ALFI Handbook Savings Directive 05

The European Savings Directive
ALFIs interpretations and

recommendations
June 2005
European Savings Directive ALFIs interpretations and recommendations 2
ALFI is the Association of the Luxembourg

Fund Industry. ALFI (Association
Luxembourgeoise des Fonds
dInvestissement) 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 INFORMATION 16
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 Luxembourgs option (Luxembourg UCI) ........................................................ 20
4.3.2 Other Member States 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 UCIs 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 Directives 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 owner2 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

owners/shareholders 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 makers4

(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 march.
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
Its 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.
Shareholders Register in Luxembourg
Name of EU Name of Nominee,

individual investor / Financial intermediary or Other accounts
residual entity Distributor
TA, STA or CA
YES instruct payment
to individual
investor /
residual entity ?
NO
TA, STA or CA instruct

TA, STA or CA instruct
payment to Distributor / TA, STA or CA instruct
correspondent /
Intermediary and payment via clearing Accounts not in scope of
custodian to instruct
Distributor / intermediary accounts to nominee / Savings Directive
payment by using funds
instructs payment to intermediary / distributor
clearing account
investor
Individual Individual Individual

investor/ residual NO investor/ residual NO investor/ residual
NO
entity in another entity in another entity in another
country than TA, country than country than
STA or CA Distrib./Intermed. Distrib./Intermed.
YES YES YES
No PA
TA, STA or CA is Distributor / Nominee/ Distributor/

PA Intermediary is PA Intermediary is PA
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.
Shareholders Register in Luxembourg

Fund instructs
YES payment to
individual
investor /
residual entity ?
NO
Fund instructs Fund instructs payment to

Fund instructs payment via
correspondent / Distributor / Intermediary
clearing accounts to Accounts not in scope of
custodian to instruct and Distributor /
nominee / intermediary / Savings Directive
payment by using funds Intermediary instructs
distributor
clearing account payment to investor

investor / NO investor/residual NO investor/residual NO
residual entity in entity in another entity in another
another country country than country than
than Fund Distrib./Intermed. Distrib./Intermed.
YES YES YES
No PA
UCI or
Distributor / Nominee / Distributor /
management
intermediary is PA Intermediary is PA
company is PA
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.
Duplicate register in Luxembourg or abroad

Bank instruct
YES payment to
individual
investor /
residual entity ?
NO
Bank (i.e. Custodian) Bank instructs payment to

instructs correspondent Distributor / Intermediary Bank instructs payment to
Accounts not in scope of
to execute payment by and Distributor / Nominee / Intermediary /
Savings Directive
using Funds clearing Intermediary instructs Distributor
account payment to investor

investor / NO investor/residual NO investor/residual NO
residual entity in entity in another entity in another
another country country than country than
than Bank Distrib./Intermed. Distrib./Intermed.
YES YES YES
No PA
Distributor / Nominee / Distributor /

Bank is PA
intermediary is PA Intermediary is PA
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 PAs 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 Information needed by PA from central administration

PA
Taxable
Tax status Tax status interest
TIS
distributions redemptions portion in
distribution
With look
through for Yes Yes Yes Yes
Withholding tax redemptions
country Without look
11
through for Yes Yes No Yes
redemptions
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
Exchange of amount of Yes Yes No No
information transaction
country Detailed
Yes Yes Yes / No Yes12
information
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

16
SICAR Out of scope 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
Yes
securities which are on loan) and loans
Long position money market instruments Yes
Cash instruments and bank accounts (i.e. interest
Yes
bearing current account, deposit, repo)
Long position grandfathered bonds (including
No
securities which are on loan)
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 Luxembourgs 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 States 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
12% 13% 5% 70%
Bonds not Bonds Bank

Equities
grandfathered grandfathered deposit
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
14% 36% 10% 40%
Bonds not Bonds

UCITS B Equities
grandfathered grandfathered
70% 30%
Bonds not Bonds

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 its 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
no no
% of target fund invested Status of distributions and
in debt-claims available ? redemptions available ?
yes yes
Distributions = in or n.a. yes

Investment in debt-claims
Redemptions = in = 100%
no
no yes
% invested in debt-claims Distributions = in or n.a. Investment in debt-claims
> 15% = 40%
Redemptions = out
yes no
Investment in debt- Distributions = out

claims = % made Redemptions = out
available
yes
Investment in debt-
n.a. = non applicable
claims = 0%
4.4.3 Examples
Example I
Luxembourg
UCITS
37% 18% 5% 40%

