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The European Savings Directive

ALFI’s interpretations and recommendations

June 2005

European Savings Directive – ALFI’s interpretations and recommendations 2

ALFI is the Association of the Luxembourg Fund Industry. ALFI (Association Luxembourgeoise des Fonds d’Investissement) is the official representative body for the Luxembourg investment fund industry and was set up in November 1988 to promote its development.

ALFI's Articles of Association were amended in April 2000 and, as well as investment funds, the association now includes a wide selection of service providers: custodian banks, fund managers and administrators, transfer agents, fund distributors, law firms, consultants and tax advisers, auditors and accounting firms, IT services companies, etc. The ALFI Working Group “Savings Directive” has been set up to analyze the implications of the Savings Directive for the Luxembourg Fund Industry. This document contains the conclusions of this Working Group.

ALFI hopes that this document will serve its members as a reference document when implementing the Savings Directive.

The document represents the opinion of the Association and is not binding for the Luxembourg Tax Authorities. The document has been submitted to them and has been discussed with them.

This document is based on the Council Directive 2003/48/EC of 3 June 2003 on taxation of savings income in the form of interest payments as published in the Official Journal of the European Union of 26 June 2003 and on the Luxembourg law which has been approved on 12 April 2005.

As not all the agreements with the dependent and associated territories and third countries were published at the date of publication of this document, the implications of those agreements are not included in the document.

June 2005


1 INTRODUCTION .............................................................................................................6 2 PAYING AGENT IN THE CONTEXT OF THE FUND INDUSTRY.........................8

2.1 DEFINITION OF PAYING AGENT .......................................................................... 8 2.2 DETERMINATION OF THE PA............................................................................... 8

2.2.1 Indirect subscription by a physical person residing in a Member State through a Luxembourg or foreign intermediary .............................................................. 9

2.2.1.1 The intermediary is the registered shareholder (nominative shares).......... 10 2.2.1.2 The investor is the registered shareholder (nominative shares) ................. 10

2.2.2 Direct subscription by an individual residing in another Member State.......... 11 2.2.3 Distribution charts............................................................................................ 11

3 REQUIREMENTS WHEN AN ECONOMIC OPERATOR IS A PA FOR A GIVEN UCI....................................................................................................................................15

3.1 PA ESTABLISHED IN A COUNTRY APPLYING THE WITHHOLDING TAX .............. 15 3.2 PA ESTABLISHED IN A COUNTRY APPLYING THE EXCHANGE OF INFORMATION16

3.2.1 PA giving information on the amount of the transaction.................................. 16 3.2.2 PA giving information on the amount of the interest payment ......................... 17

4 DISTRIBUTIONS AND CAPITAL GAINS TREATED AS INTEREST PAYMENTS.....................................................................................................................18

4.1 UCI WHICH MIGHT BE IN SCOPE........................................................................ 18 4.2 THE ASSET TESTS (15% AND 40% THRESHOLD) ............................................... 19 4.3 DE MINIMIS RULE (15% THRESHOLD)............................................................... 20

4.3.1 Luxembourg’s option (Luxembourg UCI) ........................................................ 20 4.3.2 Other Member State’s option (UCI from another Member State).................... 20 4.3.3 Investment funds from outside the EU.............................................................. 21 4.3.4 Examples........................................................................................................... 22

4.4 CAPITAL GAIN ON REDEMPTION OF UCI (40% THRESHOLD)............................ 23 4.4.1 Principle ........................................................................................................... 23 4.4.2 Indirect investment ........................................................................................... 23 4.4.3 Examples........................................................................................................... 24

4.5 DISTRIBUTIONS FROM UCI ............................................................................... 28 4.5.1 Threshold applicable ........................................................................................ 28 4.5.2 Dividend categorization ................................................................................... 28

4.6 DETERMINATION OF PERCENTAGE OF INVESTMENTS IN DEBT CLAIMS ............ 29 4.6.1 Based on the investment policy......................................................................... 30

4.6.1.1 Principle ..................................................................................................... 30 4.6.1.2 Treatment of accessory liquidities ............................................................. 30 4.6.1.3 Change in investment policy...................................................................... 30 4.6.1.4 Luxembourg real estate investment funds.................................................. 31 4.6.1.5 Breach of compliance with investment policy ........................................... 31

4.6.2 Based on actual composition of the assets ....................................................... 31 4.6.2.1 Principle ..................................................................................................... 31 4.6.2.2 Method proposed by ALFI......................................................................... 31 4.6.2.3 Rules proposed by ALFI for initial period (first year of implementation). 33 4.6.2.4 Determination for newly created Luxembourg UCIs or UCI sub-funds.... 34 4.6.2.5 Investment in a target fund......................................................................... 35

4.7 UMBRELLA FUNDS ............................................................................................ 37 4.8 DECISION TREE FOR LUXEMBOURG UCIS......................................................... 37

5 LOOK THROUGH PRINCIPLE ..................................................................................38

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5.1 PRINCIPLE ......................................................................................................... 38 5.2 PRODUCTS GENERATING INTEREST PAYMENTS ................................................ 39 5.3 METHODOLOGY OF COMPUTATION OF TIS....................................................... 40

5.3.1 Inclusion of interest payments on an accrual basis.......................................... 41 5.3.2 Treatment of OID (Original Issue Discount).................................................... 41 5.3.3 Treatment of debt claims which are on loan (securities lending)..................... 42 5.3.4 Deductible expenses ......................................................................................... 42 5.3.5 Treatment of swaps........................................................................................... 43 5.3.6 Equalization...................................................................................................... 44 5.3.7 Target fund ....................................................................................................... 44 5.3.8 Calculation logic in case of a distribution by a target fund ............................. 46 5.3.9 Summary ........................................................................................................... 47

5.4 IMPACT OF CORRECTIONS ON THE TIS.............................................................. 47 6 LUXEMBOURG PAS .....................................................................................................48

6.1 DEFAULT RULES APPLICABLE TO DISTRIBUTIONS AND REDEMPTIONS............. 48 6.2 TYPE OF RECIPIENT ........................................................................................... 49 6.3 EXCHANGE OF INFORMATION ........................................................................... 53

6.3.1 Principle ........................................................................................................... 53 6.3.2 Frequency of the exchange of information ....................................................... 53 6.3.3 Information to be provided ............................................................................... 53 6.3.4 Information to be provided on the income........................................................ 55 6.3.5 Amounts in a currency other than EURO......................................................... 55

6.4 EXEMPTION CERTIFICATE ................................................................................. 56 6.5 WITHHOLDING TAX........................................................................................... 56

6.5.1 Withholding tax on a distribution ..................................................................... 57 6.5.1.1 Principle ..................................................................................................... 57 6.5.1.2 Change of status ......................................................................................... 57

6.5.2 Withholding tax in case of a redemption .......................................................... 58 6.5.2.1 Principle ..................................................................................................... 58 6.5.2.2 Examples.................................................................................................... 59 6.5.2.3 Cost Methodology (FIFO, LIFO, Average cost)........................................ 60 6.5.2.4 Change of status ......................................................................................... 60

6.5.3 Non Luxembourg UCI’s tax information.......................................................... 61 6.5.4 Transfer of the taxes to the Luxembourg tax authorities .................................. 61

6.6 TREATMENT OF BEARER SHARES – IMPACT ON PA/TA FUNCTION................... 63 7 TAX TREATMENT OF SOME SPECIFIC TRANSACTIONS.................................65

7.1 DIVIDEND REINVESTMENT (IN THE FORM OF SHARES) ..................................... 65 7.2 MONEY MARKET FUND WITH FIXED NAV ........................................................ 65 7.3 SWITCHES/CONVERSIONS ................................................................................. 65 7.4 TRANSFERS ....................................................................................................... 65 7.5 MERGERS .......................................................................................................... 66

8 OTHER OBLIGATIONS OF LUXEMBOURG PA ....................................................67 8.1 IDENTIFICATION OF THE BENEFICIAL OWNER ................................................... 67 8.2 REPORTING TO INVESTORS ............................................................................... 68

9 IMPACT ON INFORMATION PROVIDERS.............................................................69 9.1 ROLE OF CCLUX............................................................................................... 69 9.2 DEFINITION OF DATA COLLECTED BY CCLUX.................................................. 69 9.3 TECHNICAL SOLUTIONS FOR DATA TRANSFER FROM FUND ADMINISTRATIONS TO CCLUX 70

9.3.1 Static data ......................................................................................................... 70

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9.3.2 Periodic data .................................................................................................... 70 9.4 TIMING DEFINITION FOR DATA TRANSFER FROM FUND ADMINISTRATIONS TO CCLUX 71

9.4.1 Static data ......................................................................................................... 71 9.4.2 Periodic data .................................................................................................... 71

9.5 SAVINGS DIRECTIVE PRODUCTS MARKETED BY CCLUX.................................. 71

June 2005


1 Introduction

During the transitional period, the objective of the Directive 2003/48/CE of 3 June

2003 on taxation of savings income in the form of interest payments (Savings

Directive) is to ensure minimum effective taxation of savings income in the form of

interest payments made in one European Union (EU) Member State to individual

beneficial owners who are resident in another EU Member State. This objective

should be achieved via exchange of information between Member States or by

application of a withholding tax. The EU countries that are entitled to apply a

withholding tax during the transitional period are: Luxembourg, Austria and Belgium.

The Third countries1, with the exception of the USA, and some of the dependent or

associated territories have also announced the application of a withholding tax.

The following tables mention the jurisdictions committed to the exchange of

information and those committed to withholding tax:

Exchange of information jurisdictions Anguilla Finland Italy Portugal Aruba France Latvia Slovakia Cayman Islands Germany Lithuania Slovenia Cyprus Gibraltar Malta Spain Czech Republic Greece Montserrat Sweden Denmark Hungary The Netherlands United Kingdom Estonia Ireland Poland United States

Withholding tax jurisdictions Andorra Guernsey Luxembourg Switzerland Austria Isle of Man Monaco Belgium Jersey Netherlands Antilles Turks and Caicos

Islands British Virgin Islands Liechtenstein San Marino

This document is limited to issues relating to the Luxembourg Investment Fund

Industry and aims at providing clarifications with regards to operational questions

raised by the Directive’s implementation.

The first part (Chapters 2 to 5) of this document describes the duties of the central

administration in Luxembourg in respect of information it needs to provide.

1 Switzerland, Liechtenstein, Monaco, San Marino, Andorra and the United States of America

June 2005


Chapter 2 starts with the analysis of the concept of Paying Agent and with the

determination of the Paying Agent in the context of the fund industry.

This is followed, in Chapter 3, by an explanation of the requirements to be complied

with by the central administration in Luxembourg, when there is a Paying Agent as

defined by the Directive, if the Paying Agent is established in a country applying the

exchange of information, or if the Paying Agent is established in a country applying

withholding tax.

Chapter 4 explains the rules that the central administration has to follow to determine

when, for a Luxembourg Undertaking for Collective Investment (UCI), a distribution or

redemption is in the scope of the Directive.

Chapter 5 explains the “look-through principle”, applicable to distributions and

redemptions of units of a Luxembourg UCI, as well as the methodology of

calculation.

The second part of this document (Chapters 6 to 8) aims at clarifying the obligations

of the Paying Agent established in Luxembourg.

In that second part, Chapter 6 explains the identification of the taxable status of the

payees. Also, the different alternatives offered to the Paying Agent (exchange of

information, tax exemption certificate or withholding tax) are analyzed in this Chapter.

