BVI Guide To The European Union Savings Tax Directive

HOW DOES IT AFFECT BVI INVESTMENT FUNDS?

The Government of the British Virgin Islands ("BVI") has published a Guide outlining how the European Union Savings Tax Directive ("EUSD") is to be implemented in the Territory. More comprehensive guidelines are expected to be issued in due course.

The BVI is not a member of the European Union ("EU") but along with other overseas territories and dependencies of EU member states (such as the Cayman Islands and the Netherlands Antilles) and certain other third countries (in particular, Switzerland) the BVI has agreed to implement measures to comply with the substance of the EUSD.

Before considering the approach taken by the BVI, it is first worth considering certain basic principles underlying the EUSD and its application:

• The EUSD applies in relation to an "interest payment" made by a paying agent (banks, mutual funds, debt issuers etc.) to an individual resident in the EU.
• Payments caught by the EUSD are subject to automatic exchange of information between the regulatory authorities or, in the case of Austria, Luxembourg and Belgium, a withholding tax.

The BVI has implemented the EUSD by way of a series of bi-lateral agreements with each of the EU member states together with amendments to the Mutual Legal Assistance (Tax Matters) Act, 2003 (together the "BVI legislation"). The BVI legislation provides for EU resident individuals to have the choice between (i) application of a withholding tax on applicable interest payments or (ii) the automatic exchange of information between the BVI authorities and the tax authorities in their home state.

The implementation of the EUSD in the BVI will be of particular interest to promoters of and investors in the significant number of funds established in the Territory, as "interest payment" can include income distributed by funds and income realised upon the sale or redemption of a holding in a fund. The question being asked of many BVI funds by their investors is whether the payments made by the fund are "in scope" or "out of scope" of the EUSD. The answer lies in the type of fund and the location of the fund’s paying agent.

Under the BVI legislation, "interest payment" will include income paid from certain UCITS¹ or "equivalent undertakings for collective investment established in the BVI" ("UCITS equivalents").

The BVI has determined that, with the exception of restricted public funds (see below), all private, professional and public funds recognised or registered under the Mutual Funds Act, 1996 (as amended) are to be treated for the purposes of the implementation of the EUSD as non-UCITS equivalents and, therefore, such funds are out of scope of the EUSD. Restricted public funds will be treated by the BVI as being UCITS equivalents. A restricted public fund is a public fund which has certain express statements in its prospectus relating to the key characteristics of a UCITS.

Having determined the type of fund, it is necessary also to consider the location of the fund’s paying agent in order to determine whether payments made by the fund are in scope or out of scope of the EUSD:

• If a BVI non-UCITS equivalent has a paying agent established in the BVI, then payments by the fund will be out of scope of the EUSD.
• If a BVI non-UCITS equivalent has a paying agent in an EU Member State, then it is anticipated that, under the local legislation of the EU Member State, such funds will be treated in the same manner as EU non-UCITS and, therefore, payments by the fund will be out of scope of the EUSD.
• If a BVI non-UCITS equivalent has a paying agent in another jurisdiction applying equivalent measures to the EUSD (e.g. Switzerland, Jersey, Guernsey or the Isle of Man) advice should be sought from counsel in such jurisdiction as to the applicability of the local legislation.
• If a BVI non-UCITS equivalent has a paying agent outside of the BVI, outside the EU and outside any jurisdiction which has applied equivalent measures (eg the paying agent is in the United States), payments by the fund will be out of scope of the EUSD.
• If a BVI UCITS equivalent (ie a restricted public fund) has a paying agent in the BVI or an EU member state or a jurisdiction which has applied equivalent measures, payments by the fund will be in scope of the EUSD.
• If a BVI UCITS equivalent (ie a restricted public fund) has a paying agent outside of the BVI, outside the EU and outside any jurisdiction which has applied equivalent measures to the EUSD (eg the paying agent is in the United States), payments by the fund will be out of scope of the EUSD.

A paying agent of a BVI fund whose payments fall within the scope of the EUSD (i.e a restricted public fund), will not have to apply a withholding tax or report information on (i) a redemption of units in that fund if the percentage of the fund's assets held in debt claims (directly or indirectly) does not exceed 40% or (ii) an income payment where the percentage of the fund's assets in debt claims does not exceed 15%.

If you would like specific advice on the subject matter of this note then please contact Kieron O’Rourke or Ross Munro or your usual investment funds contact at Harney, Westwood & Riegels.