EU Tax Directive - GrandFather Clause

Are you affected?

If you are an individual with a custody account in Switzerland and you are domiciled in an EU country (see table below) then you are most likely affected, since at least some of your investments will probably generate interest income (for further details on what is deemed interest income, refer to question 4). Please note that it is your country of domicile and not your nationality that is the determining factor.

If your account is in the name of a legal entity then you are not affected. If you are uncertain as to what constitutes a legal entity please contact your client advisor.

The current 25 EU countries

Austria, Belgium, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Luxemburg, Malta, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden, The Netherlands, United Kingdom

Which of your income is affected?

Only the interest income is affected, other forms of income such as dividend’s are not.

The country of issue and the currency of an instrument is irrelevant for the purposes of determining whether interest amounts are subject to retention.

The definition of interest income is relatively broad and covers just about everything connected to debt claims. This includes regular coupons payments on bonds, interest on fiduciary placements and money market investments, capitalized interest on zero and discount bonds as well as accrued interest received as part of the proceeds from a sale or redemption transaction. Interest income contained within investment funds is also covered if it is derived from affected debt claims.

Excluded, however, are the following:

· Interest income from ”grandfathered” bonds is excluded. Grandfathered bonds are defined as debt instruments issued before March 1, 2001 and which have had no increases since March 1, 2002 This clause runs out for most products as of the January 1, 2011.

· Distributions from investment funds which have less than 15% of the assets invested in nongrandfathered debt instruments.

· Accrued interest from sale and redemption of investment funds if they have less than 40% (25% from January 1, 2011) of the assets invested in non-grandfathered debt instruments.

· Income on assets held in insurance products.

· Retention will not be charged on interest from Swiss debtors i.e. interest subject to Swiss withholding tax.

What choices do you have?

Voluntary Disclosure
If you wish to opt for voluntary disclosure you must sign a document authorizing UBS to send information to the Swiss Federal Tax Authority, which in turn will forward the information to your country of residence. The information sent to your country of domicile will include your name and address together with information regarding your relevant interest income.

Please contact your client advisor if you wish to choose voluntary disclosure.

Retention
If you do not wish to have voluntary disclosure you do not have to sign any documentation and the retention will automatically be applied to the relevant income. Assuming that the savings taxation comes into effect on July 1, 2005, the following retention rates will apply: 15% from July 1, 2005, 20% from July 1, 2008, 35% from July 1, 2011. No personal information whatsoever is disclosed in the case of retention.

When will the EU Savings Tax come into effect?

The EU originally planned to bring the savings taxation measures into effect as of January 1, 2005. However, in June 2004 ,the EU announced that this date would be postponed until July1, 2005.

The Bilateral II agreements between Switzerland and the EU, of which the EU savings taxation is a part, have been finalized. Most of the agreements could still be subject to a Swiss referendum. However, in the case of the savings taxation, there have been no indications that such a referendum would be called for. An implementation date of July 1, 2005 would therefore appear achievable in Switzerland.

It is our understanding that the new regime will be implemented at the same time in all 25 EU countries, in Switzerland, Andorra, Monaco, Liechtenstein and San Marino as well as in the relevant dependent and associated territories of the United Kingdom and the Netherlands.