Chapter 7 analyses the treatment of some specific transactions.

Chapter 8 details the rules of how to identify the beneficial owner within the meaning

of the Directive.

In order to guarantee that the information about the UCIs is available to all operators,

the interaction between fund administration and service providers like CCLux or Data

Vendors is reviewed in Chapter 9.

June 2005


2 Paying Agent in the context of the fund industry

2.1 Definition of Paying Agent

The Savings Directive defines the Paying Agent (PA) as any “economic operator who

pays interest to or secures the payment of interest for the immediate benefit of the

beneficial owner”2 when the beneficial owner of the income is an individual resident in

a different EU Member State.

In a payment chain, the PA is the last intermediary that actively initiates the payment

to the beneficial owner.

When an economic operator intervenes in a payment process but has a passive role

because it executes instructions given by somebody else, the economic operator is

not necessarily a PA. This is for example the case when a custodian bank executes a

transfer instruction given by a Transfer Agent (TA).

Equally, the fact that a bank receives a transfer of funds on behalf of one of its clients

is not sufficient to make it a PA. Therefore, when a TA instructs the custodian bank to

transfer funds to the account that the investor has with Bank A, neither the custodian

bank nor Bank A are PA for that payment.

The definition of a paying agent under the EU Savings Directive does not necessarily

correspond to the meaning of this term as traditionally used in UCIs' prospectuses.

2.2 Determination of the PA

The structure of an UCI generally includes, aside from the UCI itself, different service

providers bound contractually to the UCI. These generally include the custodian

bank, the registrar and transfer agent and the administrative agent. Each of these

service providers may be involved in the payment of the distributions or the

redemption proceeds:

● the custodian bank executes the payment of the income by a debit of the account

of the UCI and transfers it to the account of the beneficial owner;

● the transfer agent/registrar holds the information concerning the beneficial

owner’s/shareholder’s identities and may instruct the payments; 2 Article 4.1. Directive

June 2005


● the administrative agent, who calculates the Net Asset Value (NAV), holds

information on the composition/nature of the payment so as to identify the portion

constituting “interest”, if any, which is subject to the application of the Directive.

Depending on the structure of the UCI, the various tasks may be performed by a

single entity (bank) or two or three entities (bank and/or PSF3). Furthermore, some of

these tasks (except those of the custodian bank) may be performed by the UCI itself.

This means that, in the case where the UCI has its own human resources and does

not depend on external service providers who would be in charge of effecting

payments, the UCI itself could be a PA. In the case of a fonds commun de placement

(FCP) whose management company has its own human resources to administer the

UCI (without delegation of functions), the management company could be a PA.

In the case where the UCI delegated administrative functions to a specialized service

provider (as is the case for most SICAVs and FCPs), that service provider could

become a PA.

Of course, such an entity shall be a PA for the purposes of the Directive only in

connection with a direct interest payment to a beneficial owner who is an individual

resident in another EU Member State, which leads us to discuss hereafter different

distribution structures.

ALFI considers that it is not the responsibility of the board of the Luxembourg UCI to

determine whether an economic operator in the chain of distribution is a PA

according to the law of the country of establishment of the economic operator.

2.2.1 Indirect subscription by a physical person residing in a Member State through a Luxembourg or foreign intermediary

In accordance with Chapter D, Section III.2 of IML Circular 91/75 of 21st January

1991, the requirement concerning the execution of issuances and redemptions in

Luxembourg does not prohibit Luxembourg UCIs from appointing Luxembourg or

foreign intermediaries as financial agents for the placement and the redemption of

their shares.

These intermediaries may collect subscription and redemption requests concerning

shares of a UCI. As such, they may intervene in subscription and redemption

3 Professionnel du Secteur Financier

June 2005


transactions either as “distributors” or as “nominees” or as “market makers”4

(hereafter, the “intermediaries”).

In connection with the subscription and redemption orders of UCI shares,

intermediaries provide the fund administrator in Luxembourg with the nominative data

on an individual basis for each investor or in a “global” form under the name of the

distributor with a view to updating the register of shareholders of the UCI held by the

registrar.

This register of shareholders will therefore comprise either (i) the name of the

investor on whose behalf the intermediary acts, or (ii) the name of the intermediary

having placed a global subscription order.

For the purposes of the discussion hereafter, we assume that the intermediary is a

corporate entity.

2.2.1.1 The intermediary is the registered shareholder (nominative shares)

When interest is paid to the foreign intermediary who is the registered shareholder,

the payment will not be subject to withholding tax or exchange of information in

Luxembourg as the Luxembourg economic operator that instructs the payment, does

not make a payment to the beneficial owner but to an intermediary.

When the intermediary in turn pays interest directly to a beneficial owner who is an

individual, his obligation to withhold or to provide information will depend on the

country where the intermediary is established and the residence of the beneficial

owner. Indeed, if the intermediary is established in the country of residence of the

beneficial owner (investor), the payment is outside the scope of the Directive.

2.2.1.2 The investor is the registered shareholder (nominative shares)

Even in the case of an indirect subscription, the investor can be registered under his

own name and the payments can be made directly to the investor. If interest is paid

directly to the investor, one should refer to the scenario set out under point 2.2.2

(direct subscription).

4 Teneurs de marché.

June 2005


2.2.2 Direct subscription by an individual residing in another Member State

When the Luxembourg TA pays interest directly to a non Luxembourg resident

investor into an account belonging to such investor in Luxembourg or abroad, the

Luxembourg TA is considered as being a PA pursuant to the Savings Directive when

the investor is an individual resident of another EU Member State. Interest payments

by a Luxembourg TA to a Luxembourg resident investor into an account in

Luxembourg or abroad is outside the scope of the Directive.

If the TA does not pay the amount in question directly into an account of the investor

but to an “agent” appointed contractually for that purpose (generally, but not

necessarily, in the country of residence of the investor, with the mission to make

payments to different investors residing in that country), this “agent” might become a

PA (if he pays directly to a beneficial owner resident in another EU country).

2.2.3 Distribution charts

The following distribution charts5 purport to give a detailed overview of the UCI

distribution scenarios applicable to the distribution of nominative shares of a

Luxembourg UCI. Three models have been identified6:

5 Abbreviation list:

N: Nominee EU: European Union FI: Financial Intermediary PA: Paying Agent D: Distributor TA: Transfer Agent STA: Sub Transfer Agent CA: Central Administrator

6 The charts are based on the models most commonly observed within the Luxembourg fund industry.

June 2005


Model 1

It’s assumed that the UCI or the management company (ManCo) of the UCI

delegates the transfer/shareholder register function (TA function) either to a

Luxembourg agent (i.e. the Transfer Agent7) or to the Luxembourg Administrative

Agent (i.e. Central Administration) of the UCI.

TA, STA or CA instruct payment

to individual investor /

residual entity ?

Name of EU individual investor /

residual entity

Name of Nominee, Financial intermediary or

DistributorOther accounts

TA, STA or CA instruct correspondent /

custodian to instruct payment by using fund’s

clearing account

TA, STA or CA instruct payment to Distributor /

Intermediary and Distributor / intermediary

instructs payment to investor

Individual investor/ residual entity in another country than TA,

STA or CA

YES

TA, STA or CA is PA

YES

Distributor / Intermediary is PA

TA, STA or CA instruct payment via clearing

accounts to nominee / intermediary / distributor

Nominee/ Distributor/ Intermediary is PA

Accounts not in scope of Savings Directive

NO

No PA

NO

Shareholders Register in Luxembourg

Individual investor/ residual entity in another

country than Distrib./Intermed.

NO

YES

Individual investor/ residual entity in another

country than Distrib./Intermed.

YES

NO

When the name in the register is the one of an intermediary, that person will be a PA

only if it pays the income to an individual investor resident of or a residual entity

established in another EU Member State.

For example, if the income is paid to a German intermediary, that intermediary will

not be a PA if it pays the income (distribution or redemption proceeds) to an

individual resident in Germany or outside the EU, but it will be a PA if it pays the

income to an individual resident in another EU country, e.g. in Poland.

7 This Transfer Agent may in turn delegate these functions to a sub-transfer agent.

June 2005


Model 2

When the UCI has its own personnel, the chart is similar to the previous one, but the

UCI itself can be a PA.

Fund instructspayment toindividualinvestor /

residual entity ?

Name of EUindividual investor /

residual entity

Name of Nominee,Financial intermediary or


Fund instructscorrespondent /

custodian to instructpayment by using fund’s

clearing account

Fund instructs payment toDistributor / Intermediary

and Distributor /Intermediary instructspayment to investor

YES

Fund instructs payment viaclearing accounts to

nominee / intermediary /distributor

Accounts not in scope ofSavings Directive

NO

Shareholders Register in Luxembourg

Individualinvestor /

residual entity inanother country

than Fund

UCI ormanagement

company is PA

YES

Distributor /intermediary is PA

Nominee / Distributor /Intermediary is PA

No PA

NOIndividual

investor/residualentity in another

country thanDistrib./Intermed.

NO

YES

Individualinvestor/residualentity in another


YES

NO

June 2005


Model 3

The UCI or the Management Company is delegating the shareholder register record

keeping function to the Luxembourg Transfer Agent or the Luxembourg

Administration Agent and the instruction of the payment to a different service

provider. In this case, such service provider has to maintain a duplicate shareholder

register. This delegated service for the execution of payment services may be

delegated e.g. by the UCI or the management company to the custodian not in its

role of Custodian but as a separate service.

In this case, the service provider that instructs the payments to the investor, might be

a PA for some payments.

If the service provider is established outside Luxembourg, and if such service

provider became the PA, exchange of information will be applied or withholding tax

will be levied depending on the country where the service provider is established.

When a service provider established outside Luxembourg is to be involved,

confidentiality rules and other possible legal or regulatory aspects may have to be

considered.

Bank instructpayment toindividualinvestor /

residual entity ?

Name of EUindividual investor /

residual entity

Name of Nominee,Financial intermediary or


Bank (i.e. Custodian)instructs correspondentto execute payment byusing Fund’s clearing

account

Bank instructs payment toDistributor / Intermediary

and Distributor /Intermediary instructspayment to investor

YES

Bank instructs payment toNominee / Intermediary /

Distributor

Accounts not in scope ofSavings Directive

NO

Duplicate register in Luxembourg or abroad

Individualinvestor /

residual entity inanother country

than Bank

Bank is PA

YES

Distributor /intermediary is PA

Nominee / Distributor /Intermediary is PA

No PA

NOIndividual

investor/residualentity in another


NO

YES

Individualinvestor/residualentity in another


YES

NO

June 2005


3 Requirements when an economic operator is a PA for a given UCI

When an intermediary is established in a EU Member State, a third country or a

dependent or associate territory and is a PA for a given payment (distribution or

redemption proceeds), the intermediary needs information about the tax status of the

distribution or redemption of the Luxembourg UCI in order to be able to decide

whether or not it has to apply a withholding tax or provide information when it makes

the payment directly to an individual resident of another EU Member State or resident

of a dependent or associated territory that has asked for reciprocity8. That point is

analysed in detail in this chapter.

Nevertheless, the type of information the PA needs to receive from the central

administration depends on the method the PA applies (withholding tax, exchange of

information or tax certificate) and in the case of exchange of information, on the

options the PA has taken. The method depends first on where the PA is established

(a withholding tax country or exchange of information country) and, if the PA is

established in an exchange of information country, on the different methods allowed

by such country and by the specific PA.

