DEFINITION of 'Grandfathered Bond'

A classification for bonds in the European Union that excludes the payments made on these bonds from retention taxes. For a bond to fall into this classification it has to have been issued before March 1, 2001, or had its prospectus certified before this date, and has not had any re-issues at any point after February 28, 2002.

BREAKING DOWN 'Grandfathered Bond'

The retention tax, which became effective on July 1, 2005 when the European Union Savings Tax Directive was implemented, is a withholding tax on interest payments. The retention tax starts out at 15%, but will be raised to 20% on July 1, 2008 and 35% on July 1, 2011. This tax simply withholds some of the interest and the ultimate amount taxed on the interest will depend on several factors including the individual's overall income. This tax only applies to the residents of an EU member state and does not affect the interest payments made to non-EU residents. It also covers savings accounts, fiduciary deposits and investment funds.

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