| Ref | Amendment | Comments |
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| Pt. 6 | It appears from the first report on the application of Directive  2003/48/EC that it may be circumvented by the use of financial instruments which, having regard to the level of risk, flexibility and agreed return, are equivalent to debt claims. It is therefore necessary to ensure that it covers not only interest but other substantially equivalent income. | Structured products:
Now included will be structured notes which either offer a capital guarantee or largely contain contain bonds. Other financial products included will be hybrid capital products and derivatives linked to interest. |
| Pt. 7 | Similarly, life insurance contracts containing a guarantee of income return or the performance of which is at more than 40% linked to income from debt claims or equivalent income covered by Directive 2003/48/EC should be included in the scope of this Directive. | Life insurance policies:
The UCITS industry and STEP complained to the EU Commission that if funds and trusts were to be within scope, then investors would switch to insurance wrappers to avoid the EUSD. The insurance industry fought vigorously against inclusion, maintaining that insurance is already reportable and that cross-border policies are less than 6% of total business. However EU Council has indeed become stricter on insurance, as the original EU Commission proposal only included life insurance policies with less than 5% life risk.
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| Pt. 8 | As regards investment funds established in the European Union, Directive 2003/48/EC at present covers only income obtained through undertakings for collective investment in transferable securities authorised in accordance with Council Directive 85/611/EEC of 20 December 1985 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS). Equivalent income from non-UCITS falls within the scope of Directive 2003/48/EC onlywhen non-UCITS are entities without legal personality and therefore act as paying agents on receipt of interest payments.
In order to ensure the application of the same rules to all investment funds or schemes independently of their legal form, the reference in Directive 2003/48/EC to Directive 85/611/EEC should be replaced with a reference to their registration in accordance with the law of a Member State or their fund rules or instruments of incorporation being governed by the law of one of the Member States. Furthermore, equal treatment should be ensured taking into account the Treaty on the European Economic Area | Non-Ucits / Other funds:
The EU Commission noted several press reports of the Swiss banks moving billions into Luxembourg non-UCITS to avoid the EUSD just prior to the directive's implementation. These were Sicav money-market or bond funds, clearly designed to avoid the savings directive, brazenly marketed as EUSD optimised investments. |
| Pt. 9 | As regards investment funds not established in a Member State of the European Union or of the European Economic Area, it is necessary to make clear that the Directive encompasses interest and equivalent income from all those funds, irrespective of their legal form and of how they are placed with investors. | Non EU Funds:
The EU Commission noted that Cayman Islands and BVI deemed virtually all their funds as non-UCITS equivalent to avoid the savings directive. This was done by reducing mandatory reporting regulations from quarterly to annually, and was not based on the funds' investment strategies. Bermuda followed suite six months later by exempting many of its funds from Bermuda Monetary Authority. Swiss banks took advantage by adopting a home rules policy, whereby if the funds were exempt from the EUSD in their home jurisdiction, then they would also be exempt in Switzerland.
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| Pt.10 | The definition of interest payment should be clarified to ensure that not only direct investments in debt claims but also indirect investments are taken into account in the calculation of the percentage of the assets invested in such instruments. Furthermore, in order to facilitate the application by paying agents of Directive 2003/48/EC to income arising from undertakings for collective investment established in other countries, it should be made clear that the calculation of the composition of the assets for the treatment of certain income of such undertakings is governed by the rules laid down in the Member State of the European Union or of the European Economic Area in which they are established. | Funds-of-funds:
Some funds-of-funds were not tracking interest income in their indirect investments. |
Art 6
Par 1
aa
intro |
Any income paid or realised, or credited to an account, relating to securities of any kind. | Critical to determining what can generate interest is the term securities, which is defined as a:- fungible - one unit easily exchanged for another unit of the same commodity
- negotiable instrument - A transferable contract that promises to pay the bearer a sum of money at a future date or on demand
- representing financial value.
Securities are broadly categorized into:- Debt securities (such as banknotes, bonds and debentures)
- Equity securities (such as shares)
- Derivative contracts, such as forwards, futures, options and swaps.
Derivative Contracts:
Derivative which are sold openly on the market such as credit default swaps, synthetic securitization contracts, credit default swaps, Collateralized Debt Obligations (CDOs), etc. are securities and hence within scope of the savings tax. Derivatives which are exclusively contracts between two parties and are not sold to others such as interest swaps, total return swaps are defined as non security contracts and are out of scope.
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Art 6
Par 1
aa |
Any income paid or realised, or credited to an account, relating to securities of any kind, ..., and where:- the conditions of a return of capital defined at the issuing date include a commitment towards the investor that he receives, at the end of the term, at least 95% of the capital invested, or
- the conditions defined at the issuing date provide for a link of at least 95% of the income from the security to interest or income.