When the UCI is exclusively distributed outside the EU, the Third Countries and the

dependent and associated territories or when the investors are only institutional

investors, no information needs to be provided by the Central Administration, as

those situations are out of scope.

3.1 PA established in a country applying the withholding tax

When the PA is established in a country that has opted for the withholding tax, the

PA might have to levy a withholding tax on the portion of the distribution that is

derived from interest payments. In case of redemption, it might limit the withholding

tax to the portion of the capital gain realized by the investor that is derived from

interest payments (if the country where the PA is established allows the look through

method for redemptions).

For that purpose, Luxembourg UCIs should set up a Taxable Income per Share (TIS

– see below) that will be published on each valuation date.

8 Jersey, Guernsey, Isle of Man, Aruba, the Netherlands Antilles, the British Virgin Islands and

Montserrat

June 2005


When the Luxembourg UCI makes a distribution, the TIS will allow the UCI to decide

what portion of the distribution is derived from interest payments.

In case of redemption, the difference of the TIS at the date of redemption/sale and at

the date of subscription/acquisition will determine the portion of the capital gain that

is derived from interest payments.

3.2 PA established in a country applying the exchange of information

When the PA is established in a country that applies the exchange of information,

different options are – in principle - given to the PA9:

in the case of distributions: either to give information on the amount of the

distribution or on the amount of interest portion included in the distribution;

in the case of redemptions: either to give information on the amount of (i) the

redemption proceeds, (ii) the capital gain or (iii) the amount of the interest

portion included in the capital gain / redemption proceeds.

It is expected that most exchange of information countries will allow the PA to apply

the easiest solution, which is to disclose the amount of the redemption proceeds and

that most PAs will opt for that solution.

3.2.1 PA giving information on the amount of the transaction

When the PA gives information on the amount of the transaction (amount of the

distribution or amount of the redemption proceeds as discussed above) or on the

amount of the capital gain, the only information it needs when it pays the distribution /

redemption proceeds to the investor, is whether the UCI is in scope or out of scope

for distributions / redemptions.

The PA does not need any information on the TIS level at the date of subscription or

redemption, nor does it need information on the interest portion of a distribution.

Therefore, if the Luxembourg UCI is only distributed through distributors that provide

information on the total amount of the transaction when they are acting as PA, there

will be no need to set up and publish the TIS.

9 Article 8.2 of the Directive

June 2005


This solution is however not recommended if later on, the Luxembourg UCI might be

distributed in a country that applies a withholding tax (and some individual investors

are resident of another Member State) or in a country that applies the exchange of

information but where the PA has to provide information on the interest portion of the

distribution / redemption.

3.2.2 PA giving information on the amount of the interest payment

When the PA provides information on the interest portion of a distribution /

redemption, it needs not only to have access to the information about the status of

the UCI for distributions and redemptions (in scope / out of scope) but it also needs

to have information on the TIS level at the subscription and redemption date and on

the interest portion in a given distribution.

In that case, it is important for the Luxembourg Central Administration of the UCI to

implement the TIS and to make this information available.

It has been proposed by the European Fund and Asset Management Association

(EFAMA) and the European Banking Federation (EBF) in a Recommendation

published on 6th June, 200510, that PA’s established in a State different from the one

of the domicile of the UCI could rely on

• the tax status of the UCI for distributions and redemptions determined

according to the rules of the domicile of the UCI

• the TIS computed according to the rules of the domicile of the UCI.

Summary

Country of establishment of PA

Information needed by PA from central administration

Tax status distributions

Tax status redemptions TIS

Taxable interest

portion in distribution

With look through for redemptions

Yes Yes Yes Yes Withholding tax country Without look

through for redemptions

Yes Yes No Yes11

10 "Home Country Rule" for Funds under the EU Savings Directive 11 To determine the taxable interest portion in the distribution, the central administration will have to

compute a TIS

June 2005


Information on amount of transaction

Yes Yes No No Exchange of information country Detailed

information Yes Yes Yes / No Yes12

4 Distributions and capital gains treated as interest

payments

4.1 UCI which might be in scope

Under certain conditions, the Savings Directive qualifies as an interest payment13, (i)

income distributed by or (ii) income realized upon the redemption, sale or refund of

shares or units of:

a UCI authorized in accordance with Directive 85/611/EEC14 (UCITS);

a UCI established outside the EU;

a residual entity that has opted to be treated as a UCI authorized in

accordance with Directive 85/611/EEC.

The Luxembourg law foresees that a Luxembourg entity that meets the criteria of a

residual entity will automatically be treated as a UCI authorized in accordance with

Directive 85/611/EEC15. This is for example the case of the Fonds Commun de

Placement (FCP) which falls under the Part II of the law of 20 December 2002 or

under the law of 19 July 1991.

Those rules imply the following status for distributions and redemptions from

Luxembourg UCI.

Distributions Redemptions

SICAV Part I Potentially in scope Potentially in scope

FCP Part I Potentially in scope Potentially in scope

SICAV Part II / SICAF Part II Out of scope Out of scope

FCP Part II Potentially in scope Potentially in scope

SICAV Law 91 / SICAF Law 91 Out of scope Out of scope

12 Idem footnote 10 13 Article 6.1.c) and d) of Directive 14 Council Directive of 20 December 1985 on the co-ordination of laws, regulations and administrative

provisions relating to undertakings for collective investment in transferable securities (85/611/EEC) (as amended)

15 Article 4.3 of the law

June 2005


FCP Law 91 Potentially in scope Potentially in scope

SICAR Out of scope16 Out of scope

It has however to be mentioned that the operation of the Directive will be reviewed

after 3 years and that the Commission may propose to review the scope of the

Directive.

Because the Luxembourg FCP Part II of the law of 30 March 1988 or of the law of 20

December 2002 will automatically be treated as a UCITS authorized in accordance

with Directive 85/611/EEC, interest paid to the FCP Part II will not be subject to

withholding tax and will not trigger exchange of information.

4.2 The asset tests (15% and 40% threshold)

For a UCI which distributions and redemptions are potentially in scope, they will be in

scope or out of scope depending on the percentage of the assets of the UCI invested

in debt-claims.

Therefore, we will first examine which instruments have to be considered as debt-

claims under the Savings Directive.

Instrument17 Debt-claim Long position non grandfathered bonds (including securities which are on loan) and loans Yes

Long position money market instruments Yes Cash instruments and bank accounts (i.e. interest bearing current account, deposit, repo) Yes

Long position grandfathered bonds (including securities which are on loan) No

Overdrawn cash account Yes18

Borrowings, credit lines No Equities and warrants No Derivatives (i.e. futures, options, swaps, …) No Non interest bearing cash accounts / receivables No

16 Dividends paid by the SICAR (but not interest paid by the SICAR) 17 Not exhaustive 18 A cash account is considered as an asset even if the cash account is overdrawn

June 2005


4.3 De minimis rule (15% threshold)

4.3.1 Luxembourg’s option (Luxembourg UCI)

The Directive allows each Member State not to treat as an interest payment a

distribution from, or a capital gain on the redemption, the sale or the refund of units of

a UCI established in that Member State when no more than 15% of the assets of the

UCI are debt claims as defined under article 6.1.a of the Directive.

Luxembourg has exercised that option. The fact that Luxembourg has introduced the

de minimis rule means that the following income is out of scope:

distributions of a Luxembourg UCI whose direct and indirect19 investments in

debt claims referred to in art. 6.1.a of the law do not exceed 15% of the

assets of the UCI,

redemption from units of a Luxembourg UCI whose direct and indirect

investments in debt claims referred to in art. 6.1.a of the law do not exceed

15% of the assets of the UCI.

The exercise of the option by Luxembourg is binding on the other Member States.

4.3.2 Other Member State’s option (UCI from another Member State)

The 15% rule is applicable only if the Member State where the UCI is established has

included the de minimis rule in its internal laws (option for each Member State). The

exercise of the option is binding on the other Member States.

Therefore, if a Member State does not exclude UCIs that have invested no more than

15% of their assets in debt claims, a Luxembourg PA has to apply withholding tax on

the distributions of a UCI established in that Member State even when the 15%

threshold is not exceeded.

19 Following an exchange of views between the different Member States and the Commission at the

ECOFIN meeting of 12 April 2005, they agreed that only income from UCITS which invest directly and indirectly only 15% or less of their assets in debt claims can be excluded from the definition of interest payments set out in Article 6.1. of the Directive. The Member States, the Commission as regards Third countries and the Netherlands and the U.K. as regards the associated and dependent territories, will respectively guarantee in writing or ensure that written guarantees will be provided that all parties act in full conformity with that interpretation. Would it not be the case, Luxembourg would be allowed to come back to its previous interpretation.

June 2005


4.3.3 Investment funds from outside the EU

Under the Directive, the de minimis rule is an option restricted to UCIs established in

a Member State. This means that under the Savings Directive, an investment fund

established outside the EU will not be able to benefit from de minimis rule. However,

the agreements concluded with the Third countries and the dependent and

associated territories will have to be taken into account. The "Home Country rule"

referred to in 3.2.2 above also has to be considered.

June 2005


4.3.4 Examples

Example I Luxembourg

UCITS

Bankdeposit EquitiesBonds

grandfatheredBonds not

grandfathered

12% 13% 5% 70%

The direct investment in debt claims referred to in article 6.1.a) is :

Bonds not grandfathered 12% Bonds grandfathered - Bank deposit 5% Equities - Total investment in debt claims 17%

As the total investment in debt claims exceeds 15%, the de minimis rule is not

applicable which means that for that Luxembourg UCI, distributions are in scope (but

redemptions are out of scope for the reasons set forth in 4.4 below).

Example II Luxembourg

UCITS

UCITS B EquitiesBonds grandfathered

Bonds notgrandfathered


Bonds grandfathered


Bonds grandfathered

14%

30%

36%

70%

10% 40%

The direct and indirect investment in debt claims referred to in article 6.1.a) is :

Bonds not grandfathered 14% Bonds grandfathered - via UCITS B 7% Equities - Total investment in debt claims 21%

June 2005


As the total investment in debt claims exceeds 15%, the de minimis rule is not

applicable which means that for that Luxembourg UCI, distributions are in scope (but

redemptions are out of scope for the reasons set forth in 4.4 below).

4.4 Capital gain on redemption of UCI (40% threshold)

4.4.1 Principle

For a Luxembourg UCI whose direct and indirect investment in debt claims as

referred to in art. 6.1.a) does not exceed 40%, the redemptions are out of scope.

Unlike what is foreseen for distributions, under the terms of the Directive, the 40%

threshold is applicable for all UCIs (established inside or outside the EU) and does

not depend on any decision of the country in which the UCI is established20.

4.4.2 Indirect investment

When a Luxembourg UCI is invested indirectly in debt claims, investments via UCIs

authorized in accordance with Directive 85/611/EEC, residual entities that have opted

to be treated as a UCITS and investment funds established outside the EU, are taken

into account.

When a top fund is invested in a target fund, the indirect investment in debt claims is

obtained by multiplying the direct investments of the target fund by the fraction of the

assets of the top fund invested in the target fund. However, if the target fund is

invested directly less than or equal to 15% in debt-claims, the target fund is not taken

into account at all (percentage supposed to be 0%) because it’s likely that the

percentage of the assets invested in debt claims is not be computed for such a UCI.

If the target fund does not make its status or the percentage of assets invested in

debt-claims available, the target fund is considered invested 100% in debt claims.