Equities
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
35% 15% 10% 40%
Bonds not Bonds

UCITS B Equities
70% 30%
Bonds not Bonds

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% 15% 10% 40%
Bonds not Bonds

UCITS B Equities
25% 75%
Bonds not
Equities
grandfathered

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
Luxembourg
UCITS
39% 15% 10% 36%
Bonds not Bonds

UCITS B Equities
14% 86%
Bonds not Bonds


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 Swap
UCITS conterparty
60% 35% 5%

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 Swap
UCITS counterparty
95% 5%
Bank
Equities
deposit
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
June 2005
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 no

Income out of scope
the investment policy ?
yes
Threshold exceeded based on the no

Income out of scope
actual composition of the assets ?
yes
Income in scope
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 SPVs 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,
CSSFs 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 UCIs 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 End initial period Length initial periods
period (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 ?
yes
yes
Is the UCI a SICAV Part II ? UCI out of scope
no
Are more than 15% of the assets no

invested directly and indirectly in debt- UCI out of scope
claims as referred to in art. 6.1.a) ?
yes
Are more than 40% of the assets of the

UCI invested directly or indirectly in no Distributions in scope but
debt claims as referred to in art. 6.1.a) ? redemptions out of scope
yes Distributions and redemptions

in scope
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:
Period "OUT" Period "IN" Period "OUT" Period "IN"
date entry into application

TIS 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
Yes
instruments
Grandfathered bonds No
Non grandfathered bonds (including
Yes
securities which are on loan) and loans
Non grandfathered Treasury-bills, CPs
Yes
CDs, discount notes
Equities (other than UCI) and warrants No
Swaps Yes/No25
Options / futures No
26
Repos Yes27
Target funds Yes/No
28
Real estate 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 Clearstreams 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
dabonnement, 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.
Floating
interest : 90
Floating : 90
Luxembourg Swap
UCITS counterparty
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.
Floating
interest : 110
Floating : 110
Luxembourg Swap
UCITS counterparty
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.
Fix : 100
Fix : 100
Luxembourg Swap
UCITS counterparty
5 year
performance of a
basket 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
Distribution units 15% < X <= 40% Yes
X > 40% Yes
X <= 15% No
Capitalization units 15% < X <= 40% Yes
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
35% 15% 10% 40%
Bonds not Bonds

UCITS B Equities
25% 75%
Bonds not
Equities
grandfathered
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 After

Dividend 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
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 0
TIS is computed, there should be no default rule. The
31
Art. 6.3. of the law
32
33
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 Residence / Default Exemption Exchange of

In scope
recipient establishment option certificate information
Luxembourg No - - -
Other EU country Yes WHT Option Option
Individual Third country (CH,
No - - -
Monaco, )
Dependant or 34
Yes / No WHT / - Option / - Option / -
associated territory
Residual entity
Yes WHT - Option
established in EU
Established in EU
and not residual No - - -
entity
Established in
No - - -
Third Country
Entity Residual entity
established in
Yes / No WHT / - Option / -
dependent or
associated territory
Established in
dependent or
associate territory No - - -
and not a residual
entity
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
36
This list remains subject to change.
June 2005
Country Residual entities

Austria None
Socit de droit commun
Belgium Socit momentane
Socit interne
Czech Republic None
Interessentskaber
Kommanditselskaber
Denmark
Partnerselskaber og
Europaeiske Okonomiske Firmagrupper
Unregistered firm
Partnership
Finland
Limited partnership
Estate of a deceased person
Mutual fund (fonds commun de placement)
Joint venture company (socit en participation)
France
De facto company (socit ou association de fait)
Joint ownership (indivision)
Joint ownership (Gemeinschaft)
Civil Company (Gesellschaft brgerlichen Rechts)
Germany
Partnerships other than commercial partnerships (Kommanditgesellschaft
KG, Offene Handelsgesellschaft OHG):
Greece List not available
Certain trusts
Ireland Pooled and co-mingled funds
Partnerships and investment clubs
Civil law partnerships (societ semplici) and assimilated entities
Italy Non commercial entities without legal personality
Trusts
Luxembourg None
The Netherlands Mutual fund (Fonds voor gemene rekening)
Unincorporated entities (namely estate of a deceased person
Unincorporated companies and associations
Portugal Civil companies non-vested with legal personality, investment clubs that
dont exercise as their main activity a commercial, industrial or agricultural
activity
Entities subject to a tax system of attribution of profits, like partnerships
(sociedades civiles), regardless of whether or not they have legal personality,
Spain 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 banks decision to offer or not the exchange of information and the banks task to
obtain from the investor information on the system he has chosen.
When the PA is a Luxembourg TA, its 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 investors 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 investors 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 owners TIN * Number (if available)
Date of birth (if no TIN) * Date
Name
Name of B.O.
First name
City
Place of birth (if no TIN) *
Country code
Street
City
Address of the beneficial owner
Postcode
Country code
Name of paying agent Business name for legal entities
Street
City
Address of paying agent
Postcode
Country code
Year of payment Year
Type of income Income type code
Currency code
Amount of income and currency
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
Redemption Capital gain b. 1
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=Yr 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 UCIs 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
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?
ALFIs recommendations are summarized below:
Problematic ALFIs recommendations Advantages

