The European Savings Tax Directive (EUSTD) operates in the Isle of Man, with the Island applying the retention/withholding tax option.  The Directive applies to EU resident individuals on income earned on savings held in other EU countries. Although the Isle of Man is not part of the EU, it voluntarily agreed to adopt elements of the EUSTD but, along with some other countries, negotiated a variation to the Directive. Customers of financial institutions can opt for disclosure rather than have the withholding/retention tax applied. The Directive came into force from 1 July 2005 with an initial tax deduction levied at 15% (no tax was deducted on interest earned before 1 july 2005).   From 1 July 2008 tax deduction is at the rate of 20% rising to 35% from 1 July 2011.

For those customers opting for disclosure/exchange of information, interest is paid gross but the customer's name, address, account number and the gross amount of interest paid is included in a report sent to the Isle of Man tax authorities. They in turn forward the report to the tax authority of the country of residence of the customer.

The retention tax is applied automatically to accounts unless there is a stated preference for disclosure/exchange of information or the customer informs the financial institution that they are exempt from taxation in their EU country of residence.