Our memorandum, "The EU Savings Directive - Background", explains the rationale behind the European Union Savings Tax Directive (the "EUSD") and how it works in practice in the Cayman Islands. This memorandum is designed in particular to assist our investment fund clients and takes a look at the implementing legislation in the Cayman Islands, the agreements reached between the Cayman Islands, the UK and Ireland, as well as the effect of the EUSD on the mutual fund industry to date.


For ease of reference we have defined the commonly used terms in this memorandum, most of which largely follow the terminology used in the implementing legislation of the Cayman Islands.

"Applicable States" means the Member States and the Associated Dependent Territories and the Third Countries.

"Associated Dependent Territories" means the Cayman Islands, Jersey, Guernsey, the Isle of Man, the British Virgin Islands, the Turks & Caicos Islands, Gibraltar, Anguilla, Montserrat, Aruba and the Netherlands Antilles.

"Beneficial Owner" means an individual who is resident in a Member State and who receives an interest payment. Individuals resident in an Associated Dependent Territory or Third Country are NOT caught by this definition.

"Competent Authority" means the body appointed by each Applicable State to manage the receipt of prescribed information from Paying Agents and the onward disclosure of such information to the competent authority in the relevant Member State.

"interest payment" means a payment of interest relating to debt claims, including fund distributions arising from a fund's interest income and payments from the sale or redemption of holdings in a fund that invests directly or indirectly more than 40 percent (lowering to 25 percent from 1 January 2011) of its assets in debt claims.

"Member States" means the 25 member states of the European Union being Austria, Belgium, Cyprus, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden, The Netherlands and the United Kingdom.

"Paying Agent" means any economic operator (such as a bank, mutual fund, debt issuer, administrator, transfer agent or investment manager) who pays interest to or secures the payment of interest for the immediate benefit of the Beneficial Owner, whether the operator is the debtor of the debt claim which produces the interest or the operator charged by the debtor or the Beneficial Owner with paying interest or securing the payment of interest. The Paying Agent is always the last economic operator in any chain of economic operators.

"Receiving Agent" means a person who receives payments of savings income for a Beneficial Owner.

"Residual Entity" means an entity based in a Member State that is not a legal person, not a UCITS, and not subject to business tax.

"Third Countries" means Switzerland, San Marino, Monaco, Andorra and Liechtenstein.

"UCITS" means Undertakings for Collective Investment in Transferable Securities.


In order to implement the EUSD at a local level, the Cayman Islands Government has put in place a law, regulations and guidance notes.

The Law

The Reporting of Savings Income Information (European Union) Law, 2005 came into force on 1 July 2005 and has been consolidated and revised in the 2007 Revision (the "Law").

The Law itself is relatively short and simply sets out the mechanics that allow the EUSD to be implemented in the Cayman Islands, such as the execution of agreements with Member States and the drafting of regulations and guidance notes.

The Cayman Islands are not a Member State so the EUSD cannot apply directly to them. Accordingly, bilateral agreements between the Cayman Islands and each Member State have been entered into. The form of agreement is annexed to the Law at Schedule 1 and referred to as the "Master European Union Agreement on the Reporting of Savings Income Information" (the "Agreement"). It contains the substance of Cayman's obligations with each Member State. All 25 states have signed the Agreements.


In accordance with the Law, the Governor has issued the Reporting of Savings Income Information (European Union) Regulations, 2005 (the "Regulations"). These set out, inter alia, the obligations of Paying Agents and Receiving Agents, the procedures to be followed by the Competent Authority, the prescribed forms and certificates to be used, and the penalties for failing to comply with the Regulations.

Guidance Notes

The Law nominates the Financial Secretary as the Competent Authority in the Cayman Islands with the power to issue guidance notes to provide practical assistance to those who have obligations under the Law and the Regulations (the "Guidance Notes"). The Guidance Notes are issued under section 7 of the Law and offer a useful interpretation of the Law and the Regulations. Version 2 was issued in November 2006 and can be downloaded from the internet at


It is the individual Agreement with each Member State that contains the main thrust of Cayman's obligations. In short, the Agreement applies to interest payments made by a Paying Agent established within the Cayman Islands to a Beneficial Owner or Residual Entity. If caught by the Agreement, the Paying Agent must report the following information to the Cayman Islands' Competent Authority (the "prescribed information"):

  1. identity and residence of the Beneficial Owner;
  2. name and address of Paying Agent;
  3. account number of Beneficial Owner (or identification of the debt claim giving rise to the interest); and
  4. information concerning the interest payment. This is likely to be limited to the total amount of interest or income and the total amount of the proceeds from sale, redemption or refund.

The Competent Authority of the Cayman Islands must, by June each year, forward the prescribed information relating to all interest payments made the previous year, on to the Competent Authority of the Member State in which the Beneficial Owner resides. Under the Law, the Competent Authority of the Cayman Islands has the authority to monitor Paying Agents and Receiving Agents to ensure their compliance regarding the submission and accuracy of the prescribed information.

