Model Agreements on taxation of savings income

STATES OF JERSEY

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MODEL AGREEMENTS ON TAXATION OF SAVINGS INCOME

Lodged au Greffe on 18th May 2004 by the Policy and Resources Committee

STATES GREFFE

PROPOSITION

THE STATES are asked to decide whether they are of opinion

(a ) to approve the 2 Model Agreements, as set out in the Appendix to the report of the Policy and

Resources Committee dated 14th May 2004, as the basis for bilateral agreements on taxation of savings income to be entered into with each of the 25 Member States of the European Union;

( b ) t o authorise the President of the Policy and Resources Committee to sign these bilateral

agreements or any documents ancillary thereto on behalf of the Island; and

( c) to charge the Policy and Resources Committee to prepare the necessary legislative changes to

enable the implementation of these Agreements for consideration by the States.

POLICY AND RESOURCES COMMITTEE

AGREEMENTS TO BE ENTERED INTO WITH INDIVIDUAL EU MEMBER STATES ON THE TAXATION OF SAVINGS INCOME

Introduction

1. I n J une 2003 the States were informed by the President of the Policy andResourcesCommittee that –

• t h e EU after some 6  years of negotiations had adopted what is known as the EU Tax Package which included a Directive on the Taxation of Savings Income;

• i t w a s considered to be in the Island's best interests to adopt a good neighbour policy;

• w  h il e in keeping with an overall strategy of constructive engagement the Island had sought to help the EU achieve its objective, the Island's best interests would be firmly defended in doing so;

• a n y agreement the Island entered into would be conditional upon the existence of a level playing field and would be subject to agreement by the States;

• t h e C  ommittee intended to recommend to the States that Jersey should adopt the withholding tax option on the same timetable and at the same rates as the three EU Member States and named third countries, including Switzerland;

• t h e C ommittee would bring specific proposals to the States in due course.

T h e Committee has been working with its counterparts in Guernsey and the Isle of Man to negotiate

mutually acceptable agreements with the countries of the European Union. With the conclusion of these negotiations, and after confirmation by the Finance Ministers of the EU that they are willing to proceed, the Committee is now in the position to present specific proposals to the States.

2. T  h e ModelAgreementsattached to this report, relating to the taxationof savings income, havebeen negotiated by the CrownDependencies – Jersey, Guernsey and the IsleofMan – with theEU High Level Group on direct taxation, in conjunction with representatives ofthe Presidency of the EuropeanUnion and oftheEuropeanCommission.TheseModelAgreementshavebeenformallyacceptedbytheEU Member States asthebasis upon which individual agreements are to be entered into betweeneachof the Crown Dependenciesandeachof the 25EUMember States. There are 2 ModelAgreements, one relating to those EUMember States that have opted to apply a withholding tax through what is described as the transitional period;and the other for those EUMember States that have opted for automatic exchange of information.
3. T h e States are now beingasked to agree that –

• t h e M  odel Agreements can be used for the bilateral agreements to be entered into with each of the 25 EU Member States;

• t h e P resident of the Policy and Resources Committee can sign the bilateral agreements on behalf of the Island;

• t h e P  olicy and Resources Committee should be requested to present to the States the necessary legislation to implement the bilateral agreements, when the Committee considers it an appropriate

time to do so.

4. E  a ch of the agreements entered into, oncesignedby both parties, will be presented to the States for information. However it should be noted that the signing of the bilateral agreements does notbring them automatically into force. For this to happen the States will need to approve the necessary legislation to bring the agreements into effect, and the States will onlybeasked to makethefinal decision in this

respect if the conditions referred to in Article  17 of the Model Agreements have been met. Article  17 states that–

" T h e a p p l ic a tion of this agreement shall be conditional on the adoption and implementation by all the  Member  States  of  the  European  Union,  by  the  United  States  of  America,  Switzerland, Andorra,  Liechtenstein,  Monaco,  and  San  Marino,  and  by  all  the  relevant  dependent  and associated  territories  of  the  Member  States  of  the  European  Community,  respectively,  of measures  which conform  with  or  are  equivalent  to  those  contained in  the Directive  or  the Agreement, and providing for the same dates of implementation."

