The European Savings Tax Directive (EUSD), which went into effect on July 1, does not currently apply between Gibraltar and the UK, as they are not separate member states of the EU.

The admission of this lacuna came late last week in the following statement jointly issued by the Chief Minister of Gibraltar, Peter Caruana, and the UK government's Paymaster General, Dawn Primarolo:

"The Savings Tax Directive, which comes into effect today (July 1), applies to savings income payments made in one Member State to someone resident in another Member State. Accordingly, because the UK and Gibraltar are not separate member states, the Directive does not apply between them. The UK and Gibraltar Governments are in discussion and working together with a view to agreeing arrangements to close this gap between them as soon as possible during the next few months, on terms that would offer a choice between exchange of information and withholding tax."

This effectively means that the "level-playing field" that was promised to all the other participants has not been delivered (remember that Bermuda is also currently excluded due to another oversight by the UK authorities!).

The directive is already so riddled with loopholes that it resembles a Swiss cheese - it only applies to individuals (not trusts or companies) and it only applies to interest paid on deposits.

In a related twist, it now transpires that every jurisdiction that receives investments through Swiss Banks is indirectly effected by the directive since the Swiss investors are required to establish AND MONITOR whether the investment is caught (in the case of an investment fund, like a hedge fund, this means checking whether 40% or more of the fund's income comes from fixed income investments).  As a result, it is easier for the Swiss Banks to invest in jurisdictions that ARE subject to the directive, because those jurisdictions have been able to exempt investment funds in their home jurisdiction - just as UCITS and equivalents are exempt within the EU - thus relieving the Swiss Banks from the obligation to investigate and monitor the underlying investments.

UPDATE: The Bermuda Royal Gazette is reporting that funds are already LEAVING Bermuda and moving to Cayman, where they are automatically exempted from the EUSD.  The Bermuda government is reportedly in talks with the UK, Switzerland and other jurisdictions with a view to either signing up for the EUSD and exempting Bermuda based funds, or getting specific jurisdictions like Switzerland to exempt Bermuda funds.

Frankly, the whole directive is a mess, and jurisdictions like Singapore, Hong Kong and the US are reportedly getting new business as a result of the EU fiasco.