For those concerned about conflicting obligations of disclosure and confidentiality, the Law makes it clear under section 5 that any information divulged in accordance with the Law will not amount to an offence under the Confidential Relationships (Preservation) Law (as amended). No civil claim or action for breach of a confidential relationship will exist in relation to information that is disclosed under the Law.



For the Law to apply to a Cayman based fund:

  1. the Paying Agent must be located in the Cayman Islands;
  2. the Beneficial Owner must be an individual resident in a Member State; and
  3. the interest payment must fall within the definition as set out in the Agreement and not be subject to any exclusions.

If any of these three tests fail, the Law will not apply, although it is possible that the EUSD may still be relevant if the Paying Agent is located in an Applicable State and needs information from the fund in order to comply with its own obligations. However, as you will note below, the circumstances in which distributions from Cayman funds will meet the "interest payment" requirements are limited.

Exclusions from the EUSD

The Agreement envisages that only funds that are UCITS or UCITS equivalents will be covered by the Law.

The Cayman Islands Government has 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 (the "MF Law") as non-UCITS and therefore outside the scope of the EUSD. All distributions, including dividends and liquidation proceeds, and sale or redemption proceeds arising in respect of shares, or other equity interests issued in the capital of Cayman funds (whether established as companies, trusts or partnerships) NOT licensed under section 5 of the MF Law are excluded.

This means that all funds, including hedge funds registered or regulated under section 4(3) of the MF Law (which make up the vast majority of the Cayman funds industry) will not be affected by the EUSD. Other Member States can choose to treat Cayman funds in the same way as the UK and Ireland, but not all states have issued guidance notes as yet. Accordingly, clients should take legal advice from the relevant jurisdiction to determine whether or not the EUSD will apply to a particular fund. Please also note that this exclusion applies to equity interests only. The position in respect of debt issuances is less certain but is not expected to affect many funds.

To the extent that a fund or interest payment does fall within the ambit of the Law or the EUSD, which is limited to funds licensed under section 5 of the MF Law, the following are still excluded from the reporting obligations:

  1. distributions from funds with less than 15 percent of their assets invested in debt instruments;
  2. interest accrued from the sale or redemption of a fund with less than 40 percent of its assets invested in debt instruments (reducing to 25 percent from 1 January 2011);
  3. income on assets held in insurance products;
  4. dividends, swaps and other exempt bonds issued by a Paying Agent that would otherwise have been caught by the Law or the EUSD are effectively grandfathered from the EUSD provided they were issued before 1 March 2001 and provided no subsequent issues were made after 1 March 2002; and
  5. any interest accrued or paid prior to the in force date of the EUSD (1 July 2005).

Funds licensed under Section 5

Funds licensed with the Cayman Islands Monetary Authority under section 5 of the MF Law are rarely used and make up approximately 1.3 percent of the total funds registered in the Cayman Islands. They tend to be used when a fund desires a minimum subscription level of less than US$50,000.00 and does not wish to employ a Cayman licensed administrator. It is these funds that are regarded as UCITS equivalents and which are caught by the requirements of the EUSD. However, their rarity coupled with the de-minimis thresholds referred to above, mean that the overall impact of the Law or the EUSD on our investment fund clients has been limited to date.


For those who will or may be affected by the Law or the EUSD, you may wish to bear the following issues in mind.

Debt issuing entities

Any entity that issues debt, either alone or in conjunction with shares or other equity interests in the capital of such entity, may be at risk of interest on that debt being regarded as within the scope of the EUSD.

Identity of beneficial owner

Look carefully for "hidden" beneficiaries of the interest payment. It may be easy to overlook individual investors in funds of funds or the Beneficial Owner who has instructed a corporate intermediary to act on their behalf.

Location of paying agent

If the Paying Agent must be located in an Applicable State, consider the impact on investors in a Cayman registered fund if the relevant Applicable State has opted to withhold tax instead of reporting. The investors may not be expecting to bear these taxes.

Changes to investor profile

A fund may not fall within the scope of the Law today, but a change in investor profile may bring it into range.

Role review

Funds, fund managers and service providers should review their respective roles when it comes to making investor payments to ascertain who will be regarded as the Paying Agent.

Jurisdictional differences

The Agreements reached with each Member State may differ in relation to the treatment of Cayman registered funds.

Status classification

Data vendors have started to classify funds as falling within or outside the scope of the EUSD. Fund managers may wish to volunteer this information to ensure an accurate classification, or be prepared with a response if approached. The classification could also be published in the annual report.


It is our view that although the Law (and therefore the EUSD) will undoubtedly enhance transparency within the Cayman funds industry, it is unlikely to have any real impact on the industry itself. The tests and thresholds involved in determining whether an interest payment is caught by the Law and the alternatives available for restructuring funds and their distributions, narrow the field to such a degree that it is difficult, in reality, to list the circumstances in which the Law will apply.

Cayman Islands
Jonathan Tonge, Partner

David Whittome, Partner

Heather Bestwick, Partner

British Virgin Islands
Richard May

Hong Kong
Philip Millward, Partner

Rod Palmer, Partner

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.