Background

5. T h e European Union on3rd June 2003 formally adoptedCouncilDirective2003/48/ECon the taxationof savings incomeinthe form of interest payments. The preamble to the Directive states that its ultimate aim is toenable savings income in the form of interest paymentsmadeinonemember state to beneficial ownerswho are individuals residentin another member state to bemade subject to effective taxation in accordance with the lawsof the latter member state.
6. T h e Directive builton a consensusamongEUMember States reached at the FeiraEuropeanCouncilof June 2000 and the subsequent Ecofin Council meetingsofNovember 2000, December 2001 and January 2003.
7. T  h e EuropeanUnion's overall position is that the ultimate aim of bringing about effective taxation of interest payments in the beneficial owner'smember state ofresidencefortax purposes should beachieved through the exchange of information concerning interest payments between memberstates.However, it has been agreed that 3 member states, Austria, Belgium and Luxemburg, need not apply automatic exchange of information at the same time as the othermemberstates.For a transitional period, during which it is acceptedbytheEU that a withholding tax can ensure a minimumlevelof effective taxation, especially at a rate increasing progressively from 15% to 20% and then to 35%, these three member states will apply a withholding tax tothesavingsincome covered by the Directive.
8. T h e European Union Member States were concerned however that so long as the United States of America,  Switzerland, Andorra,  Liechtenstein,  Monaco, San Marino and the  relevant dependent or associated territories of the member states did not all apply measuresequivalent to, or the same as, those provided  for  by the  Directive,  capital  flight  toward these countries  or  territories  could imperil the attainment of the Directive'sobjectives.For this reason the European Union has sought to conclude agreements with the countries and territories concerned that provide for the objectives ofthe Directive to be met from thesame date as within the EUMember States within these countries and territories The intention inrespectofnon-EU jurisdictions is set outin Article  17of the Directivetowhichparagraph (1 of the preamble to the ModelAgreementrefers.
9. T  h e CrownDependencies acting in concert decided to take the initiative intheautumnof 2003 and produce draft AgreementsfortheEUMember States to consider. ThedraftAgreements were sent to the Finance Ministersofeach of the then 15 MemberStates and the then 10 new accession countries. By taking this step the Island Authorities placed themselvesin a strongernegotiatingposition than otherwise would have been the case.Of particular importance is that italso enabled the Crown Dependenciesto better establish their international personality innegotiating and concludingsuch tax agreements.
10. T h e CrownDependenciesin responding to the wish oftheEUMember States that the measures provided for in the Directive should be supported by the Crown Dependencies have had firmly in mind the following principles –

• t h e C rown Dependencies relationship with the European Union is determined by Protocol  3 of the Treaty of Accession of the United Kingdom to the European Community, and under the terms of

that protocol the Crown Dependencies are not within the EU fiscal territory;

• th e r e should be a "level playing field" embracing jurisdictions with whom the Crown Dependencies are in competition, and particularly those competing jurisdiction that are within Europe of which Switzerland is the most significant;

• ac c e ptance of the importance of exchange of information and transparency for the efficient working of international financial markets,

• t h e C rown Dependencies' economic interests must be safeguarded;

• t h e Crown Dependencies' overall interests are to be well served through the pursuit of a good neighbour policy in respect of the European Union Member States;

• t h e C rown Dependencies' fiscal autonomy, whereby any obligations in bilateral tax agreements being entered into will be their obligations and those of the other party to the agreement only.

11. T h e CrownDependencieshaveworked extremely closely together in reachingagreement with the EU Member States and this co operation has been reflected in the strength of their representations during the negotiations. TheCrownDependenciestogetherhavebeen able to conveyto the EUMember States, the Presidency and the European Commission a clear position of a common concern to defendtheir interests at the same time as adopting a constructive positive position intheir future relationship with theEuropean Union.
12. T h roughout the negotiations, the Crown Dependencies have expressed concern that in offering their support to the EU their competitive position would beadversely effected if pressureisnotbrought to bear on jurisdictions such as Singapore and Hong Kong which are currently not covered by the EU arrangements. As far as the main European competitors of Switzerland and Luxemburgare concerned, the Crown Dependencies have madeitclear that the agreements to be entered into withtheMember States shall only come into effect when those jurisdictions and the other jurisdictions towhich the Directive refers, are in full and equal compliance in accordance with the terms of Article 17 of the Model Agreement.
13. W hile all the Crown Dependencies are committed to the principles of information exchange and transparency, the decision of thecompeting jurisdictions of Switzerland andLuxemburgtooptfor a withholding taxoptionrequired that the CrownDependenciesshould follow suit if they were not to suffer economic damage.However, the withholdingtax' referred to in the Directive willbe referred toas the retention tax' within the Islands. This is todistinguish the Islands from the MemberStates to reflect the fact that they are not a partoftheEuropeanUnionand are not subject to the Directive.

