) under a flat rate capital income tax approach, labour and capital income are taxed separately, with capital taxed at a flat rate.^[18] Exceptions in the EU include the Netherlands, which follows a deemed-return approach (a presumptive return on savings is taxed rather than the actual return).^[19] Ten out of 27 EU countries already have in place some form of tax-favoured savings and investment accounts, with four of these having a retirement focus.^[20]

The levels of taxation of investment products vary across the EU. Currently, interest on bank deposits, investment fund gains, dividends and capital gains are taxed at the same level in most Member States (Chart A, panel a). Some jurisdictions have progressive taxes (Spain) or specific exemptions for lower amounts of bank deposits (Belgium, Denmark), securities (Denmark), government bonds (Italy), EU securities holdings (Bulgaria) or non-domestic securities holdings (Cyprus). Several European countries, including Belgium (until 1 January 2026), the Czech Republic, Luxembourg, Slovakia and Slovenia, do not impose capital gains taxes on the sale of long-term shareholdings, in some cases subject to specific caps or conditions. Among the countries that do levy a capital gains tax, Greece and Hungary have the lowest rates at 15%.

The success of dedicated savings and investment accounts can be fostered by several factors. Countries like France, Hungary and Italy offer exemptions from investment income tax if the investment in the respective savings accounts is held for at least five years (Chart A, panel b). The attractiveness of the Swedish ISK stems from both the reduced tax rate and its simplicity: instead of taxing realised dividends/capital gains, it applies a simple annual tax based on the account value. Sweden also introduced a tax-free base level of SEK 150,000 in 2025 (rising to SEK 300,000 from 2026), with a flat annual tax based on the Swedish government borrowing rate which applies to holdings above the base level.^[21] The ISK is part of a broader context, including a highly developed system for long-term savings supported by a large funded pension system, and a high level of financial literacy fostered by an early exposure to capital markets. It also highlights that policies aimed at increasing retail participation are likely to take time to build savers’ experience, trust and should offer simple, diversified and low-cost products to accommodate savers’ preferences, risk tolerance and diversification of portfolios over extended periods.

Chart A

Tax rates on interest income vs dividends and capital gains

a) Interest income compared to tax rates of dividend income and capital gains	b) Tax rates for existing SIAs
(Dec. 2025, percentages)

Besides the level of taxation, the method of taxation can also affect capital market participation and lead to different impacts in terms of foregone tax revenue or the costs associated with incentives provided. Countries with some of the highest levels of tax (Chart A, panel a) have highly developed capital markets (Ireland, Denmark, Sweden), while countries with low tax levels tend to be those with less sophisticated markets. Similarly, there does not seem to be a correlation between having a more beneficial tax rate for dividends or capital gains relative to bank deposits (Bulgaria, the Czech Republic, Belgium, Ireland) and the level of capital market development. To attract new retail investors to capital markets, savings products must be simple, accessible and affordable. Incentives such as tax advantages, if used, should be tailored to encourage new savers rather than benefiting existing investors. Therefore, it is worth also looking at the method of taxation to foster capital market participation and financial literacy. Elements such as tax exemptions and deferrals can act as incentives, but the transmission channel to retail participation can be quite different depending on the method and needs to be balanced with the fiscal implications.

• Tax allowances reduce the taxable income base by a set amount (e.g. deductible contributions to a savings product) before the marginal tax rate is applied. They have a stronger impact on the participation of higher-income individuals to capital markets, who typically face higher tax rates. The implementation of this method can, however, become too complex for cross-border taxpayers, since it requires alignment of overall personal income and overall tax rates which may differ across countries. It may also result ineffective to increase the participation of low earners, who may already benefit from preferential tax income brackets.
• Tax exemptions mean that the income generated by the savings and investment account (interest or dividend returns, or capital gains) is not taxed. This method can be highly effective in increasing broad retail participation if designed in a simple manner, but are typically capped to contain their fiscal impact. Forgoing tax on large investment returns may not be sustainable for the public purse.
• Tax deferrals delay taxation until funds are withdrawn and/or returns are distributed. They are powerful ways of incentivising long-term investments and have often been used to incentivise pension savings. Limits need to be imposed to avoid that investors roll assets from one deferred tax to another (or switch providers/countries) and never face a taxable withdrawal.
• Uniform flat tax is a tax applied in a standardised way either to the income generated or to the value of assets held in the account. This approach is simple to follow, ensures market neutrality and reduces arbitrage. While it can increase participation to some extent, it is also less targeted and therefore has a potentially larger fiscal impact.