Low cost implementation
The initial contract note (issuance, storage,
serves as documentary renewal).No IT
What would be the evidence evidence modification needed.
of the acquisition date of the
bearer shares/certificate? At redemption, if the bearer Easy processing for all
instrument is presented with parties: UCI, Issuer, Paying
How to track the issuing date the contract note: subject to Agent, Distributor.
(to allow the TIS calculation)? tax on the TIS accrued
between purchase date and The Distributor (and not the
How to ensure that the same redemption date. If the Issuer) produces and stamps
evidence is not used several contract note is not the contract note with its own
times for different units? presented, the default rule stamps/norms (no standard).
applies. The bearer share/certificate
itself is not modified and can
Issuing date = purchase date
be re-used
June 2005
Questions ALFIs recommendations
In the case of transfer or partial redemption, the

What happens: contract note is stamped by any financial
- in the case of a transfer? intermediary.
- in the case of a partial redemption? At issuance, the contract note will include:
What information will be included in the contract
note at issuance / at redemption?
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
June 2005
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.
June 2005
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.
June 2005
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
June 2005
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)
June 2005
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:
June 2005
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.
June 2005
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.
June 2005
Savings Directive static data screen:
June 2005

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The European Savings Directive

ALFIs interpretations and

ALFI is the Association of the Luxembourg

5.1 PRINCIPLE ......................................................................................................... 38

9.3.2 Periodic data .................................................................................................... 70

The following tables mention the jurisdictions committed to the exchange of

Exchange of information jurisdictions

Withholding tax jurisdictions

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

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

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

Chapter 7 analyses the treatment of some specific transactions.

2 Paying Agent in the context of the fund industry

2.1 Definition of Paying Agent

2.2 Determination of the PA

the transfer agent/registrar holds the information concerning the beneficial

2.2.1 Indirect subscription by a physical person residing in a

These intermediaries may collect subscription and redemption requests concerning

transactions either as distributors or as nominees or as market makers4

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

2.2.1.1 The intermediary is the registered shareholder (nominative

2.2.1.2 The investor is the registered shareholder (nominative shares)

2.2.2 Direct subscription by an individual residing in another

2.2.3 Distribution charts

Shareholders Register in Luxembourg

Name of EU Name of Nominee,

TA, STA or CA instruct

Individual Individual Individual

TA, STA or CA is Distributor / Nominee/ Distributor/

Shareholders Register in Luxembourg

Name of EU Name of Nominee,

Fund instructs Fund instructs payment to

Individual Individual Individual

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

Duplicate register in Luxembourg or abroad

Name of EU Name of Nominee,

Bank (i.e. Custodian) Bank instructs payment to

Individual Individual Individual

Distributor / Nominee / Distributor /

3 Requirements when an economic operator is a PA

3.1 PA established in a country applying the withholding tax

3.2 PA established in a country applying the exchange of

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

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

3.2.1 PA giving information on the amount of the transaction

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 /

Country of establishment of Information needed by PA from central administration

4 Distributions and capital gains treated as interest

4.1 UCI which might be in scope

a UCI established outside the EU;

FCP Law 91 Potentially in scope Potentially in scope

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

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

4.3 De minimis rule (15% threshold)

4.3.1 Luxembourgs option (Luxembourg UCI)

distributions of a Luxembourg UCI whose direct and indirect19 investments in

redemption from units of a Luxembourg UCI whose direct and indirect

4.3.2 Other Member States option (UCI from another Member

4.3.3 Investment funds from outside the EU

12% 13% 5% 70%

Bonds not Bonds Bank

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

Bonds not grandfathered 12%