The Model Agreements

14. T h e Model Agreements include a clearstatementtothe effect that the contracting parties "have agreed to conclude thefollowingagreementwhichcontains obligations on the part ofthecontracting parties only". The same language is being negotiated in the agreements with OECDMember States under the separate OECD tax initiative on tax information exchange and transparency. TheU.K.Governmentindiplomatic notes exchanged with individual Member States, and also in correspondence with the Crown Dependencies,hasconfirmed the Islands' assertion that the CrownDependencies are able to negotiate and conclude bilateral agreements with individual Member States. Furthermore ithas been stated clearly that itis for the CrownDependenciestoexercisetheir rights and carryouttheir obligations underany such agreement. The U.K. Government has also made it clear that it will not play any part in the implementation ofanyagreementand accepts that it is for the parties to the agreementto resolve any difficulties arising therefore and accepts that itis for the CrownDependencies to suspendorterminate any such agreementin accordance with its terms.
15. T h e face-to-face discussions that the Crown Dependencies have had with those representing the Presidency oftheEU and the EuropeanCommission,andthefact that theCrownDependencies will be

signing agreements with the individual Member States in their own right, represents a considerable step forward

in the proper recognition of their fiscal autonomy and international personality.

16. A l l the CrownDependencies have agreed toapply a retention tax with effect from the 1st January 2005 provided that the Member States of the European Union have adopted the laws, regulations and administrative provisions necessary tocomply with the Directive, and the requirementsof Article 17of the Directive(mirroredin Article 17 of the ModelAgreements)have been met.TheMember States will be undertaking a review in June and will then decide whetherthe conditions set outin Article 17have been met.Thesame provision is includedin Article 17(2) of the ModelAgreements.
17. T h ere are other safeguards in the Model Agreements. If difficulties are confronted Article 16 provides for the termination ofagreementsand Article 17 provides for thesuspensionof the applicationofagreements in the circumstances to which the Articles refer.
18. T h e text of the Model Agreements follows that oftheEUDirective with appropriateadaptations and in the applicationof the agreements, on which written guidance will be provided, further account will be taken of the particular circumstances of the Crown Dependenciesintermsof their sizeandbusiness structure. In drawing up the guidance the Crown Dependencies are continuing their close working relationship, and are also consulting fully with those institutions in each island who will be involved with the implementationof the bilateral agreements.
19. W hile eachoftheCrownDependencies has opted for the retention tax, under Article 14of the Model Agreementthereis an opportunity,should they so wish to take it, to change to automatic exchangeof information atanytime.
20. T h e 3 Member States that haveopted for a withholding tax are subject to a transitional period at the end of which they will transfer to automatic exchange of information. The CrownDependencies are faced with thesame prospect.
21. T h e transitional period does not have a fixed end date.Itonlycomesto an endwhen the termssetoutin Article 10 of the Directive are met. Toquote from theDirective –

" T h e tr a n s it ional period shall end at the end of the first full fiscal year following the later of the following dates:

• t h e d ate of entry into force of an agreement between the European Community, following a

unanimous decision of the Council, and the last of the Swiss Confederation, the Principality of Liechtenstein, the Republic of San Marino, the Principality of Monaco and the Principality of Andorra, providing for the exchange of information upon request as defined in the OECD Model Agreement on Exchange of Information on Tax Matters released on the 18th April 2002 (hereinafter the OECD Model Agreement') with respect to interest payments, as defined in this Directive, made by paying agents established within their respective territories to beneficial owners resident in the territory to which the Directive applies, in addition to the simultaneous application by those same countries of a withholding tax on such payments at the rate defined for the corresponding periods referred to in Article 11(1) of the Directive;

• t h e d ate on which the Council agrees by unanimity that the United States of America is

committed to exchange of information upon request as defined in the OECD Model Agreement in respect to interest payments as defined in this Directive, made by paying agents established within its territory to beneficial owners resident in the territory to which the Directive applies.".

22. D u ring the transitional period, which it shouldbeassumedwillcommence on 1st January 2005, the withholding/retention tax will be levied at the rate of 15%during the first 3 years of that period, 20% for

the subsequent 3 years and 35% thereafter. Of the retention tax to be levied 25% will be retained by the Crown

Dependencies and 75% will be transferred to the member state of residence of the beneficial owners of the interest.

23. T h ere are some exceptions to the applicationofthe retention tax. Under the provisions of Article  3 of the Model Agreementsthere is provision for the use of one of the following procedures in order to ensure that the beneficial ownerscan if they so wish request that notaxbe retained –

• a p ro cedure which allows the beneficial owner expressly to authorise the paying agent to report

information on the interest payments to the competent authority of the party in which the paying agent is established. Such voluntary authorisations will cover all interest payments made to the beneficial owner by that paying agent;

• a p ro cedure which ensures a retention tax shall not be levied where the beneficial owner presents

to his paying agent a certificate drawn up in his name by the competent authority of the party of residence for tax purposes in accordance with arrangements set out in both the Model Agreement and the Directive.