The following flow chart indicates the percentage of the target fund that is considered

invested in debt claims when that percentage is available or if the status of the

distributions and the redemptions are known.

20 Article 6.1 d) of the law

June 2005


% of target fund investedin debt-claims available ?

Investment in debt-claims = 0%

Distributions = outRedemptions = out

Distributions = in or n.a.Redemptions = out

Distributions = in or n.a.Redemptions = in

Status of distributions andredemptions available ?

Investment in debt-claims= 100%

Investment in debt-claims= 40%

% invested in debt-claims> 15%

Investment in debt-claims = % made

available

nono

no

no

yes

no yes

yes

yes

yes

n.a. = non applicable

yes

4.4.3 Examples

Example I

Luxembourg

UCITS

Bankdeposit EquitiesBonds

grandfatheredBonds not

grandfathered

37% 18% 5% 40%

The investment in debt claims as referred to in art. 6.1.a) is equal to 42%. This

means that the Luxembourg UCITS will be in scope for redemptions (and

distributions for the reasons set forth in 4.3 above).

June 2005


Example II

Luxembourg UCITS




Bonds grandfathered


Bonds grandfathered

35%

30%

15%

70%

10% 40%

Direct investment in debt claims 35% Indirect investment in debt claims 70% * 10% 7% Direct and indirect investments in debt claims 42%

As the direct and indirect investment in debt claims as referred to in art. 6.1.a)

exceeds 40%, the UCITS will be in scope for redemptions (and distributions for the

reasons set forth in 4.3 above).

Example III

Luxembourg UCITS



35%

75%

15%

25%

10% 40%


Equities

Direct investment in debt claims 35% Indirect investment in debt claims 25% * 10% 2,5% Direct and indirect investments in debt claims 37,5%

June 2005


As the Luxembourg UCITS is invested directly and indirectly more than 15% but less

than 40% in debt claims as referred to in art. 6.1.a), it will be in scope for distributions

but out of scope for redemptions.

It is important to note that in order for the Luxembourg UCITS to be out of scope for

redemptions, the UCITS needs to know that 25% of the assets of UCITS B are

invested in debt claims.

Example IV

LuxembourgUCITS

UCITS B EquitiesBondsgrandfathered



Bondsgrandfathered

39%

86%

15%

14%

10% 36%

Direct investment in debt claims 39% Indirect investment in debt claims 0% * 10% 0% Direct and indirect investments in debt claims 39%

As UCITS B is invested less than 15% in debt claims, debt claims held by UCITS B

are not taken into account.

As the Luxembourg UCITS is invested directly and indirectly more than 15% but less

than 40% in debt claims as referred to in art. 6.1.a), it will be in scope for distributions

but out of scope for redemptions.

June 2005


Example V

Luxembourg UCITS

Bankdeposit

Bonds grandfathered


60% 35% 5%

Swap conterparty

65% of the assets of the Luxembourg UCITS are invested in debt claims. The UCITS

has concluded a swap under which it pays the interest on the bond portfolio and

receives the return on a basket of shares. Since the swap contract itself is not an

asset, it is not taken into account to check if the thresholds are exceeded (but the

unrealized gain on the swap is an asset which appears on the balance sheet).

As the investment in debt claims exceeds 15% and 40%, the Luxembourg UCITS will

be in scope for distributions and redemptions (cf. point 5.3.5 for the treatment of a

swap under the look through approach).

Example VI

Luxembourg UCITS

BankdepositEquities

95% 5%

Swap counterparty

The Luxembourg UCITS invests in shares and has concluded a swap under which it

pays the return on the shares and receives a fixed return (computed on a notional

amount).

As the UCITS is invested less than 15% in debt claims, the UCITS will be out of

scope for distributions and redemptions.

June 2005


4.5 Distributions from UCI

4.5.1 Threshold applicable

The Directive has not introduced a specific threshold for distributions. Indeed, the

40% threshold is only applicable for redemptions.

Nevertheless, if the country were the UCI is established has introduced the de

minimis rule (cf. point 4.3.), the UCI will be out of scope for distributions when the

direct and indirect investments in debt claims as referred to in art. 6.1.a) does not

exceed 15%.

4.5.2 Dividend categorization

A Luxembourg UCITS may in principle decide the composition of its distributions.

The distribution may be composed of interest income (as defined in article 6.1. of the

law), other income (dividends, etc.) or capital.

In accordance with the distribution policy mentioned in the prospectus, a UCI may

decide to distribute the capital and the other income elements first.

There are currently no Luxembourg legal or fiscal restrictions, which would prohibit

such a selective distribution.

One has however to be aware that the deferral of the distribution of the interest

income might not be favorable for the investor as the withholding tax rate will

increase over time from 15% to 20% and then to 35%.

Income distributed after the date of entry into application of the Directive but relating

to a period before that date should not contain any taxable income21.

21 The following rules should always be respected : (TID = taxable income in the distribution) TID >= 0 TID =< TIS TID =< distribution

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4.6 Determination of percentage of investments in debt

claims

To determine whether the 15% or 40% threshold tests have been exceeded, one

may rely on the investment policy as laid down in the UCI rules or instruments of

incorporation of the UCI.

When the investment policy does not allow drawing the conclusion that the

15% / 40% threshold is not exceeded, one may rely on the actual composition of the

assets of the UCI.

Threshold may be exceeded based on the investment policy ?

Threshold exceeded based on the actual composition of the assets ?

Income in scope

Income out of scope

Income out of scope

yes

no

yes

no

If the test is based on the investment policy, ALFI considers that it is the

responsibility of the management company of the FCP or the board of Directors of

the SICAV/SICAF to decide whether the 15% / 40% threshold is exceeded or not and

to decide on the tax status of the UCI for distributions / redemptions.

If the test is based on the actual composition of the assets, the management

company of the FCP or the board of Directors of the SICAV/SICAF has to request the

fund administrators to perform the tests.

ALFI recommends that the annual report mentions:

• the tax status for redemptions;

• the tax status for distributions;

• the method used to determine the status (investment policy / actual

composition of the assets);

• the period of validity of the status.

June 2005


4.6.1 Based on the investment policy

4.6.1.1 Principle

The 15% or 40% thresholds are not exceeded based on the investment policy when

the investment policy does not allow a direct and indirect investment in debt claims

referred to in art. 6.1.a) that exceeds 15% or 40%.

Example:

The investment policy provides that the UCI shall invest at least 2/3 of its assets

in French equities and the remaining in cash or money market instruments with a

maturity not exceeding 12 months. Based on the investment policy, the UCI is

invested at 2/3 in equities and 1/3 in debt claims. This means that the 15%

threshold is exceeded but not the 40% threshold. Distributions will be in scope

but redemptions will be out of scope.

When the distributions or the redemptions are out of scope based on the investment

policy, they will remain out of scope, even if based on the actual composition of the

assets of the UCI, the 15% or 40% thresholds would (for a short while) be exceeded.

4.6.1.2 Treatment of accessory liquidities

When the investment policy mentions that liquidities can be maintained on an

ancillary basis, for purpose of the Directive, it will be supposed that the UCI holds no

liquidities.

Example:

The investment policy provides that the Luxembourg UCITS shall invest in shares

of US companies listed on the Nasdaq and in cash on an ancillary basis. For the

purpose of the savings Directive, the UCITS is supposed to be invested 100% in

shares. Therefore, neither the distributions nor the redemptions are in scope.

4.6.1.3 Change in investment policy

When the investment policy of a UCI is changed, the new investment policy may

influence the tax status of the UCI for distributions and redemptions as from the date

of application of the new investment policy.

June 2005


If the UCI is in scope for distributions and/or redemptions based on the new

investment policy, one can check if the UCI could be considered out of scope for

distributions and/or redemptions based on the actual composition of the assets of the

UCI.

4.6.1.4 Luxembourg real estate investment funds

If the real estate investment fund is a FCP Part II which invests directly in real estate,

it will be out of scope. But, if it invests indirectly in real estate, it might be in scope

(e.g. if the FCP holds the real estate through SPV’s to which the FCP has granted

loans).

4.6.1.5 Breach of compliance with investment policy

In case the percentage of investments in debt claims is determined by reference to

the investment policy of the UCI, a temporary compliance breach will not have any

impact on the tax status of the UCI for distributions and redemptions. However,

CSSF’s instructions as described in circular CSSF 2002/77 may have to be followed.

4.6.2 Based on actual composition of the assets

4.6.2.1 Principle

If the management company of the FCP or the board of the SICAV cannot state that

the 15% or 40% threshold are not exceeded based on the investment policy, the test

can be performed based on the actual composition of the assets.

As the Directive does not stipulate when the 15% or 40% threshold tests have to be

performed (at the moment of the interest payment, on the basis of the average

composition of the UCI during a certain period of time, etc.), ALFI proposes the

method described below.

4.6.2.2 Method proposed by ALFI

The following rules have been proposed by ALFI:

• Take the composition of the assets of the UCI at 2 dates and identify all the

debt claims as defined in article 6.1.a) of the Directive (i.e. without the

June 2005


grandfathered bonds). Determine the fraction of the total (net) assets invested

directly in such debt claims and the fraction invested directly and indirectly in

such debt claims. The 2 dates taken into account are:

− date of the semi-annual report of the UCI;

− date of the annual report of the UCI.

The fraction is determined based on the book value (usually market value) of

the assets at the relevant date.

Making use of total net assets22 instead of total assets may lead to a less

favorable result (the fraction could even be higher than 100%).

• Take the average of the percentages invested directly and indirectly in debt

claims at those 2 dates (test done by using 2 decimals at the percentage level

and rounded down);

• Check if the average is higher than 15% / 40%;

• On the basis of these 2 tests, determine whether the distributions / redemptions

of the UCI are « in scope » or « out of scope ». The conclusion will be valid for a

12 months period starting on the first day of the 5th month after the UCI’s year

end (annual reports must be made available within 4 months after the year

end).

Example of a Luxembourg UCI with year-end 31.12.XX

Percentage invested directly and indirectly in debt claims as at:

• 30.06.XX : 36%

• 31.12.XX : 40%

Average = 38%

For the period from 1.5.XX+1 to 30.4.XX+2 :

Distributions : « in scope »

Redemptions : « out of scope »

22 When taking total net assets, payables may be deducted

June 2005


4.6.2.3 Rules proposed by ALFI for initial period (first year of implementation)

We assume that the Directive will enter into force on 1 July 2005.

4.6.2.3.1 December year-end UCIs

For a December year-end UCI, ALFI recommends that the status of the distributions /

redemptions be determined on the basis of the composition of the assets of the UCI

at the end of December 2004

The first test can only be performed once the information concerning the tax status of

the bonds (grandfathered or not) is available. If due to technical reasons or lack of

data availability / quality, the test can not be performed on the composition for the

UCI at the end of December 2004, ALFI recommends taking the composition at the

end of the first month the test can be performed.

The status derived from the test at the end of December 2004 (or another month

end) would be valid for the period between the July 1, 2005 and April 30, 2006.

The status for the period between May 1, 2006 and April 30, 2007 would be

determined according to the general rules (average of June 30, 2005 and December

31, 2005).

4.6.2.3.2 UCIs which do not have a December year-end

For those UCIs, the tax status of the distributions and redemptions would for a first

period also be determined on basis of the composition of the assets of the UCI at the

end of December 2004.

