The Cayman Islands recently has agreed to implement the EU Savings Tax Directive (EUSD) in a modified form. In this respect, the Cayman Islands government has issued a release outlining the scope of the directive, which will be implemented by the Cayman Islands.

The release provides in part that the Cayman Islands has agreed to implement with the member states of the European Union exchange of information measures consistent with the EU Savings Tax Directive with effect from Jan. 1, 2005. The agreement is conditional on all EU member states, all named third countries (Switzerland, San Marino, Monaco, Andorra and Liechtenstein) and associated and dependent territories of member states of the EU (the Channel Islands, the Isle of Man and the dependent or associated territories in the Caribbean) implementing the directive, as well.

The scope of exchange of information measures is very restricted. The implementation will impose obligations only on “paying agents” within the Cayman Islands who make or hold payments of “savings income” for individuals who are tax residents of EU member states. The obligations will require that “paying agents” provide information for EU tax authorities on the amount of payments of “savings income” together with details of the recipients when they are individuals who are tax residents of the EU. Persons, corporate structures, other investment vehicles and institutions that do not fall within the narrow scope of the implementation will be unaffected.

As discussed in the government release, the requirements of the directive only will be applicable to funds domiciled in the Cayman Islands, if the “paying agent” is within the Cayman Islands or any EU member state, named third country or other associated or dependent territory and if the “paying agent” makes or holds payments of “savings income” for individuals who are tax residents of EU member states. Where the “paying agent” is located in the Cayman Islands, the “paying agent” will provide information reporting to the EU tax authorities on the amount of payments of “savings income” together with details of the recipients.

As indicated by its commitment to the EUSD and standards of transparency on cross-border financial transactions, the Cayman Islands government believes its position is consistent with the quality of the financial services businesses (e.g., offshore funds) that it wishes to attract.

Howard Leventhal is co-national director of Ernst & Young’s Asset Management Tax Practice and a partner in the firm’s Global Hedge Fund Practice based in the New York financial services office. Joyce Hsu, an international tax partner, is the director of the International Tax Group for Ernst & Young’s New York financial services office.