24. L e gislation will need to be enacted to provide for the retention tax to be applied to thosewho are tobe subject to the tax. Provision will also need tobemade for the exchange of information wherethose subject to the retention tax decide to take advantageof the voluntary disclosure arrangementsreferredto in paragraph 22above.Subject to theirapprovalof the ModelAgreements, and the satisfying of the conditions in Article 17ofthoseAgreements, the States will beaskedto approve anenabling law which will provide for Regulations tobemade implementing international obligations andagreements with the governments ofother countries and territories regarding or relating to taxation. The intention is that the enabling law will be presented to the States for debate inJuly,and the Regulations wouldbe presented in September/October if the conditions set out in Article 17ofthe Directive and of the Model Agreements have been satisfied, and it is confirmed that 1st January2005is the operative date and that allof the EU memberstates,the named third countries and the relevantdependentand associated territories of the member states areincompliance with the provisions of Article 17.
25. A s noted in paragraph 17 above, those subject to the provisions of the bilateral agreements will be assisted in carryingoutthe obligations arising from the agreementsbytheprovisionof written guidance. A final version of the guidance is currently being prepared in consultation with the finance industry and the other Crown Dependencies.Theguidancenotes,forexample, will assist in determining who is a paying agent with an obligation to retain the tax; andwho is tobe subject to the tax oninterestpayments received. Thenoteswillmake it very clear that those subject to the tax are limited to individuals resident in a EUMemberState,and that companies and trusts (with a few exceptions)donotcomewithin the scopeoftheagreements.
26. In drafting the guidance the objective has been to rely on existing practices as far as possibleand limit the administrative burden. Thus, for example, in determining the identity andresidenceofthosewho are to be subject to retention tax the paying agents shouldbe able to rely upon their existing know yourcustomer' practices arising from the obligations already placed upon them under the existing money laundering and terrorism legislation.
27. A number of benefits are expected to flow from the closer working relationship which has been established between the Crown Dependencies and the EUMember States. A better understandinghas been establishedof the CrownDependencies' fiscal autonomyand international personality. There is also greater recognition of the commitment of the Crown Dependencies to international standards in the application of financial regulation andanti-moneylaunderingmeasures.One example ofwhere some benefit is already being derived arises from theacceptance in theModelAgreements that the regulation of undertakings for collective investment are deemedtobe equivalent to the regulation ofUCITS in the European Community.

28. T h e overall outcome of what attimes has been a difficult process has been a clear demonstrationof the wish of the CrownDependenciestobe good neighbours whileat the same time defending their interests and in particular their fiscal autonomy.TheModelAgreementsreflectthis. It is firmly believed that the Model Agreements that have been agreed with theMember States represent a goodoutcomefor the Crown Dependencies from the negotiations that have taken place with the EU Member States. The adoption of the ModelAgreementsand their use asthe basis for bilateral agreements with individual EU Member States is considered to be in the best interests of all the Islandand therefore to besupported.

14th May 2004

APPENDIX

MODEL'AGREEMENT ON THE TAXATION OF SAVINGS INCOME BETWEEN EACH OF (GUERNSEY, ISLE OF MAN, AND JERSEY) AND EACH INDIVIDUAL EU MEMBER STATE THAT IS TO APPLY THE WITHHOLDING TAX IN THE TRANSITIONAL PERIOD

WHEREAS:

1. A r ticle 17 of Directive 2003/48/EEC ("the Directive") of the Council of the European Union ("the Council") on taxationofsavingsincome provides that before 1st January 2004Member States shalladopt and publish the laws,regulations and administrative provisions necessary to comply with this Directive whichprovisionsshallbe applied from 1st January 2005 provided that:

" ( i) th e Swiss Confederation, the Principality of Liechtenstein, the Republic of San Marino, the Principality of Monaco and the Principality of Andorra apply from that same date measures equivalent to those contained in this Directive, in accordance with agreements entered into by them with the European Community, following unanimous decisions of the Council;

(i i) al l agreements or other arrangements are in place, which provide that all the relevant dependent or

associated territories apply from that same date automatic exchange of information in the same manner as is provided for in Chapter  II of this Directive, (or, during the transitional period defined in Article  10, apply a withholding tax on the same terms as are contained in Articles 11 and 12)".