June 2005


The following table summaries the rules for the initial period:

Year end Beginning initial period

End initial period Length initial periods (months)

December 1 July 05 30 April 06 10 January 1 July 05 31 May 06 11 February 1 July 05 30 June 06 12 March 1 July 05 31 July 06 13 April 1 July 05 31 August 06 14 May 1 July 05 30 September 06 15 June 1 July 05 31 October 05 4 July 1 July 05 30 November 05 5 August 1 July 05 31 December 05 6 September 1 July 05 31 January 06 7 October 1 July 05 28 February 06 8 November 1 July 05 31 March 06 9

For the UCIs with a year-end in March, April or May, the first period will be somewhat

longer than 12 months but for simplicity reasons, it has been considered that it would

be preferable not to have two initial periods.

The UCI may extend the initial period if the information needed to perform the asset

test at the date of the semi-annual financial statement is not available (i.e. the initial

period for June year-end UCI might be 16 months if the December 2004 asset test

can not be performed).

4.6.2.4 Determination for newly created Luxembourg UCIs or UCI sub-funds

If based on the investment policy of the new Luxembourg UCI or new sub-fund, it is

clear that the direct and indirect investment in debt claims will not exceed 15%, the

distribution and the redemptions will be out of scope. If based on the investment

policy the direct and indirect investments in debt claims will not exceed 40%, the

redemptions will be out of scope.

If the investment policy is not clear, the distributions / redemptions will be in scope

until the first available annual or semi-annual report, unless otherwise expressly

stated by the board of the SICAV or the management company of the FCP.

In case of creation of a new class of units, the status of the new class for distributions

and redemptions will be the same as the status of the other classes.

June 2005


4.6.2.5 Investment in a target fund

For a UCI invested in a target fund, when the 15% and 40% test is made on basis of

the actual composition of the UCI, there are two possibilities to take into account the

indirect investments in debt claims:

• take the actual percentage of the target fund invested in debt claims. If

this information is made available by the fund administration of the target

fund, one can rely on that information. The percentage taken into account

is the latest one available at the date of computation;

• take the maximum percentage that can be invested in debt claims based

on the investment policy of the target fund.

When the UCI has no information (i) concerning the percentage of the assets of the

target fund invested in debt claims and (ii) the status of the distributions and

redemptions of the target fund, that percentage is supposed to be 100%.

As mentioned under point 4.4.2., if the target fund is invested for less than 15% in

debt claims, the target fund is not taken into account at all.

Example 1:

5% of assets of UCI A are invested in UCI B whose investment policy is to invest

2/3 of the assets in European equities and the remaining in bonds or cash.

Based on the investment policy of UCI B, UCI A is considered to have invested

indirectly 1,67% (5% * 1/3) of its assets in debt claims.

Example 2

At the date of the semi-annual report of UCI X, 10% of the assets were invested in

UCI Z and that figure was 8% at the year-end. The investment policy of UCI Z is to

invest in equities or convertible bonds issued by European companies. UCI X has a

year-end in December and UCI Z has a year-end in March.

If the indirect investment in debt claims is based on the investment policy of UCI Z,

one will have to consider that the indirect investment is 10% (10% * 100%) at the

date of the semi-annual report and 8% at the year-end because UCI Z may

theoretically invest 100% of its assets in convertible bonds which are debt claims

unless they benefit from the grandfathering.

June 2005


If the indirect investment in debt claims is based on the actual composition of UCI

Z, for the computation for the indirect investment in debt claims at the date of the

semi-annual report of UCI X, one should take the latest figure (based on a semi-

annual report or annual report) communicated by UCI Z. The same rule is

applicable for the computation at the date of the annual report.

Suppose that UCI X knows via an information provider that at the end of March

25% of the assets of UCI Z are invested in debt claims and 20% at the date of the

next semi-annual report.

At the end of June, UCI X is invested 2,5% indirectly in debt claims via UCI Z (10%

* 25%) and 1,6% at the end of the year (8% * 20%).

June 2005


4.7 Umbrella funds

In the case of an umbrella fund, for the purpose of the Savings Directive, each sub-

fund (compartment) is treated as a separate UCI. In other words, an umbrella fund is

not treated as a single UCI.

For a given sub-fund, the status of the distributions and redemptions depends only

on the investment policy or on the actual composition of the assets of this sub-fund.

4.8 Decision tree for Luxembourg UCIs

Is the UCI established in

Luxembourg ?

Is the UCI a SICAV Part II ?

Are more than 15% of the assetsinvested directly and indirectly in debt-

claims as referred to in art. 6.1.a) ?

Are more than 40% of the assets of theUCI invested directly or indirectly in

debt claims as referred to in art. 6.1.a) ?

UCI out of scope

UCI out of scope

Distributions in scope but redemptions out of scope

yes

yes

yes

no

no

Distributions and redemptionsin scope

no

yes

June 2005


5 Look through principle

5.1 Principle

Under the Savings Directive, when applying the withholding tax, the PA should only

levy the withholding tax on the portion of the distribution that derives from

accumulated interest payments. When the investor redeems units of a UCI, the

withholding tax may be levied only on the portion of the capital gain that is derived

from the accumulated interest payments.

For that purpose, ALFI proposes to introduce a TIS (“Taxable Income per Share”).

The TIS might also be relevant for a PA that provides information on the interest

portion of the income (and not information on the amount of the transaction).

As the law foresees that only interest accrued after the date of entry into application

of the law has to be taken into account, the TIS will start at zero on that date23. If

later on, the board decides to start the implement a TIS, the TIS will also start at

zero24.

ALFI recommends that for UCIs or sub-funds (or share classes) that are out of scope

on the day of entry into application of the law, the TIS will remain at zero until (if

applicable) the day the UCI or sub-fund (or share class) is “in scope” for the first time.

ALFI recommends that the UCI publishes a TIS equal to 0 as that information might

be required by another UCI invested in that target fund.

Once the UCI or sub-fund (or share class) has been “in scope”, the TIS will continue

to be impacted by the interest payments received even during the periods where the

UCI is out of scope.

Example:

date entry into application

Period "OUT" Period "IN"

TIS

Period "OUT" Period "IN"

0 12 25 38

23 Articles 6.1.c) and 6.1.d) of the law 24 The PA might need to distinguish between units subscribed before and units subscribed after the

first day of determination of a TIS.

June 2005


The TIS remains at zero until the first day of the “IN” period and afterwards it is

impacted by the interest received by the UCI even during the “out” periods (the TIS is

not frozen during the “OUT” periods).

5.2 Products generating interest payments

The following table deals with the classification of various product categories typically

held by a Luxembourg UCI (non exhaustive list).

Product Generating interest? Bank deposits and other cash instruments Yes

Grandfathered bonds No Non grandfathered bonds (including securities which are on loan) and loans Yes

Non grandfathered Treasury-bills, CP’s CD’s, discount notes Yes

Equities (other than UCI) and warrants No Swaps Yes/No25

Options / futures No Repos26 Yes27

Target funds Yes/No Real estate28 No

A negotiable debt-security is grandfathered if:

• it was first issued before March 1, 2001 or the prospectus was first

approved by the appropriate regulatory authority before that date; and

• no further issue was made on or after March 1, 2002.

When a further issue is made on or after March 1, 2002, a distinction must be made

between:

25 A swap is no a debt-claim. However, for the purpose of the look through, interest paid on a swap is

deductible and interest received on a swap is taxable 26 Temporary purchase of securities by the UCI in which the seller has agreed to repurchase the

securities at a fixed price and at a set time in the future 27 The difference between the sale price of the securities and the purchase price (= interest on the

cash “lent” by the UCI) 28 Direct investment in real estate or in equity securities of SPV's through which the UCI holds real

estate

June 2005


• Government bonds and bonds issued by a related public authority or an

international organization29. For those bonds, the entire issue (even the

issues made before 1 March 2001) is not grandfathered;

• bonds issued by another type of issuer (e.g. corporate bonds). For those

bonds, only the issues made after March 1, 2002 are not grandfathered

(the issues made before 1 March 2002 remain grandfathered). When no

distinction is made between issues made before March 1, 2002 and those

made after that date (same ISIN code)30, when the bond is bought on the

secondary market after March 1, 2002, ALFI recommends that the bond is

considered as grandfathered.

Bonds that benefit from the grandfathering clause will become debt claims as

referred to in art. 6.1.a) at the end of the transitional period but no later than 31

December 2010.

In case the transitional period would continue beyond 31 December 2010, the

grandfathering clause will only continue to apply for PAs established in a withholding

tax country when they pay interest on a negotiable debt security issued before 1

March 2001, which contains a gross-up or early redemption clause.

This means that after 31 December 2010, all negotiable debt securities will be taken

into account when examining whether the thresholds (15% and 40%, but reduced to

25% on 31 December 2010) have been exceeded.

5.3 Methodology of computation of TIS

The TIS is calculated at each share class level in the share class currency and will

always be positive or equal to zero. In the event the TIS calculation derives a

negative TIS, the TIS would default to zero. The TIS will decrease, for example after

the UCI has made a distribution containing interest.

ALFI recommends that the TIS be computed with 4 decimals.

29 The annex of the Directive lists the related entities referred to in article 15 of the Directive. 30 According to Clearstream’s information notice of 4 March 2002, when Euroclear and Clearstream

are the ISIN numbering agencies for the security, a separate ISIN is allocated to the tranches issued after 28 February 2002

June 2005


5.3.1 Inclusion of interest payments on an accrual basis

Even if the Directive requires that the PA levies a withholding tax or exchanges

information only when there is an interest payment or when the debt claim or the

units of a UCI are sold or redeemed, under the look through approach, ALFI

recommends that interest generated by the different products which are in scope, is

taken into account on an accrual basis (and not on a cash basis).

This means for example that for a bond, which pays an annual coupon of 365 on

June 15, the TIS of the UCI will not be impacted once a year (impact of 365) on

June 15 but each day, there will be an impact of 1.

In case of UCI A that owns units of UCI B (a UCI invested more than 15% in debt

claims), the TIS of UCI A will be impacted by the evolution of the TIS of UCI B.

5.3.2 Treatment of OID (Original Issue Discount)

Under the Directive, premiums and discounts paid out at the redemption of a debt

claim (Treasury-bill, bond issued under par, zero-coupon bond, etc.) or included in

the price paid by a purchaser when the security is sold before redemption, are

interest payments that should impact the TIS of the UCI.

However, small discounts must not be taken into account, i.e. when the discount is

not higher than 0,25% per year and in total not higher than 3%.

Examples

A bond with a 10 year maturity issued at 99,2% and redeemed at par may be

considered as issued at par.

A bond with a 10 year maturity issued at 90% (annual coupon of 2%) and

redeemed at par has to be considered to be issued at 90%.

As the issue price may be higher than the redemption price, the amortization of the

premium may have a negative impact on the TIS. However, if the fund administration

opts not to take into account small discounts, it will not be allowed to take into

account small premiums.

When for a bond bought on the secondary market, the fund administrator is unable to

take into account the issue yield, it may rely on the market yield.

June 2005


5.3.3 Treatment of debt claims which are on loan (securities lending)

The treatment of interest income derived from securities, which are on loan, gives

rise to a number of practical difficulties.

Three different scenarios have been identified:

• Scenario 1 : interest income on securities on loan is included, and interest

income derived on any collateral is excluded;

• Scenario 2 : interest income on securities on loan is excluded, but interest

income on any collateral is included;

• Scenario 3 : interest income on securities on loan is excluded, and interest

income on any collateral is excluded.

