Complicated or ambiguous clauses

Complications

Area	Particular concern	Example	Opinion
Are fiduciary arrangements managed outside the territory beyond scope ?
Arrangements established and managed outside the territory without an immediate identifiable beneficiary	A Swiss bank account held by a New Zealand trustee with a New Zealand resident trustee	Why must a Paying Agent Upon receipt deem the settlor / founder as a beneficial owner when no immediate beneficiary is identifiable, yet an economic operator does not have to apply this condition for arrangements outside the territory.	This omission/ loophole arose when it was thought that banks within the EU did not know who the settlor / founder is. This is a clearly a loophole that the EU Commission will close in the second review of the EUSD.

Area	Particular concern	Example	Opinion
Does Art 4(2) take priority over Art 2(3) ?
Entity / legal arrangement established outside EUSD territory but managed within the EUSD territory.	A swiss bank account held by a trust established in Bahamas with trustee based in Geneva - is the trustee a Paying Agent Upon Receipt, or is the bank a Paying Agent which must look through the trust at the beneficial owner?	Art 4(2) states an entity or a legal arrangement which has its place of effective management within the (EUSD territory) and which is not subject to effective taxation shall be considered to be a paying agent upon receipt. However Art 2(3) states an economic operator must look through to the beneficial owner of an entity or a legal arrangement,which is not subject to effective taxation and which is established* or has its place of effective management in a country or jurisdiction outside the territory.*	Even though the trust is established outside the territory, the trustee in Geneva is considered a Paying Agent Upon receipt because the effective management of the entity / arrangement is within the EUSD territory. This is logically confirmed when one considers that the Geneva based trustee is a Paying Agent upon receipt even if the Bahamas trust has its account in Bahamas, i.e. outside the EUSD territory. The EU Commission response to this issue is.. Article 2(1)(b) actually helps, as, in case of difference of the country of establishment and the country where is the place of effective management, the individual acting on behalf of the foundation should have to disclose both, so the economic operator making an interest payment would not have any other choice than applying the fourth subparagraph of Article 4(2) or the provisions of Article 11(5). In respect to this, and in case of doubt, the provisions of Article 2(3) could only raise an issue of duplication of reporting or withholding, article 4(2) would 'de facto' have the priority.

Area	Particular concern	Example	Opinion
Are multi-layer structures subject to savings tax ?
An international business company (IBC) owned by discretionary trust / foundation / establishment or other multi-level structures.	If an IBC has no immediate beneficial owner because it is owned by a discretionary trust or foundation or establishment, how can savings tax be applied?	A BVI company owned by a Jersey trust with Swiss bank account	The bank will report on payments to the BVI company that the Jersey trustee is the manager. The Jersey trustee becomes the Paying Agent Upon Receipt and will apply the savings tax when interest when a beneficiary becomes entitled to the interest within 10 years of receipt.
		A Hong Kong company owned by a Panama foundation.	The bank will look through the company and not be able to determine a beneficial owner. This will avoid the savings tax.

Are all gains on capital guaranteed notes subject to savings tax ?

Area

Particular concern

Example

Opinion

Capital Guaranteed structured notes

Withholding tax on derivative / equity gains

Why is withholding tax levied on all the gains of capital guaranteed structured products? Surely teh savings tax should only be withheld on the income from debt assets i.e. gains on the bonds.

A major amendment to the savings tax is to include substitutes for interest. Interest is now regarded as income on any security which has the same risk profile of debt. As gains on a capital structured product are considered to be in the same risk as debt, all gains are considered as interest. Note gains on other "non debt" substitutes for interest are also caught such as sharia compliant deposits which are shared profits.

Note that the savings tax will apply to both the interest from the zero coupon bonds plus all income from the derivatives.

Area	Particular concern	Opinion
Why is the savings tax so strict on life insurance wrappers ?
Life insurance wrappers	Why are all the gains on insurance wrappers deemed interest if performance of benefits is linked to at least 25% debt claims? If interest income must be tracked by insurers, why cant the EUSD only relate to this interest?	Poor defense of the insurance industry resulted in this draconian treatment.

Area	Particular concern	Opinion
Are non-life insurance wrappers in scope - viz. Capital Redemption Bonds ?
Capital Redemption Bonds	How can capital redemption bonds be in scope if it is not a life insurance contract	All capital redemption bonds contain an initial condition whereby at least 95% of contributions will be repaid. In most cases there is a minimum repayment of twice the premiums after 99 years, even though early redemption is allowed at value of underlying assets. This guarantee ensures CRB are in scope as per art 6(1)(aa). Note that this is more draconian than life insurance contracts because all gains will be deemed as interest whereas for life policies, all gains are deemed as interest only if the performance is linked to at least 25% interest.

- EU Savings Tax Expert -
Although I regularly consult with the EU Commission, not all my interpretations of the directive have been confirmed by them.