The EU Savings Tax Directive (the Directive) came into force on 1 July 2005. The Cayman Islands implemented measures equivalent to the Directive by way of bi-lateral agreements with each of the EU Member States and enacted legislation implementing the provisions contained in the model agreement (the Cayman EUSD Law).
The Cayman EUSD Law requires a report to be made on interest payments if certain tests are met. If it applies, the Cayman EUSD Law requires paying agents located in the Cayman Islands to report to the Cayman Islands Competent Authority certain prescribed information regarding interest payments to a beneficial owner who is an individual resident in an EU Member State. The Cayman Islands Competent Authority then forwards the prescribed information on to the Competent Authority of the EU Member State in which the beneficial owner resides.
Only mutual funds which are both (i) licensed under section 5 of the Mutual Funds Law (as amended) of the Cayman Islands (the MF Law) and (ii) listed on the Cayman Islands Stock Exchange fall within the scope of the Cayman EUSD Law. Funds registered under section 4(3) of the MF Law (which comprise the vast majority of Cayman Islands funds) and any other funds not licensed under section 5 of the MF Law fall outside of the scope of the Cayman EUSD Law. Furthermore, to the extent that a fund does fall within the scope of the Cayman EUSD Law, a dividend payment will only be reportable if over 15% of the fund's investments are in debt instruments, while a redemption payment will only be reportable if 40% of the fund's investments are in debt securities.
The number of funds impacted by the Cayman EUSD Law is very limited. To avoid reporting obligations, funds within the scope of the Cayman EUSD Law might consider either (a) appointing a paying agent outside of the Cayman Islands, the EU or a jurisdiction that is applying similar or equivalent measures to the Directive or (b) limiting the fund to non-EU individual residents.