The exclusion of the definition of interest payments of any substitute payment relating

to bonds on loan can be defended but may lead to impractical results due to the fact

that in the accounts of the UCI, interest on bonds on loan continues to be accounted

for.

Therefore, ALFI recommends scenario 1 as mentioned above.

5.3.4 Deductible expenses

AFLI recommends that expenses for example fees paid in relation with the cashing in

of coupons, fees in relation with the sale of securities, custody fees, the “taxe

d’abonnement”, legal and audit fees or debit interests (in case of borrowing) are

deductible on a prorata basis.

The fund administration has the choice between two different ratios:

a ratio computed on the basis of the ‘in scope’ income / total income of the

UCI (income ratio);

a ratio computed on the basis of the ‘in scope’ assets / total assets of the UCI

(asset ratio).

If the asset ratio is used, the ratio could be determined on basis of the investment

policy (maximum percentage that can be invested in debt claims) or on the

composition of the assets of the UCI at the date of the semi-annual report and annual

report of the preceding accounting year (average of the two percentages).

June 2005


Some items are however 100% deductible: withholding taxes on interest received by

the fund, interests paid on a swap, etc.

5.3.5 Treatment of swaps

For the purpose of the look through approach, ALFI recommends that interest paid

under a swap agreement is a deductible expense and that interest received under a

swap agreement is treated as an interest payment whatever the other leg of the

swap.

Example 1

A Luxembourg UCITS has a bond that generates an income of Euribor + 15 b.p.. It

has concluded a swap under which it pays the floating income (Euribor + 15 b.p.)

and receives a fix income of 100.

The first year, Euribor + 15 b.p. gives 90. For the purpose of the Savings Directive,

the taxable income would be: 90 – 90 + 100 = 100.

LuxembourgUCITS

Swapcounterparty

Floatinginterest : 90

Floating : 90

Fix : 100

The second year, Euribor + 15 b.p. is 110. For the purpose of the Savings

Directive, the taxable income would be: 110 – 110 + 100 = 100.

LuxembourgUCITS

Swapcounterparty

Floatinginterest : 110

Floating : 110

Fix : 100

June 2005


Example 2

A Luxembourg UCITS has a bond portfolio that generates an annual fixed income

of 100. It has concluded a swap under which it pays the fixed income of 100 and

receives the 5 year performance of a basket of different shares.

For the purpose of the savings Directive, the taxable income would be: 100 – 100 +

0 = 0. Indeed, the performance of a basket of shares is not an interest payment.

LuxembourgUCITS

Swapcounterparty

Fix : 100

Fix : 100

5 yearperformance of abasket of shares

5.3.6 Equalization

In order to avoid that subscriptions and redemptions have an impact on the TIS of the

UCI, it is recommended to perform equalization of all categories of income.

5.3.7 Target fund

In general, the TIS of the target fund influences the TIS of the top fund. The TIS of

the target fund serves to determine (i) the interest portion in a redemption and (ii) the

interest portion in a distribution.

However, when the target fund does not exceed the 15% threshold, the TIS of the

target fund (even if computed) has no impact on the TIS of the top fund.

When the target fund has a TIS equal to 0, for example because the target fund has

only capitalization units and the 40% threshold is not exceeded for that fund, the top

fund will add 0 to its TIS.

When the target fund does not apply the look through approach and does not

compute a TIS, the TIS of the top fund is influenced by the evolution of the NAV of

the target fund and the distributions of the target fund.

The following table indicates when the TIS of the target fund influences the TIS of the

top fund.

June 2005


Type of units target fund % in debt claims TIS of top fund

X <= 15% No

15% < X <= 40% Yes Distribution units

X > 40% Yes

X <= 15% No

15% < X <= 40% Yes Capitalization units

X > 40% Yes

For a Luxembourg UCI, the rules applicable to determine the interest portion of a

distribution (TID) and the interest of a redemption are the same.

Example

Luxembourg

UCITS

UCITS B EquitiesBondsgrandfathered


35%

75%

15%

25%

10% 40%


Equities

The TIS of the top fund, which serves to determine the interest portion of a

distribution to the investors or the interest portion of the capital gain that an

investor realizes when he redeems his units, is influenced by the TIS of UCITS B

even if the top fund owns only capitalization units of UCITS B.

June 2005


5.3.8 Calculation logic in case of a distribution by a target fund

On distribution ex-date, the TIS of the target fund is reduced by the TIS portion

included in the total dividend amount.

Before Dividend

Dividend After Dividend

NAV 100 90 Total distribution 10

TIS 8 3 5 Other income 13 7 6

When the target fund distributes a dividend of 10 containing 3 of interest, the TIS of

the parent fund will be increased by 3. On the other side, the impact of the TIS of the

target fund on the TIS of the top fund will be reduced from 8 to 5. This means that

globally, the distribution has no impact on the TIS of the top fund.

June 2005


5.3.9 Summary

Impact on TIS

Amortization from non grand-fathered debt instruments +/-

Interest from non-grandfathered debt claims +

TIS of target fund or capital gain if no look through +

Swap income +/-

Deductible expenses -

TIS portion of dividend distribution (of top fund) -

Equalization +/-

Total Σ

Shares outstanding at compartment level for single class funds or at class level for multiple class funds

/

Taxable Interest Portion per share (TIS) (per compartment for single class funds or at class level for multiple class funds)

=

5.4 Impact of corrections on the TIS

ALFI recommends that, in case of a NAV, TIS or a TID correction, if at the level of the

fund administration, the impact of the correction of the TIS is less than 0,03% of the

NAV, the Luxembourg fund administration shall not be required to make an

adjustment.

In the same spirit, ALFI recommends that, at the level of a Luxembourg PA, in case

of a NAV, TIS or TID correction, if the impact on the withholding tax is less than EUR

30, the Luxembourg PA shall not be required to make an adjustment.

June 2005


6 Luxembourg PAs

6.1 Default rules applicable to distributions and redemptions

The Directive and the law introduce some default rules:

• When a Luxembourg PA has no information on the tax status of a UCI for

distributions or redemptions, it should consider that the tax status is in scope31.

• For the determination of the tax status of a UCI for distributions and redemptions,

the Luxembourg PA may rely on the information provided by established

information providers (Telekurs, Reuters, Bloomberg, CCLux, ). ALFI considers

that a PA has fulfilled its professional duty when checking one recognized

information source.

• When the PA has no information concerning the portion of the distribution /

capital gain which derives from interest payments, it has to consider the total

amount of the distribution / capital gain as an interest payment.32

For units, which are held by the beneficial owner on the date of entry into application

of the law, the law authorizes the PA to consider the net asset value on that date as

the purchase price (even when the PA has the information on the purchase price).33

When a beneficial owner redeems units subscribed after the date of entry into force

of the law, if the PA has no information on the purchase price of those units, it has to

consider that the capital gain is equal to the redemption price of the units. However, if

a TIS is computed, the PA may levy the withholding tax on an amount equal to the

TIS if the amount is lower than the capital gain.

No information concerning Default rule

Tax status redemptions In scope

Tax status distributions In scope

Interest portion in a distribution Distribution

Purchase price of units subscribed before 1/7/05 NAV at 30/6/05

Purchase price of units subscribed later than 30/6/05 0

TIS (TIS not computed) NAV

TIS at subscription (TIS computed) [to be clarified. If the TIS is computed, there should be no default rule. The

0

31 Art. 6.3. of the law 32 Art. 6.2. of the law 33 Art. 6.3. of the law

June 2005


actual TIS has to be taken]

6.2 Type of recipient

Depending of the type of recipient, the Luxembourg economic operator might be a

PA.

Luxembourg PAs might offer different alternatives to the investors. Besides the

withholding tax option, which is the default option, it has at least to offer one of the

other two options: the exemption certificate or the exchange of information.

The following table mentions the different alternatives that the Luxembourg PA can

offer depending on the type of investor.

Type of recipient

Residence / establishment In scope Default

option Exemption certificate

Exchange of information

Luxembourg No - - - Other EU country Yes WHT Option Option Third country (CH, Monaco, …) No - - - Individual

Dependant or associated territory Yes / No34 WHT / - Option / - Option / -

Residual entity established in EU Yes WHT - Option

Established in EU and not residual entity

No - - -

Established in Third Country No - - -

Residual entity established in dependent or associated territory

Yes / No WHT / - Option / - Entity

Established in dependent or associate territory and not a residual entity

No - - -

In case of joint accounts, the transfer agent/paying agent has to identify and classify

all the investors holding the joint account. The default methodology is to consider an

equal proportion of holding of each investor (i.e. an equal 50% split in case of two

34 Yes for individuals resident of Jersey, Guernsey, Isle of Man, Aruba, The Netherlands Antilles, the

British Virgin Islands and Montserrat.

June 2005


investors in one joint account). Furthermore, ALFI recommends that the same

system apply to all the account holders of the joint account (exchange of information

or withholding tax or tax certificate for/from all the beneficial owners).

A residual entity is an entity established inside the EU or in a relevant dependent or

associated territory, which is not:

• a legal person; or

• taxed under the general arrangement for business taxation; or

• a UCI recognized in accordance with Directive 85/611/EEC or an elective

UCITS.

An elective UCITS is an entity that fulfils the conditions of the residual entity but that

has opted to be treated as a UCITS. The elective UCITS will have to provide the PA

with a certificate issued by the Member State of establishment proving that the option

has been exercised.

The Luxembourg law provides that all the Luxembourg entities that fulfill the

conditions of the residual entity will automatically be treated as a UCITS, which

means that for those Luxembourg entities, distributions and redemptions might be in

scope.35 This will be the case for the FCP Part II of the law of 20 December 2002.

Those Luxembourg entities will not have to provide a certificate in order to avoid a

withholding tax on the interest they receive as they are treated like UCITS (there is

no option).

The interest payment made by an economic operator to an elective UCITS is outside

the scope of the Directive which means that no withholding tax must be levied and

that no information has to be exchanged concerning interest paid to the elective

UCITS (but distributions made by or capital gains on units of the elective UCITS

might be in scope).

The European Banking Federation (EBF) has submitted to the European

Commission for different EU Member States, a list of entities that could be residual

entities. The list drawn up by the EBF is as follows36:

35 Art. 4.3. of the law 36 This list remains subject to change.

June 2005


Country Residual entities Austria None

Belgium • Société de droit commun • Société momentanée • Société interne

Czech Republic None

Denmark

• Interessentskaber • Kommanditselskaber • Partnerselskaber og • Europaeiske Okonomiske Firmagrupper

Finland

• Unregistered firm • Partnership • Limited partnership • Estate of a deceased person

France

• Mutual fund (fonds commun de placement) • Joint venture company (société en participation) • De facto company (société ou association de fait) • Joint ownership (indivision)

Germany

• Joint ownership (Gemeinschaft) • Civil Company (Gesellschaft bürgerlichen Rechts) • Partnerships other than commercial partnerships (Kommanditgesellschaft

– KG, Offene Handelsgesellschaft – OHG): Greece List not available

Ireland • Certain trusts • Pooled and co-mingled funds • Partnerships and investment clubs

Italy • Civil law partnerships (società semplici) and assimilated entities • Non commercial entities without legal personality • Trusts

Luxembourg None The Netherlands Mutual fund (Fonds voor gemene rekening)

Portugal

• Unincorporated entities (namely estate of a deceased person • Unincorporated companies and associations • Civil companies non-vested with legal personality, investment clubs that

don’t exercise as their main activity a commercial, industrial or agricultural activity

Spain

Entities subject to a tax system of attribution of profits, like partnerships (sociedades civiles), regardless of whether or not they have legal personality, undistributed estates, joint ownership of assets arrangements and other entities without legal personality that constitute a separate economic unit or a separate group of assets

Sweden Sole trader UK Investment club (member entitled to specific share of assets)

One has to note that a trust is in principle not treated as a residual entity.

