Faced with growing international pressure over tax evasion, Luxembourg confirmed Wednesday it would implement rules on the automatic exchange of bank account information with its EU partners from 2015.
"We can introduce the automatic exchange of (bank account) information without any danger from January 2015," Prime Minister Jean-Claude Juncker said.
The country's important financial services sector -- which critics say has benefited from a strong tradition of bank secrecy to attract funds -- was ready for the change, Juncker said.
"The financial sector does not depend totally on bank secrecy," he said, insisting that Luxembourg did not make its living "off dirty money or tax evasion."
"The lights are not going to go out," he added.
A Luxembourg government statement said increased pressure for change, especially from the United States, meant it had to look again at its current regime which levies a withholding tax on the interest earned on bank accounts.
While the withholding tax was "a most effective instrument to ensure tax compliance and guarantee data protection," the government had to adapt to the times and so agreed to the "broader use of automatic exchange of information in tax matters," the statement said.
Accordingly, as envisaged under current EU regulations, it would introduce the change from January 2015, covering "all interest payments made" to individuals resident in another EU member state.
There would be no change for residents in Luxembourg, who pay a 10-percent withholding tax and "who will enjoy bank secrecy as it exists today," it said.
Accounts held by US citizens or residents will be covered by a separate agreement with Washington, it said, while the fiscal regime for payments made to residents of third countries will remain unchanged.
Juncker said that it was "above all because of the radical position taken by the United States" that Luxembourg would make the change.
"The Americans only want to work with countries which accept the automatic exchange of information," he said, adding: "Our financial services sector cannot be cut off from the American market."
The US Foreign Account Tax Compliance Act (FATCA) passed in 2010 requires US depositors to declare their overseas accounts and requires foreign financial institutions to report on the balance and activities of its US account-holders to American tax authorities.
On Tuesday, Britain France, Germany, Italy and Spain said in a letter to the European Commission that they had agreed to work on setting up a multilateral exchange facility modelled on FATCA which "will not only help in catching and deterring tax evaders but it will also provide a template as to the wider multilateral agreement we hope to see in due course."
The European Commission has been pushing its 27 EU-members to lift bank secrecy provisions on foreign depositors, with Austria and Luxembourg the only two to have held out against the automatic exchange of information.
With Luxembourg ready to come into line, Austria on Tuesday signalled that it wanted to at least discuss the issue.
Chancellor Werner Faymann said "yes, we will negotiate" but then insisted that banking secrecy was protected by the constitution and that any sharing of information would not impact Austrian depositors.