The legal authority of the UK Government to extend the European Union Savings Directive to the UK's overseas territories is in doubt following a European Court ruling at a preliminary hearing in March 2003. The Directive is still in draft form and has not yet been adopted by the EU's Council of Minisiters, but in its current state would require EU member states to impose either spontaneous reporting or withholding tax. Although the Cayman Islands is a UK overseas territory, it is not a member of the EU.
The President of the European Court ruled that the EU could not directly impose any obligation on the Cayman Islands to implement the proposed directive on the taxation of savings income. The Court further confirmed that the Directive did not legally require the UK to impose the same measures on its overseas territory. The UK has constitutional power to legislate for the Cayman Islands including foreign affairs, but not in relation to domestic matters and not, by convention, in relation to matters of taxation.
Anthony Travers OBE