June 2005


As the recipient of an interest payment is not the trust but the trustee, when the

trustee is a legal entity, the interest payment to the “trust” is out of scope.

The trustee might however be a PA if the trustee secures the interest payment for an

individual who is entitled to the income as it arises.

The same principles apply to fiduciary agreements.

June 2005


6.3 Exchange of information

6.3.1 Principle

The Luxembourg law authorizes the PA to propose to the beneficial owner of the

interest to opt for the exchange of information. Whether the PA wants or not to offer

this type of service comes down to a commercial issue between the promoter and the

investors.

Under the exchange of information system, the beneficial owner has to provide to a

special mandate to the Luxembourg PA requiring him to report information to the

Luxembourg tax authorities.

When the PA is a Luxembourg bank where the beneficial owner has an account, it is

the bank’s decision to offer or not the exchange of information and the bank’s task to

obtain from the investor information on the system he has chosen.

When the PA is a Luxembourg TA, it’s the responsibility of the fund promoter to

adapt the subscription form in order to allow the investor to opt at the subscription for

the system he prefers (if the TA offers the exchange of information).

One of the difficulties of this system is that the investor’s option covers all the interest

payments attributed by the PA to the beneficial owner as the exchange of information

is typical to a specific individual and not to a specific security owned by the investor37.

When the Luxembourg TA is the PA, each register may not be treated independently.

The investor’s option in one register should affect his choice in another register with

the same TA.

6.3.2 Frequency of the exchange of information

The PA has to provide the information to the Luxembourg Tax Administration (ACD)

not later than March the 20th of the year following the one of the interest payment.

6.3.3 Information to be provided

The information to be provided by a Luxembourg PA to the ACD shall consist of:

Identity of the beneficial owner 37 Art. 9.1.a) of law

June 2005


Residence of the beneficial owner

Account number of the beneficial owner or identification of the debt claim

giving rise to the interest

Information concerning the interest payment

In February 2002, the ECOFIN Council agreed on a standard format for the

exchange of information between the competent authorities (the tax administrations).

The information to be enclosed is the following one:

Type of information Details

Residence country of beneficial owner (B.O.) Country code Beneficial owner’s TIN * Number (if available) Date of birth (if no TIN) * Date

Name of B.O. Name First name

Place of birth (if no TIN) * City Country code

Address of the beneficial owner

Street City Postcode Country code

Name of paying agent Business name for legal entities

Address of paying agent

Street City Postcode Country code

Year of payment Year Type of income Income type code

Amount of income and currency Currency code Amount (rounded down)

B.O.’s account number / identification of security IBAN code / ISIN code

(*) Only for contractual relations that began on or after 1 January 2004 or when there is no

contractual relation.

It is the intention of the ACD to use a similar format for the exchange of information

between the Luxembourg PA (that opted for the exchange of information) and the

ACD.

June 2005


6.3.4 Information to be provided on the income

In case of exchange of information, a Luxembourg PA has the choice to provide

detailed information or only information on the amount of the transaction (art.9.2.d of

the law).

Under the detailed method, the PA has to distinguish between the 5 different

categories of interest payments listed in article 8(2) of the Directive (distinguished by

letters “a” to “e”)38.

The simplified method foresees only 2 categories (distinguished by figure “1” and

“2”): (1) the total amount of interest or income and (2) the total amount of the

proceeds from sale, redemption or refund.

Detailed method Simplified method Interest portion of the distribution c. 1

Distribution Amount of the distribution c. 1

Interest portion of the capital gain b. 1

Capital gain b. 1 Redemption

Amount of sales proceeds b. 2

The PA can aggregate all the amounts that relate to a same category when those

amounts are credited on the same account unless the currency is different. When the

interest payment is not credited on an account, each payment has to be disclosed

individually.

6.3.5 Amounts in a currency other than EURO

A PA that provides information needs to mention the amount of interest or the

amount of the transaction or the amount of the capital gain in the currency of the

transaction, which means that when information is exchanged, the amounts in a

currency other than EURO are not converted in EURO.

38 FISC 39

June 2005


6.4 Exemption certificate

Under the exemption certificate system, the investor provides a certificate issued by

the tax authorities of his residence country, which indicates:

- his name, address and Tax Identification Number (TIN) (or date and place of

birth instead of the TIN);

- the name and address of the PA, which means for example that the investor

should know the name and address of the Luxembourg TA when the TA is the

PA;

- the identification of the units (e.g. ISIN code) when the units are not deposited

on an account (otherwise the account number must be provided).

When the Luxembourg PA has a valid exemption certificate from a beneficial owner

concerning a given security, the PA does neither levy a withholding tax on the

interest payments relating to this security nor provide information to the Luxembourg

tax authorities.

The tax authorities issuing the exemption certificate will decide on the validity period

of the certificate, knowing that it may not exceed 3 years.

As for the exchange of information, the PA is not obliged to offer the exemption

certificate system if it offers the other alternative.

6.5 Withholding tax

When a Luxembourg PA makes a payment falling under the Directive to an individual

resident of another EU Member State (or in a specific relevant dependent or

associated territory39), it has to apply a withholding tax on the amount of the payment

/ gain (or on the portion of the payment / gain that derives from interest payments)

unless the beneficial owner has provided an exemption certificate or has opted for

the exchange of information.

When the interest payment is made to a residual entity, the Luxembourg PA has to

apply the withholding tax unless the residual entity is an elective UCITS or has opted

for the exchange of information. However, no withholding tax has to be applied on

39 Idem footnote 35

June 2005


the portion of the interest attributable to a member of the entity that is not an

individual or that is an individual outside the scope of the Directive.

6.5.1 Withholding tax on a distribution

6.5.1.1 Principle

When the PA has information on the interest portion of the distribution, the

withholding tax will be computed as follows:

a Dividend rate per share

b Interest portion of dividend rate

c number of shares held by investor on dividend record date

d tax amount to be paid by investor

T40 15% during the first 3 years, then 20% during another 3 years and finally 35%

When the PA has the information on the interest portion of the distribution, the

formula is: d = b x c x T

When the PA has no information on the interest portion, the formula is: d = a x c x T

ALFI recommends that:

even for a unit subscribed after the previous distribution, the withholding tax is

applied on 100% of the interest portion of the distribution;

distributing funds may implement a dual dividend policy, whereby dividend

distributions are labeled as entirely taxable or entirely non-taxable on the basis

of the origin of proceeds.

6.5.1.2 Change of status

When a PA proceeds with the payment of a distribution, the relevant tax status of the

distribution is the one at the ex-dividend date.

40 If the Directive is applicable as from 1 July 2005 and as long the transitional period has not ended,

the withholding tax rate will be the following: 1 July 2005 - 30 June 2008 : 15% 1 July 2008 – 30 June 2011: 20% after 30 June 2011: 35%

June 2005


Therefore, when an investor cashes in a distribution from a UCI whose distributions

were “in scope” on the ex-dividend date, but that are out of scope at the moment of

the actual payment, the distribution remains “in scope”.

6.5.2 Withholding tax in case of a redemption

6.5.2.1 Principle

The Luxembourg PA will have to apply a withholding tax when the redemption is in

scope and the investor is an individual resident in another EU Member State or a

specific dependent or associated territory41

When the PA has no information concerning the percentage of the assets invested in

debt claims as referred to in art. 6.1.a), the Directive states that the percentage shall

be considered to be above 40%. This means that if the PA has no information on the

tax status of the redemptions, it will have to consider that they are in scope.

When the redemptions are in scope, it will have to levy the withholding on the capital

gain realized by the investor or only on the interest element embedded in the capital

gain.

This means that the withholding tax will be applied on the lowest of the capital gain

realized by the investor and the increase of the TIS between subscription and

redemption.

For each situation, the following table indicates the taxable income:

X NAV per share at subscription date

Y NAV per share at redemption date

s subscription commission (sales charges) in cents

r redemption commission in cents

A = Y – r redemption price

B = X + s subscription price

aa number of shares redeemed

ab TIS at subscription date

ac TIS at redemption date

T 15% during the first 3 years, then 20% during another 3 years and

finally 35%

41 Idem footnote 35

June 2005


Condition Condition Condition Result

If (A - B) ≤ 0 Capital loss, no tax withheld

If (A - B) > 0 and If (A - B) < (ac-ab) (A - B) * aa * T

If (A - B) > 0 and If (A - B) > (ac-ab)] and If [ac-ab] > 0 (ac - ab) * aa * T

If (A - B) > 0 and If (A - B) > (ac-ab)] and If [ac-ab] =< 0 No tax withheld

6.5.2.2 Examples

Example 1

NAV per share TIS

Subscription 100 10

Redemption 90 12

Delta -10 +2

As the investor realizes a capital loss, the Luxembourg PA

does not levy a withholding tax.

Example 2

NAV per share TIS

Subscription 90 10

Redemption 100 12

Delta +10 +2

The taxable income is 2 (Lower of +10 and +2).

Example 3

NAV per share TIS Subscription 100 10

Redemption 90 9

Delta -10 -1

As the investor realizes a capital loss, the Luxembourg PA

does not levy a withholding tax.

June 2005


Example 4

NAV per share TIS

Subscription 90 10

Redemption 91 12

Delta +1 +2

The taxable income is +1 (Lower of +1 and +2)

Example 5

NAV per share TIS

Subscription 90 10

Redemption 91 8

Delta +1 -2

The taxable income is 0 as the TIS has decreased

6.5.2.3 Cost Methodology (FIFO, LIFO, Average cost)

The choice of the correct cost methodology is critical from an IT perspective. The

cost methodology in the shareholder register of the TA / PA links subscription and

redemption activity of the investor.

As no cost methodology provides a real advantage and although the 3 methods

(FIFO, LIFO and average cost) are acceptable, ALFI recommends the use of the

average cost.

6.5.2.4 Change of status

When the tax status for redemptions of the units has changed between subscription

and redemption, the only information that is relevant is the tax status on redemption

date, to be more precise, the date as of which the applicable NAV per shareis

determined.

June 2005


Example 1

Investor A subscribes units when the redemptions are “out of scope” but redeems

them when the redemptions are “in scope”. As on redemption date the tax status is

“in scope”, the PA has to levy the withholding tax.

Example 2

Investor B subscribes units when the redemptions are “in scope” but redeems them

when the redemptions are “out of scope”. As on redemption date the tax status is

“out of scope”, the PA does not have to levy a withholding tax.

6.5.3 Non Luxembourg UCI’s tax information

For a UCI domiciled in another member state, a Luxembourg PA can rely on the

information provided by the UCI or its administrator.

According to the Luxembourg tax authorities, in the case of a Swiss UCI, a

Luxembourg PA is not allowed to rely on the tax information computed according to

the Swiss rules as Swiss debt claims are not taken into account.

6.5.4 Transfer of the taxes to the Luxembourg tax authorities

The Luxembourg tax law foresees that the withholding taxes that have been levied

during the year have to be transferred to the “bureau de recette Esch-sur-Alzette” at

the latest on 20 March of the following year42. If the Directive is applicable as from 1

July 2005, the withholding taxes levied during the period from 1 July 2005 until 31

December 2005, will have to be transferred at the latest on 20 March 2006.

