EU Exempts Eurobond 'Tap' Issues From Savings Tax Directive Until March 2002

Jason Gorringe, Tax-News.com, London

07 March 2001

The European Union has agreed that the withholding tax proposals agreed at the Feira summit last June at the end of the Portuguese presidency of the Union should not apply to extensions of existing Eurobonds issued between 1st March 2001 and 1st March 2002. It continues however to be the case that new bonds issued after 1st March 2001 will be subject to the tax, if it is imposed.

The bond markets had been in confusion last week, with issuers and traders reluctant to get involved with new 'tap' issuance on existing bonds. Euroclear, which clears all Eurobond trades, had said that it would not recognise new issues on existing international bonds as exchangeable or fungible with old bonds, unless the borrower accepted full legal responsibility.

The passage of the proposal was made possible after Italy and Luxembourg, which had blocked it earlier this month, agreed to abstain in a write-in vote. 'Tap' issuance on all bonds after 1st March 2002 will be subject to the new rules, but they will not affect the exempt status of previously issued bonds. That gives a year for the market to sort out the fungibility issues it had not addressed by last week.

The problem for the markets is to know what the new proposals will actually amount to. There is as yet no legislation, just an agreement that a withholding tax and exchange of information directive will be agreed at the end of 2002, provided that non-EU countries have fallen in line with the EU's own proposals. There then follows a seven-year period until 2009 during which countries can choose either to impose a withholding tax (minimum 15%) or to participate in exchange of information with other EU members and key outside countries such as the US and Switzerland.

It is seen as improbable that the end-2002 deadline will be achieved; but it might be deferred; and there are many other might-be's. What will be the status of new bonds issued after 1st March 2002, before there is concrete legislation? Whose responsibility is it to deduct interest, or to keep and hand over information? Is it even legal for the EU to impose retrospective rules of this type? What damage will the uncertainty do to the Eurobond markets?

These are rather large questions for bond issuers and traders to ponder in the time between now and the end of 2002.

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