Note: Art 6.9 Income referred to in point (aa) shall be considered to be an interest payment only to the extent to which the securities producing that income were first issued on or after 1 July 2010. | Capital protected structured products: were exempted from the the definition of interest by Switzerland because the entire product was too narrowly interpreted to be a derivative as its performance is predominantly based on an underlying. In fact it is only the performance above the capital guarantee that is based on an underlying. The capital guarantee comprises entirely of debt and interest. The proposed clause now includes capital protected structured products, no matter the classification. Ironically this is harsh because all the product's income, i.e. the interest on the bond and the derivative equity gains, will be defined as interest.
Islamic Banking Products: Also included by this clause are products offering similar guarantees although not classified as interest bearing such as Sharia deposits with no risk of loss. Sukuk bonds may be out of scope if loss is possible.
Derivatives: are defined as securities. Therefore clause (ii) will encompass derivative contracts and marketable OTC contracts linked to at least 95% interest, e.g. Interest rate swaps, interest rate caps and floors, Short dated options and LEPOS on bonds if the gains are linked to interest or gains mentioned in Art 6 Par 1(b) (viz LEPOS on zero coupon bonds), bond baskets, bond certificates, mixed certificates, reverse convertibles paying a coupon no matter the duration, etc.
The expiration of grandfathering as per clause Article 15 of Directive 2003/48/EC also means that any negotiable debt securities containing derivatives linked to interest issued before March 2001 will now be within scope.
Futures, are derivative securities, so futures linked to interest such as bond futures are within scope.
OTC contracts and contracts between two people are not securities so a non marketable swap would be out of scope.
Hybrid Capital products which are a form of debt, even though they generally have equity equity component or characteristics will now be in scope Examples are preference shares, convertible bonds, payment in kind loans(PIK), tax liens, perpetual loans, mandatory convertibles and other debt plus equity products established through Special Purpose Vehicles.
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Art 6
Par 1
c
| - Undertakings for collective investment or other collective investment funds or schemes that either are registered as such in accordance with the law of any of the Member States or of the countries of the European Economic Area which do not belong to the Community, or have fund rules or instruments of incorporation governed by the law relating to collective investment funds or schemes of one of these States or countries. This applies irrespective of the legal form of suchundertakings, funds or schemes and irrespective of any restriction to a limited group of investors of the purchase, sale or redemption of their shares or units
- entities having exercised the option under Article 4(3)
- 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:
This in effect encompasses all collective investments, no matter the legal form or restriction. This is aimed at non-UCITS funds, such as:- Luxembourg SICAV II, SICAR, SIF-SICAV
- Ireland UCITS-III collective investments
- Investment Company with Variable Capital / OEICs
- Professional investors funds
- Qualifying investors funds
- Caribbean non-UCITS equivalent funds
- Hedge funds
- Private equity funds
- Income trusts
- Manged Futures Accounts which act like a mutual fund for more than one investor
- Micro finance funds
- Pooled private investment clubs
- Mutual funds
- Closed end funds
- Unit trusts
- Fonds commun de placement
- Beleggingsvennootschap met vast kapitaal / PRIVAK
- Exchange Traded Funds (ETF)
- Real Estate Investment Trusts (REIT)
- Listed investment company, etc.
.
Note: Collective investments not caught by the 25% threshold and if not taxed, are indeed candidates for: - Paying Agent upon receipt according to Article 4 Par 2, or
- Look through entities or legal arrangements according to Article 2 Par 3, or
- 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 Par 1(aa), rather than investment funds
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Art 6
Par 1
e | Benefits from a life insurance contract, if- the contract contains a guarantee of income return, or
- the actual performance of the contract is at more than 25% linked to interest
Note Article 6.10 Benefits from a life insurance contract shall be considered to be an interest payment ... only to the extent that life insurance contract giving rise to such benefits was first subscribed on or after 1 July 2010. | Life Insurance Policies:
Treated similarly to collective investment, i.e. within scope if more than 25% of the linked assets are related to interest producing assets. |
Art 6
Par 1
e
Cont. | ... For the purpose of this point the excess of any repayment or partial repayment made by the life insurer before the maturity of the life insurance contract as well as the excess of any amount paid out by the life insurer over the sum of the payments made to the life insurer under the same life insurance contract, shall be considered to be a benefit from a life insurance contract. In the case of assignment, in whole or in part, of a life insurance to a third party, the excess of the value of the contract conferred over the sum of all the payments made to the life insurer shall also be considered to be a benefit from a life insurance contract.
A benefit from a life insurance contract which solely provides for - a pension, or
- a fixed annuity
paid for at least 5 years, shall be considered as such only if it is a repayment.
An amount paid out solely in respect of death, disability or illness shall not be considered to be a benefit from a life insurance contract. | Life Insurance Pensions /Annuities:
This is the first mention of life insurance based pensions and annuities. The EUSD is targeting short-term annuities and pension insurance policies, paid over less than 5 years because then there is no difference with other unit-linked life insurance benefits. |
Art 6
Par 1
e
Cont. | As regards point (e) (ii), a Member State shall have the option of including in the definition of interest payment benefits regardless of the composition of performance, if paid by or obtained from a life insurer established within that State. | Life Insurance Debt Threshold:
Unlike funds, each EU Member State will have the option to determine the level of debt for an insurance policy to be within scope, if it is under the 25% threshold. |
