Impact of EU Savings Tax amendments on Cayman Islands
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| In Sept 2009, the Cayman Islands Tax Information Authority released statistics showing in total, 5,679 reports were made to EU Member States with USD 26 million in savings income held. As in 2008, the largest number of reports on accounts based in the Cayman Islands were sent to the French tax authority, with 2,159 having been sent, followed by the United Kingdom with 1,643. However, the USD 13 million in savings income reported to the UK was substantially higher than the USD 1.2 million reported to the French authorities. The second highest aggregate amount of savings income was reported to the Netherlands USD 6 million from 47 reports. These figures are minuscule in relation to total Cayman Islands banking deposits of around one trillion US dollars. |  |
| Current avoidance with Non-UCITS Equivalent: For years, the Caymans had carefully cultured their funds to be UCITS equivalent in order to be allowed for distribution in the EU. However the savings tax directive included collective funds that were only classified as UCITS. Therefore, at the stroke a of a pen and no strategy change in any fund, the Cayman Financial authorities reclassified all their UCITS equivalent funds to non-UCITS equivalent to circumvent the savings tax directive. This was in effect done by requiring quarterly reporting be done on a less regular basis, i.e. annually. Not to left in the cold, other Caribbean countries soon followed suit this strategy i.e. Bermuda, BVI, etc. The Cayman Islands Government subsequently negotiated a position with the tax authorities in both the UK and Ireland that Paying Agents based in the UK, Ireland and the Cayman Islands will be able to treat all Cayman funds NOT licensed under section 5 of the Mutual Funds Law as non-UCITS and therefore outside the scope of the Directive. All distributions, including dividends and liquidation proceeds, and sale or redemption proceeds arising in respect of shares, or other equity interests issued in the capitalof Cayman funds (whether established as companies, trusts or partnerships) NOT licensed under section 5 of the Mutual Funds Law are excluded. |  This meant that all funds, now miraculously regulated under section 4(3) of the Cayman Mutual Fund Law, would not be affected by the Directive. Other Member States could choose to treat Cayman funds in the same way as the UK and Ireland. Switzerland treated the funds according to Cayman Islands home rules and were thus exempt. |
| The demise of non-UCITS equivalent exemption Live by the Pen - Die by the Pen. Just as Cayman funds avoided the savings tax at a stroke of a pen, the same instrument was used to address the issue of substance over matter. Press release statements regarding Caymans fund category change to avoid the savings tax garnered attention by the EU Commission. The prevalence of non-UCITS equivalent funds being distributed to cross border EU-residents was noted. While reviewing the savings tax directive, the EU Commission prioritized the extension of interest to include all types of collective investments, including the Cayman Island's non-UCITS equivalent funds. |  |
| Amendments will catch all Cayman Islands funds: Art 6(1)(c) - Any collective investment fund or scheme established outside the territory referred to in Article 7 and outside the European Economic Area. This applies irrespective of the legal form of that fund or scheme and irrespective of any restriction to a limited group of investors of the purchase, sale or redemption of its shares or units.  | All collective investments: No matter the legal form or restriction, such as:
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| Collective investments below 25% threshold: Untaxed funds in the Caymans with less than 25% debt claims are candidates for Paying Agent upon receipt according to Art 4(2). Some collective investments, notably ETFs, when marketed to private individuals and not held by financial intermediaries, might also be regarded as wrapper products found in Art 6(1)(aa), rather than investment funds. | |
| Discretionary Trusts It is estimated that 95% of trusts are discretionary, which to date have avoided the savings tax directive. The amendments will appoint the trustee as Paying Agent Upon receipt with responsibilities to apply the savings tax provisions. The principal settlor will be deemed the beneficial owner, irrespective if the settlement is irrevocable. This concept is similar to a US grantor trust. If the principal settlor is not identifiable, e.g. deceased estate, then the trust must keep track of interest earned and apply the savings tax when a beneficiary becomes entitled to the payment within 10 years. Note that the use of a nominee settlor is looked through as per the EU money laundering directive. A nominee agent is regarded as a trust & company service" and is candidate to being a Paying Agent Upon Receipt to identify for whom they are acting for. |  |
| Legal entities Cayman companies managed within the EU savings tax territory, will become paying Agents Upon Receipt. The management will have to identify beneficial owners of the company according to the 3rd EU money laundering and anti terrorist financing directive  .Art 11(5) - Note that the Paying Agent must report payments to the Cayman company if managed within the savings tax territory, irrespective of the eventual identity of the beneficial owner. If the entity / legal arrangement does not agree to having its information reported, then the Paying Agent must withhold 35% tax, irrespective of the eventual identity of the beneficial owner.
If the principal contributor is not identifiable, then the company becomes a Paying Agent Upon receipt and must apply the savings tax provisions on any beneficiary who becomes entitled to the assets within 10 years of the company's receipt of the income. |  Unhappy beneficial owners of Cayman companies |