After 10 years, Europe finally agrees on withholding tax compromise

European finance ministers have finally agreed rules on the taxation of savings in a deal that ended five years of detailed and fraught negotiations.

The move, which is designed to crack down on EU citizens who hold accounts offshore or in foreign banks, was sealed after a compromise was agreed with Luxembourg, Austria and Belgium. From next year Britain and all but three of the 15 member states will share information on interest earned by residents of other EU countries.

Luxembourg, Austria and Belgium will instead introduce a withholding tax of 15 per cent, rising to 20 per cent between 2007 and the end of 2009 and then 35 per cent. Outside of the EU, Switzerland has also agreed to levy a 35 per cent tax on foreign investments.

The deal could have implications for offshore financial centres such as Jersey and Guernsey, which could become much less attractive locations for investment. But the Treasury hopes for a tax windfall from cash held by Britons abroad.

The Chancellor, Gordon Brown, said: "Today's important agreement secures the principle of exchange of information on tax matters – not one-size-fits-all tax harmonisation."

The idea of common rules on taxation of savings has been on the agenda for at least a decade. Britain had pressed for a system based on exchange of information, arguing a withholding tax would threaten the City's lucrative eurobond market. But Austria, Luxembourg and Belgium refused to share details of interest earned in their banks unless others, such as Switzerland, agreed to do the same.

Meanwhile, the EU is trying to persuade the US, Liechtenstein, Monaco, Andorra and San Marino to adopt "equivalent" measures.