DEFINITION of 'Retention Tax'

A mandatory tax placed on income that is earned on investments in a country that is not the resident's home country. This only applies to countries that are members of the European Union (EU).

BREAKING DOWN 'Retention Tax'

The retention tax was set up by the EU in 2005 to prevent individual investors from avoiding taxes on their income by investing their money in other countries. The rates are scaling, and will rise to a level of 35% by 2011.

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