Bermuda is exempt from a European Union directive with wide-reaching rules on the taxation of income from savings aimed at stopping their citizens dodge their taxes and ending banking secrecy, The Royal Gazette can reveal.

After 14 years of tough talks the EU on Tuesday adopted a missive on the taxation of income from savings that was aimed at helping cash-strapped states to recoup money EU citizens squirrel abroad.

It had been understood that Bermuda, as an overseas territory, would be included in any document signed by the United Kingdom - and that non-resident EU citizens with offshore savings in Bermuda would be taxed 35 percent on the interest on their accounts.

But yesterday a spokesman for the EU said: "Bermuda is not covered by the agreement." The spokesperson said it was not covered by the agreement because it was not listed in the final missive - only overseas territories in the Caribbean are included in the written statement.

The spokesperson for the EU said: "Last time I looked, Bermuda was not in the Caribbean."

But the spokesperson could not say whether Bermuda was left out as an oversight or if there was a reason for it not being included in the drafted document.

The agreement therefore does not affect Bermuda's banks - unless it applies to their subsidiaries abroad. Both banks said they are monitoring the possible effects of the EU decision.

Acting Finance Minister Paula Cox said yesterday that she did not believe that the savings tax applied to Bermuda - and said she did not believe that it had ever applied to the Island.

"I don't think we were ever included," said Ms Cox. "We have an exchange of information agreement, and as long as the proper paperwork is filled and referred to the Attorney General's chambers, it can be released. But we do not want anyone on fishing expeditions. We do not engage in such matters."

In a written statement from the Ministry of Finance Ms Cox said: "Government has been closely monitoring the development of this directive because of Bermuda's relationship with the United Kingdom. However, Bermuda is not affected by the directive at this time as Bermuda was not referred to in the Feira Conclusions that initiated the directive in June 2000."

The European Council met in Santa Maria da Feira on 19 and 20 June of 2000 when the tax package was put into the conclusions of the document. In this document Britain's overseas territories are said to be included - but does not include Bermuda.

This 2000 document states that EU members' and their "relevant dependent or associated territories (the Channel Islands, Isle of Man, and the dependent or associated territories in the Caribbean)" are affected, but does not mention any islands in the mid-Atlantic.

Ms Cox added: "Government notes that the European Union is continuing its negotiations with Switzerland, Liechtenstein, San Marino, Monaco, Andorra and the United States of America in order fully establish exchange of information as the preferred method of co-operation between tax administrations.

"The Commission of the European Union has also been called on to enter into discussions with other important financial centres with a view to having them adopt equivalent measures. Government will continue to monitor developments surrounding this directive and will liaise with Bermuda's financial services sector to keep them abreast of any significant changes in our status."

The tax rules would allow 12 EU states to better fight fiscal evasion by sharing information on EU citizens' bank accounts held abroad, according to international press reports.

Private banking strongholds such as Luxembourg, Austria, Belgium and its rival centre Switzerland will also be exempt from the rules and would be allowed to keep their prized banking secrecy in exchange for imposing a withholding tax of up to 35 percent on interests from savings of non-residents and sharing the revenues with other EU states.

Switzerland is in the process of finalising a tax treaty with the EU. Four other smaller non-EU financial centres - San Marino, Liechtenstein, Monaco and Andorra - are also expected to impose a withholding tax on EU income from savings. The rules also envisage greater tax co-operation with the United States.

A spokesperson from the Bank of Bermuda said: "The bank has been monitoring carefully the progress of the EU Savings Tax Directive and is aware that the directive was approved by EU Finance Ministers on 3rd June, 2003 and is now scheduled to come into effect on 1st January, 2005.

"As the directive applies to EU Member States, their Dependent or Associated Territories and certain "key third countries", it will have implications for a number of jurisdictions in which we operate.

The directive presents a host of compliance requirements for banks and other paying agents with regard to the reporting or remittance of taxable interest income earned world-wide by citizens of EU Member States.

While the requirements will vary across the affected jurisdictions, the bank fully intends to comply with the commitments made by any affected jurisdiction in which we operate. In this regard, we are involved in dialogue with the relevant authorities in each location. "We believe that the global breadth of our operations will significantly assist us to satisfy the requirements of the directive while continuing to successfully serve our clients' needs.

"We further believe that our existing robust `know your customer' practices will stand us in good stead as we prepare for the implementation of the directive".

Richard Ferrett executive vice president and chief financial officer of Bank of Butterfield said: "Our understanding is that Bermuda is not directly affected by the EU Savings tax agreement, for instance to supply information on interest on deposit accounts to an investors home country.

" It is Bank of Butterfield's policy to only open accounts for customers who have a legitimate business reason to have a bank account in Bermuda. We do not envision any material impact on either our business or the Island by the action by the EU."