2. T h e relationship of [the Island] with the EU is determined by Protocol 3 of the Treaty ofAccessionofthe United Kingdomto the EuropeanCommunity. Under thetermsof the Protocol [the Island] is not within the EU fiscal territory.
3. [T he Island] notesthat,while it is the ultimate aim of the EU MemberStates to bring about effective taxation of interest payments in the beneficial owner's Member State of residence for tax purposes through the exchange of information concerning interest payments between themselves, threeMember States, namelyAustria, Belgium and Luxembourg, during a transitional period, shallnotbe required to exchange information butshallapply a withholding tax to the savings incomecovered by the Directive.
4. T h e "withholding tax" referred to in the Directive will be referred to as the "retention tax" in [the Island's] domestic legislation. Forthe purposes of this Agreementthetwoterms therefore are to beread coterminously as "withholding/retention tax" and shall have the same meaning.
5. [T he Island] has agreed toapply a retention tax with effect from 1st January 2005 provided the Member States have adopted the laws, regulations, and administrative provisions necessary tocomply with the Directive, and the requirementsof Article 17 of the Directive and Article 17(2)of this Agreementhav generally beenmet.
6. [T h e Island] has agreed toapplyautomaticexchangeof information inthesamemannerasisprovidedfor in Chapter II of the Directive from the end ofthe transitional period as defined in Article 10 of the Directive.
7. [ T he Island] has legislation relating to undertakings for collective investment that is deemed to be equivalent in its effect to the EC legislation referredto in Articles 2 and 6 of the Directive.

The [Island] and [Member State] hereinafter referred to as a "contracting party" or the "contracting parties" unless the context otherwise requires,

Have agreed to conclude the following agreement which contains obligations on the part of the contracting parties only and provides for:

(a ) th e application by the contracting parties, during the transitional period defined in Article  10 of the

Directive, of a withholding/ retention tax from the same date and on the same terms as are contained in Articles 11 and 12 of that Directive;

( b ) t h e exchange of information between the contracting parties acting in accordance with the

provisions of Article  13 of the Directive;

(c ) th e payment by one contracting party to the other contracting party of 75% of the revenue from the

withholding/retention tax levied under this Agreement,

in respect of interest payments made by a paying agent established in a contracting party to an individual resident in the other contracting party.

For the purposes of this Agreement the term competent authority' when applied to the [contracting parties] means [ ].

Article  1 W  it hholding/Retention of Tax by Paying Agents

Interest payments as defined in Article 8 of this Agreement which are made by a paying agent established in the jurisdiction of a contracting party to beneficial owners within the meaning of Article 5 of this Agreement who are residents of the other contracting party shall, subject to Article 3 of this Agreement, be subject to a withhold/retention from the amount of interest payment during the transitional period referred to in Article 14 of this Agreement starting at the date referred to in Article 15 of this Agreement . The rate of withholding/retention tax shall be 15% during the first three years of the transitional period, 20% for the subsequent three years and 35% thereafter.

Article  2 R e p orting of Information by Paying Agents

Where the provisions of Article  3(1)(a) of this Agreement apply, the paying agent shall report to its competent authority;

(a ) th e identity and residence of the beneficial owner established in accordance with Article  6 of this

Agreement;

(b ) th e name and address of the paying agent;

(c ) th e account number of the beneficial owner or, where there is none, identification of the debt claim

giving rise to the interests;

(d ) in f ormation concerning the interest payment specified in Article  4(1) of this Agreement. However

each contracting party may restrict the minimum amount of information concerning interest payment to be reported by the paying agent to the total amount of interest or income and the total amount of the proceeds from sale, redemption or refund.

Article  3 E x c eptions to the Withholding/Retention Tax Procedure

1. A contracting party when levying a withholding/retention tax in accordance with Article 1 of this Agreementshallprovidefor one or both ofthefollowingprocedures in order to ensure that the beneficial ownersmay request that no tax be retained:

(a ) a p rocedure which allows the beneficial owner as defined in Article  5 of this Agreement to avoid

the withholding/retention tax specified in Article  1 of this Agreement by expressly authorising his paying agent to report the interest payments to the competent authority of the contracting party in which the paying agent is established. Such authorisation shall cover all interest payments made to the beneficial owner by that paying agent;

(b ) a p rocedure which ensures that withholding/retention tax shall not be levied where the beneficial

owner presents to his paying agent a certificate drawn up in his name by the competent authority of the contracting party of residence for tax purposes in accordance with paragraph  (2) of this Article.

2. A t the request ofthe beneficial owner, the competent authority of the contracting party of the country of residence for taxpurposesshallissue a certificate indicating:

(a ) th e name, address and tax or other identification number or, failing such, the date and place of

birth of the beneficial owner;

(b ) th e name and address of the paying agent;

( c ) th e account number of the beneficial owner or, where there is none, the identification of the

security.

S u c h certificate shall be valid for a period not exceeding three years. It shall be issued to any beneficial

owner who requests it, within two months following such request.

