Cayman Islands added to EU tax blacklist

The Cayman Islands has been added to the EU's blacklist of non-cooperative jurisdictions following a meeting of EU finance ministers held on Tuesday 18 February in Brussels. The Council announced that four jurisdictions, including the Cayman Islands, are added to the list of non-cooperative jurisdictions for tax purposes, confirming earlier reports.

Blacklisted countries may be subjected to a number of administrative measures by EU Member States, though in the short term the impact is not likely to be significant. Nevertheless, the Cayman Islands will be disappointed at this outcome, considering its work with the EU in the introduction of a number of legislative measures to avoid being blacklisted.

Background

In December 2017, following work of the EU Code of Conduct Group on Business Taxation, the EU Council adopted an EU list of non-cooperative jurisdictions for tax purposes, which were set out in an Annex to its conclusions. The Annex contained a black list of non-cooperative jurisdictions but also a grey list containing a number of different lists of jurisdictions in relation to which the EU Code of Conduct Group identified concerns during its screening process. The jurisdictions identified on the grey list all committed to address these concerns by introducing relevant changes in their tax legislation in order to comply with the EU criteria. It was expected that most grey list jurisdictions would implement the necessary changes by the end of 2018. The Cayman Islands was one of those jurisdictions on the original grey list on the basis of the existence of tax regimes that facilitate offshore structures which attract profits without real economic activity (the so-called 2.2 jurisdictions).

Since then, the Cayman Islands has engaged with the EU and adopted a number of legislative measures, such as the Cayman International Tax Co-operation (Economic Substance) Law, 2018, in response to this situation.

Nevertheless, the EU Council has decided to add the Cayman Islands to the black list of overseas tax territories that do not effectively co-operate with the EU, joining Fiji, Oman, Samoa, Trinidad and Tobago, Vanuatu and the three US territories of American Samoa, Guam and the US Virgin Islands. Palau, Panama and Seychelles have also been added to the black list. The Conclusions from the meeting state that “Cayman Islands does not have appropriate measures in place relating to economic substance in the area of collective investment vehicles.”

Impact of black listing

Member States are encouraged to apply additional administrative measures for tax purposes to transactions or structures involving jurisdictions on the black list. In addition, financing from the European Fund for Sustainable Development is not available to such jurisdictions and further defensive measures are likely to be added in the future. In particular, a December 2019 ECOFIN meeting recommended at least one from a series of additional defensive measures should be adopted by Member States from 2021, such as denying a deduction for costs and payments directed to entities or persons in a black listed jurisdiction, applying additional or higher withholding taxes, applying CFC rules or limiting the benefits of a participation exemption for payment from subsidiaries in black listed jurisdictions. For further details, see EU black list: further defensive measures recommended.

For example, the Netherlands has introduced measures which target blacklisted jurisdictions, including applying new CFC rules to entities in these jurisdictions, denying Dutch tax ruling to entities in these jurisdictions and imposing (from 2021) a withholding tax on interest and royalty payments to these jurisdictions.

Blacklisting may also impact upon the requirements under DAC 6 to report deductible payments made to associated enterprises in the Cayman Islands.

Further details

For further details of the EU black list and grey list, see EU list of non-cooperative jurisdictions for tax purposes updated and the EU Council website.

For the key practical impacts for investment managers and Cayman funds following Cayman’s addition to the EU's list of non-cooperative jurisdictions, see our article Cayman added to EU's list of non-cooperative tax jurisdictions.