Impact of the EU tax directive on Asian issues

New EU tax directives will have an impact on Asian fixed income issuers and their guarantors. Here, lawyers from Linklaters & Alliance discuss the outcome.


On 15 February 2001, the International Primary Market Association (IPMA) issued a Guidance Note in respect of the European Union (EU) Directive on the Taxation of Savings proposed at the Nice ECOFIN Council on 26-27 November 2000 (the Directive).

The Directive is intended to work towards the harmonisation of tax on income relating to the payment of interest (including payments by collective investment funds that derive their income from interest) to individuals resident in an EU Member State. This article considers the impact of the Directive on Asian issues. For the purposes of this article, Asian issues would encompass the following scenarios:

  • Asian issuer (unguaranteed issue); 
  • Asian issuer and Asian guarantor; 
  • and non-Asian (non-EU) issuer and Asian guarantor.

The EU proposal is that the directive will be agreed and effective from 1 January 2003 but, assuming it takes effect, will apply to most payments of interest after 1 March 2001, subject to grandfathering arrangements outlined below. The Directive will require the unanimous agreement of all 15 Member States of the EU and is also conditional on the EU agreeing parallel measures with certain non-EU states including the United States.

The Commission Proposal for the Directive was published on 18 July 2001. This reflects the position adopted in an EU Presidency paper entitled "Conclusions of the ECOFIN Council on 26-27 November 2000 on the tax package" dated 27 November 2000 upon which the IPMA Guidance Note and the following discussion are based.

The Application of the Directive

It is currently proposed that the Directive will apply:

  • when a person located in one Member State of the EU; 
  • makes a payment to an individual resident in another Member State of the EU; 
  • and the payment is in respect of income on a debt claim (this will include any interest payment on Eurobonds and notes issued pursuant to MTN drawdowns).

When the Directive applies, it is currently proposed that the person making the payment will collect information relating to that payment from the individual receiving the payment and transmit that information to the payer's tax authority. The payer's tax authority will exchange the information with the individual's tax authority which will collect any tax due.

However, some countries cannot immediately implement this information reporting regime due to their laws on confidentiality. In recognition of this, the Directive allows such countries to impose a withholding tax, instead of information reporting requirements, for seven years from its date of introduction. Austria, Belgium and Luxembourg (each a Withholding Jurisdiction) will impose a withholding tax in place of information reporting. It is proposed that these countries will transmit to the tax authorities of the country of residence of the individual suffering the withholding, 75 per cent. of any tax withheld under revenue sharing arrangements.

Why is the Directive Relevant to Eurobond Issues?

Typically, the terms of most Eurobonds envisage that payments of interest by, or on behalf of, the issuer (or the guarantor, if there is one) can be made gross, but that if the jurisdiction of residence of the issuer (or the guarantor) imposes a withholding obligation, interest will be grossed up. In order to prevent the issuer from being locked into a bond with a costly gross-up obligation, an issuer is typically given the right to call the whole issue at par if the gross-up obligation is triggered as a consequence of a change in law.

The interim withholding tax arrangements contemplated by the Directive raise the following concerns:

  • from the issuer's perspective, the risk of having to gross up payments of interest or redeem the bonds early; 
  • and from the investor's perspective, although they are not affected by the Directive itself, their bonds could be redeemed early if the Directive gives rise to a gross-up obligation. Any such early redemption would deprive them of the benefit of any future income stream they would have otherwise been able to obtain (and depending on market conditions, subsequent investments may not offer similar returns) and perhaps the use of the bonds as a hedge against a future liability.

The Impact of the Directive on Asian Issues

The Directive currently proposed is unlikely to trigger the gross-up and tax call provisions of an Asian issue.

The only way in which the gross-up and tax call provisions of an Asian issue can realistically be affected by the Directive in its current form is for an EU paying agent in a Withholding Jurisdiction to make payments to individuals directly. This can only be done if definitive notes have been or might be issued. The fact that the Directive only applies to interest paid to individuals is very significant since the vast majority of securities issued, from bonds to commercial paper, are held by corporates rather than individuals. It is also worth noting that individuals cannot currently hold accounts with clearing systems, so where securities are held in clearing systems, the gross up and tax call provisions will not be triggered as no payments by the issuer (or the guarantor) will be made to individuals.

The gross-up provisions in Eurobonds are limited to taxes imposed by the issuer's (or guarantor's) jurisdiction (i.e. source-country taxes). Thus, even if a Japanese issuer made a payment of interest through a Luxembourg paying agent which had to withhold tax, the tax withheld is Luxembourg tax which would typically be outside the scope of the gross-up provision.

However, it is possible that Asian countries may, on a bilateral basis, agree with EU countries to implement a comparable domestic regime (the EU would like other countries to agree similar proposals, although the likelihood of this happening appears remote). If this was to be done, then it is also just about conceivable that there may be a remote risk that the gross-up obligation could be triggered as the withheld tax, once shared under revenue sharing arrangements also envisaged in the EU proposal, could be treated as tax of the issuer's (or guarantor's) country. Despite the very great unlikelihood of this occurring, to counter the extremely remote risk of a gross-up obligation being triggered, IPMA has suggested that two new exceptions to the gross-up obligations be included in non-EU issues as well as EU issues.

The first exception removes the gross-up obligation from any payment to an individual where the withholding results from the Directive. The second exception deprives a bondholder of the benefit of the gross up if the payment would not have attracted withholding if presented to another paying agent in the EU.

These exceptions protect issuers (and guarantors) from the risk of being obliged to gross up, and protects investors from the risk of their bonds being the subject of an early tax call. Furthermore, IPMA suggests the inclusion of certain disclosure language in relation to the Directive in the disclosure documents.

It has also been proposed by IPMA that consideration should be given to imposing an obligation on the issuer to maintain an EU paying agent in a country that will not implement a withholding regime under the Directive. This would work together with the second exception to the gross-up provision, to ensure that there will be no gross up and hence, no tax call.


Pursuant to a decision of the ECOFIN Council adopted on Friday, 2 March 2001, the Directive will not apply to bonds issued before 1 March 2001 (or the original prospectus certified before that date). The Directive will also not apply to bonds issued prior to 1 March 2002 that are fungible with bonds issued (or with the original prospectus certified) before that date. The treatment of issues of further bonds (intended to be fungible with grandfathered bonds) issued on or after 1 March 2002, is dependent upon whether issuers are classified as "Governments or related entities" or not.


It is always difficult to predict the future. However, it is unlikely that the Directive, if it is introduced, will adversely affect international debt securities, including Asian Issues, provided the IPMA recommendations discussed above are incorporated in the relevant securities' documentation.

Swain Roberts Denise Cheong Singapore Simon Marks London

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