3. W here paragraph (1)(a) of this Article applies, the competent authority of the contractingparty in which the paying agent is established shall communicate the information referred to in Article 2 of this Agreement to the competent authority of the contracting partyof the country of residence ofthe beneficial owner.Suchcommunicationsshallbeautomaticandshall take place at least once a year, within six monthsfollowing the endof the tax year established bythe laws of a contracting party, for all interest payments madeduring that year.

Article  4 B a s is of assessment for withholding/retention tax

1. A payingagent established in a contracting party shall levy withholding/retention tax in accordance with Article  1 of this Agreement as follows:

(a ) in the case of an interest payment within the meaning of Article  8(1)(a) of this Agreement: on the

gross amount of interest paid or credited;

(b ) in the case of an interest payment within the meaning of Article  8(1)(b) or (d) of this Agreement:

on the amount of interest or income referred to in (b) or (d) of that paragraph or by a levy of equivalent effect to be borne by the recipient on the full amount of the proceeds of the sale, redemption or refund;

(c ) in the case of an interest payment within the meaning of Article  8(1)(c) of this Agreement: on the

amount of interest referred to in that paragraph;

(d ) in the case of an interest payment within the meaning of Article  8(4) of this Agreement: on the

amount of interest attributable to each of the members of the entity referred to in Article  7(2) of this Agreement who meet the conditions of Article 5(1) of this Agreement;

(e ) w h ere a contracting party exercises the option under Article  8(5) of this Agreement: on the amount

of annualised interest.

2. F o r the purposesofsub-paragraphs (a) and (b) of paragraph  (1) of this Article, the withholding/retention tax shallbedeductedon a pro rata basis tothe period during which the beneficial owner held the debt- claim. If the payingagentis unable todetermine the period of holding on the basisofthe information made available to him, the paying agentshall treat the beneficial owner as having been in possession of the debt-claimforthe entire periodof its existence, unlessthe latter provides evidenceofthe date of the acquisition.

3. T h e imposition of withholding/retention tax by the contracting partyof the payingagentshallnotpreclude the other contracting party of residence for tax purposesof the beneficial owner from taxingincomein accordance with its nationallaw.
4. D u ring the transitional period, the contracting party levying withholding/retention taxmayprovide that an economic operatorpayinginterestto,orsecuring interest for, an entity referred to in Article  7(2) of this Agreement in the othercontracting party shallbe considered the paying agent in place ofthe entity and shall levy the withholding/retention tax on that interest, unless the entity has formally agreed to its name, address andthetotalamount of the interest paid to it orsecured for it beingcommunicatedinaccordance with thelastparagraphof Article  7(2) of this Agreement.

Article  5 D e f inition of beneficial owner

1. F o r the purposesof this Agreement "beneficial owner" shall mean any individualwho receives aninterest payment or any individual forwhoman interest paymentissecured, unless such individual can provide evidence that the interestpaymentwas not receivedor secured for hisownbenefit.An individual is not deemedtobe the beneficial ownerwhen he:

(a ) ac t s as a paying agent within the meaning of Article  7(1) of this Agreement;

( b ) a c ts  on  behalf  of  a legal  person,  an entity  which is  taxed on  its  profits  under the  general

arrangements for business taxation, an UCITS authorised in accordance with Directive 85/611/EEC or an equivalent undertaking for collective investment established in [the Island], or an entity referred to in Article 7(2) of this Agreement and, in the last mentioned case, discloses the name and address of that entity to the economic operator making the interest payment and the latter communicates such information to the competent authority of its contracting party of establishment;

(c ) a ct s on behalf of another individual who is the beneficial owner and discloses to the paying agent

the identity of that beneficial owner.

2. W here a paying agent has information suggesting that the individual who receives an interest paymentor for whom an interest payment is secured may not be the beneficial owner, and where neither paragraph (1)(a) nor (1)(b) of this Article apply, it shall take reasonable steps to establish the identity o the beneficial owner. If the payingagent is unable to identify the beneficial owner, it shalltreat the individual inquestionasthe beneficial owner.

Article  6 Id e n tity and residence of beneficial owners

1. E a chParty shall, within its territory, adopt and ensure the application ofthe procedures necessaryto allow the payingagentto identify the beneficial owners and their residence for the purposes of this Agreement. Such procedures shallcomply with the minimumstandardsestablished in paragraphs (2) and (3);
2. T h e payingagentshall establish theidentityof the beneficial owner on thebasisofminimum standards which vary according to when relations between the paying agentand the recipientof the interest are entered into, as follows:

(a ) fo r contractual relations entered into before 1st January 2004, the paying agent shall establish the

identity of the beneficial owner, consisting of his name and address, by using the information at its disposal, in particular pursuant to the regulations in force in its country of establishment and to Council Directive 91/308/EEC of 10th June 1991 in the case of [the Member State] or equivalent legislation in the case of [the Island] on prevention of the use of the financial system for the purpose of money laundering;