Only EUROS can be transferred to the tax administration, which means that the

Luxembourg PA will have to convert the withholding taxes that are in another

currency. Those conversions may take place either at the moment of the interest

payment, or at any moment thereafter be it weekly, monthly or annually.

As the PA will make only one payment to the tax authorities, the PA will have to

complete a prescribed form in order to provide the tax authorities with a breakdown

by EU Member State and dependent or associated territories that asked for

42 Art. 7.6. of the law

June 2005


reciprocity (plus one basket for the withholding taxes levied on interest payments to

residual entities).

PAs can verify internal calculations and withholding mechanisms until the date of

transfer of the funds to the tax administration. The law further allows a PA to correct

any case of overwithholding until the end of the fiscal year following the year during

which the overwithholding occurred.

June 2005


6.6 Treatment of bearer shares – impact on PA/TA function

The present section analyses the specific issues arising with bearer

shares/units/certificates. Four areas of concern have been identified when dealing

with bearer shares/units/certificates:

What should be the evidence of the acquisition date of the bearer

shares/units/certificates by the beneficial owner?

How do we track the issuing date of the bearer shares/units/certificates in

order to allow the correct calculation of the capital gain and the increase of

the TIS?

How do we reduce the risk that the same evidence of the acquisition date is

used several times for different units?

What should be the starting date for the implementation of the proposed

solution?

ALFI’s recommendations are summarized below:

Problematic ALFI’s recommendations Advantages

• What would be the evidence of the acquisition date of the bearer shares/certificate?

• How to track the issuing date (to allow the TIS calculation)?

• How to ensure that the same evidence is not used several times for different units?

• The initial contract note serves as documentary evidence

• At redemption, if the bearer instrument is presented with the contract note: subject to tax on the TIS accrued between purchase date and redemption date. If the contract note is not presented, the default rule applies.

• Issuing date = purchase date

• Low cost implementation (issuance, storage, renewal…).No IT modification needed.

• Easy processing for all parties: UCI, Issuer, Paying Agent, Distributor.

• The Distributor (and not the Issuer) produces and stamps the contract note with its own stamps/norms (no standard). The bearer share/certificate itself is not modified and can be re-used

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Questions ALFI’s recommendations

• What happens: - in the case of a transfer? - in the case of a partial redemption?

• What information will be included in the contract note at issuance / at redemption?

In the case of transfer or partial redemption, the contract note is stamped by any financial intermediary.

At issuance, the contract note will include:

• Date of purchase

• NAV at purchase date

• TIS at purchase date

At redemption, the initial “buying” contract note will be stamped in order to include:

• Name or logo of the Paying Agent

• Date of redemption

• Number of shares/units/certificates redeemed

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7 Tax treatment of some specific transactions

7.1 Dividend reinvestment (in the form of shares)

A UCI prospectus may offer the choice between two distribution policies, i.e., a cash

dividend payment or a reinvestment of the dividend in the form of additional shares.

In the latter case, the investor does not receive any cash and the dividend is thus

reinvested.

When the reinvestment is at the option of the investor, the reinvestment is treated as

a distribution followed by the reinvestment of the proceeds, which means that there

is a “taxable” event.

In the case of automatic reinvestments, ALFI recommends also to treat a reinvested

dividend as a “taxable” event.

7.2 Money market fund with fixed NAV

In the case of a money market fund with a fixed NAV, ALFI recommends to treat

each attribution of additional units as a “taxable” event.

7.3 Switches/Conversions

If a shareholder switches/transfers from a share class/compartment into another,

such an exchange is to be treated as a “taxable” event when the PA is established in

Luxembourg (redemption followed by a subscription)

In case a withholding tax is applied, the investor may have to redeem part of the

units to have cash in order to pay the withholding tax.

In case of an automatic conversion, the conversion should be treated as a “taxable”

event unless the unitholder receives new units (e.g. new class of shares), which

have the same acquisition price, NAV and TIS as the old ones.

7.4 Transfers, donations, inheritance, etc.

A transfer of units is not a sale, a refund or redemption. Therefore, a transfer is not

treated as a “taxable” event.

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If the transfer is not a taxable event, the following questions must be answered:

• What is the subscription price of the units that have been transferred to

the beneficiary?

• What is the initial TIS of the units that have been transferred?

The subscription price and the initial TIS of the units that have been transferred to

the beneficiary are the subscription price and the initial TIS of the transferee (the

“historical” data should be taken over).

When the “historical” data is not forwarded, for units subscribed before the date of

entry into application of the law, the PA has to take as subscription price and initial

TIS, the NAV and the TIS at that date unless the beneficial owner provides evidence

of the subscription price and the initial TIS.

Important considerations:

For PAs using the FIFO/LIFO methodology, transfers should be made on the

basis of the same lot methodology as for redemptions. The recipient PA may

apply its own methodology.

The feasibility of a transfer of the historical data between economic operators

depends on the quality of the data.

• The operator transferring out a historical data should be responsible for the

data transferred.

7.5 Mergers

ALFI recommends that in the case of a merger, the exchange of the units be treated

as a redemption with issuance of new units unless a dedicated share class with

transfer of historical data is created. This could for example be the case when a UCI

sub-fund is merged into a new or empty UCI sub-fund.

Example

Fund A absorbs Fund B and the unitholders of Fund B receive units of Fund A. For

the purpose of the Savings Directive, the unitholders of Fund B are supposed to

have redeemed their units of Fund B, which means that a Luxembourg PA might

have to levy a withholding tax on the interest portion of the capital gain that is

supposed to be realized. For the unitholders of Fund A, no taxable event occurred.

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8 Other obligations of Luxembourg PA

8.1 Identification of the beneficial owner

All Luxembourg PAs, such as TAs that pay directly the income to the individual

investors must establish the identity and the country of residence of the beneficial

owner(s) of the income.

The identification rules are similar to the Know Your Customer rules (KYC rules) for

anti-money laundering purposes but unlike the KYC rules, there is no de minimis

rule.

For a bank acting as a PA, the Directive provides for specific rules for the

identification of the beneficial owner depending on the beginning of the relationship

prior to or after 1 January 2004.

If the relationship began prior to 1 January 2004, the beneficial owner can be

identified on the basis of the existing documentation on file (i.e.: name and address).

This rule is also applicable for all new relations entered into after 1 January 2004 by

an individual who was a client of the PA before 1 January 2004.

For a beneficial owner who becomes client (opens an account) after 1 January 2004,

and who receives interest income after the entry into application of the Directive, the

required information shall be obtained on the basis of the passport or the identity

card. The address can also be established on the basis of any approved document.

This client also needs to provide his Tax Identification Number (TIN) as attributed by

his country of tax residence. If the client does not communicate his TIN, the

information has to include his date and place of birth (town and country).

The Luxembourg tax authorities have confirmed that any document signed by the

beneficial owner of the interest could be used as an approved document for the

needs of the Directive. This means that the account opening form signed by the

accountholder(s) or a signed letter could be used to establish the address of the

beneficial owner(s).

It has been confirmed by the Luxembourg tax authorities that the PA is not obliged to

obtain the TIN of the client. But in case where the client does not communicate the

TIN, the date and place of birth are obligatory information to be obtained.

Also, an individual which becomes client after 1 January 2004, who declares to be

resident outside the European Unions and who, at the same time, presents a

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passport or identity card issued by an EU Member State for his identification, will be

considered – for the needs of the Directive – to be resident of the Member State

which issued the passport or identity card. In this case, the client will only be

considered as a non-resident of the European Union, if he provides a certificate of

tax residence issued by his country of residence.

With regards to UCIs, when a TA established in Luxembourg is a PA for a specific

interest payment, the identification rules for post 1.1.2004 accounts should in

principle be applicable, even if the investor has subscribed the units prior to 1

January 2004. Indeed, no contractual relationship exists between the TA and the

investor. However, in order to preserve the competitive position of the Luxembourg

Fund Industry, the Luxembourg tax authorities have agreed that the relationship

between the TA and the investor could be assimilated to the relationship between the

UCI and the investor. Therefore, subscriptions prior to 1 January 2004 can benefit

from the rules applicable to relationships entered into prior to 1 January 2004.

Consequently, for interest payments in the meaning of the Directive, and relating to

shares/units subscribed prior to 1 January 2004, the TA can determine the identity

and the address of the beneficial owner on the basis of the information available in

the register and does not need to obtain the TIN (or place and date of birth).

This solution will not avoid that the TA contacts the in scope investors in order to

propose them the exchange of information and/or the tax-exemption certificate

instead of the application of the withholding tax.

8.2 Reporting to investors

TA / PA may consider providing the following additional information in their

subscription/redemption/dividend confirmations:

Subscription confirmation:

Option of the BO (withholding tax, certificate or exchange of information)

TIS

Redemption & dividend confirmation:

Option of BO

TIS

Tax withheld (in local currency and/or Euro)

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9 Impact on information providers

9.1 Role of CCLux

CCLux acts as a communication hub between fund administrators generating the

information (NAV prices, reference data, prospectuses, financial reports, etc.) and

companies redistributing it or using it for their own account (newspapers, data

vendors, data analysts, etc.).

In order to guarantee the exhaustiveness of Luxembourg funds, ALFI recommends

that CCLux act as the unique channel to collect, manage and disseminate the

information as far as the income of Luxembourg-registered investment funds falls

within the scope of the Directive.

In order to fulfil its obligations, CCLux has implemented the appropriate data

centralisation and transmission solution to comply with the needs of fund

administrators and data vendors in terms of data dissemination requirements.

9.2 Definition of data collected by CCLux

CCLux will collect and disseminate the static and periodic data for Luxembourg-

registered investment funds.

The static data intend to define whether the EU Savings Directive is applicable while

the periodic data are used to compute the withholding tax amount.

The static data consist of:

• The information source (prospectus or asset test)

• The application threshold (≤ 15%, 15% < and ≤ 40%, > 40%)

• The % of direct holding in debt claims (annual report date, semi-annual report

date and average figure)

• The % of direct and indirect holding in debt claims (annual report date, semi-

annual report date and average figure)

• The application period start and end

• The status of redemptions (IN/OUT)

• The status of distributions (IN/OUT)

• The TIS and TID publication status

The periodic data consist of:

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• TIS (portion of interest income in NAV)

• TID (portion of interest income in dividend distribution)

9.3 Technical solutions for data transfer from fund administrations to CCLux

9.3.1 Static data

Fund administrators will provide CCLux with the static data, using either a manual

Excel file or an automatic file (refer to the CCLux website, www.cclux.lu, for more

detailed information about both options).

9.3.2 Periodic data

Fund administrators will provide CCLux with the periodic data using their current

information network for NAV prices transmission.

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9.4 Timing definition for data transfer from fund administrations to CCLux

9.4.1 Static data

As the application period starts the 1st day of the 5th month after the year-end closing

of the fund, it is strongly recommended that CCLux be provided with static data

before the 10th day of the 4th month after the year-end closing to ensure the

information is made available in due time.

9.4.2 Periodic data

TIS will be provided on each NAV computation while TID will be provided on each

dividend distribution.

9.5 Savings Directive products marketed by CCLux

CCLux updates its web portal content with the static and periodic data. The periodic

and static data will be displayed for each share type. Moreover, an up-to-date Excel

file for static data will be available on a daily basis.

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Savings Directive static data screen:

June 2005

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