The European Commission’s detailed proposals for amendments to the EU Savings Directive (2003/48/EC) were published on 13th November. The proposals were widely anticipated following the release of the first of the Commission’s triennial reports on the operation of the Directive last month, and have the stated purpose of reducing opportunities for the “circumvention” of the existing Directive.  

The existing Directive  

In general terms, the EU Savings Directive currently applies to require either the disclosure of information or (in the case of Luxembourg, Austria, and Belgium) the application of a withholding tax on certain payments of interest from within an EU member state to or for the immediate benefit of an individual resident in another EU member state. Through the conclusion of related bilateral agreements between certain non-EU states and the EU member states, the impact of the Directive extends beyond the EU to jurisdictions such as Jersey, Guernsey, and the Cayman Islands.  

Timing  

In considering the potential impact of the proposals it is firstly useful to bear in mind the slow pace of EU legislative reform. These proposals must first be considered by the Council, and the suggestion is that, even after the Council has adopted an amending Directive, member states would still be given between two to three years to implement the result.  

Proposals  

As to the proposals themselves, if implemented they would result in two key extensions to the Directive’s scope:  

  •  a “look-through” approach would have to be applied to certain “intermediate structures” such as trusts based outside the EU; and  
  •  the class of income to which the Directive relates would be extended to include kinds of income considered to be equivalent to interest on debt claims.

With respect to the “look-through” requirement, EU paying agents would be expected to treat individuals who had been identified through EU anti-money-laundering compliance procedures as the ultimate natural beneficial owners of certain intermediate entities as the recipients of payments made to those entities. In general this should only affect intermediate entities owned or controlled to the extent of 25% by a particular individual. The kinds of intermediate entities potentially affected would be listed in an Annex. The draft list, alongside many forms of trust, interestingly includes Cayman Islands exempt companies. However, in this case, provided the Cayman Islands introduced certain reporting and information sharing obligations by bilateral treaty with the EU member states, the “look-through” requirement would cease to apply. This will no doubt require amendment to the Cayman Islands’ existing bilateral treaties relating to the Savings Directive, and such amendments are specifically contemplated by the relevant Commission press releases.  

Further, where an EU paying agent has evidence that a payment to a party in a non-EU state without a Savings Directive related bilateral treaty will be paid on to, or for the immediate benefit of, an EU resident individual, the paying agent must apply the Directive to the payment. The scope of this proposed obligation is likely to need clarification.  

The proposed extension of the class of income covered relates mainly to income on financial products with guarantees as to the return of capital, and income from certain life assurance products. The category of funds to which the directive applies is also being extended.  

It is also notable that it is proposed that the current concept of a “residual entity” or “paying agent on receipt” be clarified. Under the existing Directive, where payments are made to an EU “residual entity” both the paying agent and the residual entity itself may have disclosure or withholding obligations. The proposal is to provide a clearer indication of which entities are to be considered “residual entities” by including a list in an Annex.  

The proposed changes are likely to require widespread amendment to EU member states’ existing Savings Directive related information exchange agreements with various territories.