( b ) f o r contractual relations entered into, or transactions carried out in the absence of contractual relations, on or after 1st January 2004 the paying agent shall establish the identity of the

beneficial owner, consisting of the name, address and, if there is one, the tax identification number allocated by

the Member State of residence for tax purposes. These details should be established on the basis of the passport or of the official identity card presented by the beneficial owner. If it does not appear on that passport or official identity card, the address shall be established on the basis of any other documentary proof of identity presented by the beneficial owner. If the tax identification number is not mentioned on the passport, on the official identity card or any other documentary proof of identity, including, possibly, the certificate of residence for tax purposes, presented by the beneficial owner, the identity shall be supplemented by a reference to the latter's date and place of birth established on the basis of his passport or official identification card.

3. T h e payingagent shall establish the residence of the beneficial owneron the basisofminimum standards which vary according to when relations between the paying agentand the recipientof the interest are entered into.Subjectto the conditions set outbelow,residence shall be considered to be situated in the country wherethe beneficial owner has his permanentaddress:

(a ) fo r contractual relations entered into before 1st January 2004 the paying agent shall establish the

residence of the beneficial owner by using the information at its disposal, in particular pursuant to the regulations in force in its country of establishment and to Directive 91/308/EEC in the case of [the Member State] or equivalent legislation in the case of [the Island];

( b ) f o r contractual relations entered into, or transactions carried out in the absence of contractual

relations, on or after 1st January 2004, the paying agents shall establish the residence of the beneficial owner on the basis of the address mentioned on the passport, on the official identity card or, if necessary, on the basis of any documentary proof of identity presented by the beneficial owner and according to the following procedure: for individuals presenting a passport or official identity card issued by a Member State who declare themselves to be resident in a third country, residence shall be established by means of a tax residence certificate issued by the competent authority of the third country in which the individual claims to be resident. Failing the presentation of such a certificate, the Member State which issued the passport or other official document shall be considered to be the country of residence.

Article  7 D e f inition of paying agent

1. F o r the purposes of this Agreement, paying agent' means any economic operatorwhopays interest to or secures the paymentof interest for the immediate benefit of the beneficial owner,whethertheoperatoris the debtorof the debtclaimwhich produces the interest ortheoperator charged bythedebtor or the beneficial owner with paying interestorsecuring the paymentof interest.
2. A n y entity established in a contracting party to which interest is paid or for whichinterestis secured for the benefitofthe beneficial owner shall alsobe considered a paying agent upon such payment or securing of such payment.Thisprovision shall not applyiftheeconomicoperator has reason tobelieve,on the basis of official evidenceproducedby that entity that:

(a ) it is a legal person with the exception of those legal persons referred to in paragraph (5) of this

Article; or

(b ) it s profits are taxed under the general arrangements for business taxation; or

( c ) i t is an UCITS recognised in accordance with Directive 85/611/EEC of the Council or an

equivalent undertaking for collective investment established in [the Island].

A n e conomic operator paying interest to, or securing interest for, such an entity established in the other

contracting party which is considered a paying agent under this paragraph shall communicate the name and address of the entity and the total amount of interest paid to, or secured for, the entity to the competent authority of its contracting party of establishment, which shall pass this information on to the competent authority of the contracting party where the entity is established.

3. T h e entity referred to inparagraph (2) of this Article shall, however,have the optionofbeing treated fo the purposes of this Agreementas an UCITS or equivalent undertaking as referred to in sub-paragraph (c) of paragraph (2). The exercise of this option shall require a certificate to beissued by the contracting party in which the entity is established and presented to the economic operator by that entity. A contracting party shall lay down the detailed rules for this option for entities established in their territory.
4. W here the economic operator and the entity referred to inparagraph (2) of this Article are established in the same contracting party, that contracting partyshall take the necessary measures to ensure that the entity complies with the provisions of this Agreement when itactsas a paying agent.
5. T h e legal persons exempted from sub-paragraph (a) ofparagraph (2)of this Article are:

(a ) in Finland: avoin yhtio (Ay) and kommandiittiyhtio (Ky)/oppet bolag and kommanditbolag; (b ) in Sweden: handelsbolag (HB) and kommanditbolag (KB).

