In July 2005, the 25 member states of the European Union (EU) agreed to exchange information concerning the repatriation of savings income in the form of interest payments made in one member state to investors who are individuals situated in another member state.

The provisions of the European Union Directive on Taxation of Savings Income (the "Savings Directive") impact jurisdictions that are not member states. The EU concluded savings taxation agreements with jurisdictions like Monaco and Switzerland. Individual member states concluded savings taxation agreements with 10 dependent and associated territories of the United Kingdom and the Netherlands including the British Virgin Islands, the Cayman Islands and the Netherlands Antilles.

Bermuda was not among the jurisdictions included in the taxation agreements - but potential issues still emerged.

The Savings Directive was thought to be problematic for Bermuda-domiciled funds in some situations depending on the location of the paying agent and the investors. There was also cause for concern regarding the manner in which certain countries had applied their "home rules" giving effect to the Savings Directive.

A Bermuda-domiciled fund was thought to fall within the scope of the Savings Directive in Switzerland, for example, if it was a collective investment scheme, if it was subject to regulation in its home jurisdiction and it provided for redemptions on at least a quarterly basis.

In December 2005, after discussions with the Swiss tax authorities concerning the application of Swiss home country rules on Bermuda domiciled non-retail funds, the Government of Bermuda amended the Bermuda Monetary Authority (Collective Investment Scheme Classification) Regulations 1998 (the "Regulations"). The amendment provided that funds which are exempted from the Regulations would be deemed to be "out of scope" for purposes of the Savings Directive under the Swiss guidelines on the grounds that they are not subject to regulation in Bermuda.

Existing classified funds as well as newly formed funds may apply for exemption under the Regulations. Application is made in writing to the Bermuda Monetary Authority ("the Authority") by completing a collective investment scheme form ("CIS Form") and providing certain details with regard to the scheme and its service providers. To qualify for an exemption, the Bermuda fund must satisfy certain minimum criteria. Interests in the fund must be offered exclusively to "Qualified Investors". That term is defined by Section 3A of the Regulations as any one of the following classes of persons:

a sophisticated private investor;

high net worth private investor;

high income private investors;

a body corporate in which all the shareholders fall within the classes of persons referred to in paragraphs one to three above;

a partnership which all of the partners fall within the classes of persons set out in paragraphs 1 to 3 above;

a trust in which all of the beneficiaries fall within the classes of persons set out in paragraphs 1 to 3 above;

a body corporate that has total assets of not less than US$5,000,000 whether such assets are held solely by the body corporate or held partly by the body corporate and partly by any other body corporate of which it is a subsidiary or holding company; or

an unincorporated association or trust that has total assets of not less than US$5,000,000.

In the first three instances listed, those terms are defined in section 2 of the Investment Business (Exemption) Order 2004.

In addition to the CIS Form which is submitted to the Authority with an application for exemption, a copy of the prospectus must also be submitted, or an explanation for the omission given, and information on the auditor, recognised fund administrator and a local officer, trustee or representative in Bermuda with access to its books and records provided. The Authority has stipulated that a certain wording must be included in the prospectus of a fund which is seeking exemption from classification and an application will not be approved unless the prospectus contains these notices and health warnings. The Regulations provide that a fee for an exemption application will be charged at the time the application is made and annually thereafter.

The Authority will grant an exemption to a new scheme if it satisfies the foregoing criteria. The Authority will grant an exemption to an existing Bermuda classified scheme only if it is proved that the investors have been notified of the proposed change in the regulatory status of the fund and have been given an opportunity to redeem their shares. It is also a pre-condition for exemption that a scheme should exclude any existing shareholder who does not meet the definition of Qualifying Investor under the Regulations by compulsory redemption or other means.

Although the effect of an exemption will be that a scheme is no longer governed by the Regulations, as all collective investment schemes in Bermuda are financial institutions under the Bermuda Monetary Authority Act 1969, the Authority will still have certain powers under that legislation to require the production of information and documents from the fund. An exempted scheme is also required to file with the Authority on or before 30 April of each calendar year, a notice stating that it continues to qualify for the exemption. It is also required to pay the annual fee once prescribed under the Regulations.