Article  8 D e f inition of interest payment

1. F o r the purposes of this Agreement "interest payment" shall mean:

( a) in t erest paid, or credited to an account, relating to debt claims of every kind, whether or not

secured by mortgage and whether or not carrying a right to participate in the debtor's profits, and, in particular, income from government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures; penalty charges for late payment shall not be regarded as interest payment;

(b ) in t erest accrued or capitalised at the sale, refund or redemption of the debt claims referred to in

(a);

(c ) in c ome deriving from interest payments either directly or through an entity referred to in Article  7

2. of this Agreement, distributed by:

(i ) a n U  CITS authorised in accordance with EC Directive 85/611/EEC of the Council; or (i i) a n eq uivalent undertaking for collective investment established in [the Island];

(i ii ) e n t it ies which qualify for the option under Article  7(3) of this Agreement;

(i v ) u n d e rtakings for collective investment established outside the territory to which the Treaty

establishing the European Community applies by virtue of Article 299 thereof and outside [the Island].

( d ) i n come realised upon the sale, refund or redemption of shares or units in the following

undertakings and entities, if they invest directly or indirectly, via other undertakings for collective investment or entities referred to below, more than 40% of their assets in debt claims as referred to in (a):

(i ) a n U  CITS authorised in accordance with Directive 85/611/EEC; or

(i i) a n eq uivalent undertaking for collective investment established in [the Island]. (i ii ) e n t it ies which qualify for the option under Article  7(3) of this Agreement;

(i v ) u n d e rtakings for collective investment established outside the territory to which the Treaty

establishing the European Community applies by virtue of Article 299 thereof and

outside [the Island].

H o w e v e r, th e contracting parties shall have the option of including income mentioned under

paragraph  (1)(d) of this Article  in the definition of interest only to the extent that such incom corresponds to gains directly or indirectly deriving from interest payments within the meaning of paragraphs (1) (a) and (b) of this Article.

2. A s regard paragraphs (1)(c) and (d)of this Article, when a payingagenthasno information concerning the proportion oftheincomewhich derives from interest payments,the total amountoftheincomeshall be considered aninterestpayment.
3. A s regards paragraph (1)(d) of this Article,when a paying agenthasno information concerning the percentage of the assetsinvestedindebtclaimsorinsharesor units as defined in that paragraph, that percentage shall be considered tobeabove40%.Wherehecannotdetermine the amountofincome realised by the beneficial owner,theincome shall bedeemed to correspond to theproceedsof the sale, refund orredemption of the shares or units.
4. W hen interest, as defined inparagraph (1) of this Article, is paid to or credited to an account held by an entity referred to in Article 7(2) of this Agreement, such entity nothaving qualified for the option under Article 7(3) of this Agreement,suchinterestshallbe considered an interest paymentby such entity.
5. A s regards paragraphs (1)(b)and(d)of this Article, a contracting party shall have the option of requiring paying agentsin its territory to annualise the interest over a periodoftimewhichmaynot exceed one year, and treating such annualised interest as an interest payment even if nosale, redemption orrefund occurs during that period.
6. B y wayof derogation from paragraphs (1)(c) and (d) of this Article, a contractingparty shall have the option ofexcluding from the definition ofinterestpayment any income referred to in thoseprovisions from undertakingsor entities established within its territory wherethe investment in debt claimsreferred to in paragraph (1)(a) of this Article ofsuch entities has notexceeded 15% of their assets.Likewise,by way of derogation from paragraph (4) of this Article, a contracting party shall have the option of excluding from the definition of interest payment in paragraph (1) of this Article interest paid orcredited to an account of an entity referred to in Article 7(2)of this Agreementwhich has not qualified for the option under Article 7(3) of this Agreementandis established within its territory, where the investmentof such an entity indebt claims referred to in paragraph (1)(a) of this Article hasnotexceeded15%of it assets.

T h e e xercise of such option by one contracting party shall be binding on the other contracting party.

7. T h e percentage referred to inparagraph (1)(d) of this Article  andparagraph (3) of this Article shall from 1st January2011be25%.
8. T h e percentages referred to inparagraph (1)(d) of this Article andinparagraph (6) of this Article shall b determined by reference to the investment policy as laid down in the fund rules or instruments of incorporation of the undertakings or entities concerned or, failing which, by reference to the actual composition of the assets of the undertakingsor entities concerned.

Article  9 W  it hholding/Retention Tax Revenue sharing

1. A contracting party which applies withholding/retention tax shall retain 25% of the withholding/retention tax deductedunder this Agreementand transfer theremaining 75% of the revenue to the othercontracting party.
2. A contracting party levying withholding/retention tax in accordance with Article  4(4) of this Agreement shall retain 25%oftherevenueand transfer 75% to the othercontractingparty.

3. S u ch transfers shall take place foreachyearin one instalmentatthe latest within a periodof six months following the end ofthetaxyear established by the laws of a contracting party.
4. A contractingparty levying withholding/retention tax shall take thenecessary measures to ensure the proper functioning of the revenue sharing system.