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On 18 February 2020 the EU Finance Ministers updated the EU
list of non-cooperative tax jurisdictions. Four countries or territories
-Cayman Islands, Palau, Panama and Seychelles- have been added to the list of
non-cooperative tax jurisdictions. These jurisdictions join US Samoa, Fiji,
Guam, Samoa, Oman, Trinidad and Tobago, Vanuatu and US Virgin Islandsthat were
already on the list.
On February 18, the EU Council confirmed that the Cayman
Islands had been added to the EU’s official list of non-cooperative
jurisdictions for tax purposes, commonly referred to as the “EU blacklist”.
This is a significant development, but generally speaking in the short term it
is not expected to give rise to any immediate adverse tax consequences. Any
longer term impact will depend both on
·
whether this turns out to be a temporary or more
permanent status and
·
investor perceptions, particularly for EU based
investors.
Q. What is the EU blacklist?
A. The stated purpose of the EU blacklist is to assist EU
Member States in taking a more robust approach towards jurisdictions which are
perceived to be encouraging so-called abusive tax practices. The objective is
said to be to encourage cooperation from the listed jurisdictions rather than
to name and shame them.
Q. What are “abusive tax practices”?
A. In general terms, they are tax regimes which provide for
a low or zero rate of tax without requiring a sufficient degree of connection
to, or substance in, the relevant jurisdiction, or which do not provide for an
adequate degree of transparency, or which do not correspond to internationally
accepted principles of profit determination.
Q. Why have the Cayman Islands been added to the blacklist?
A. Although the Cayman Islands has recently introduced
economic substance requirements for certain Cayman entities, the EU believes
that these requirements are insufficient, specifically in the area of
collective investment schemes.
https://www.mooresrowland.tax/2019/11/economic-substance-in-cayman-islands.html
Q. In general terms, what are the consequences of the Cayman
Islands being added to the blacklist?
A. Access to EU governmental funding may be restricted,
which is unlikely to be material to commercial clients. There may also be
increased administrative disclosures required in EU Member States in relation
to transactions involving Cayman entities (for example, targeted questions in EU
Member State tax returns, or increased requirements for reports under the “DAC
6” mandatory disclosure regime). Otherwise, the EU has recommended that EU
Member States implement at least one of four possible defensive tax measures by
January 1, 2021:
·
withholding taxes on payments from entities in
EU Member States to blacklisted jurisdictions,
·
loss of tax deductions on payments from entities
in EU Member States to blacklisted jurisdictions,
·
enhanced requirements for CFC inclusion under
the laws of EU Member States of the profits of entities in blacklisted
countries, and
·
loss of participation exemption benefits on
profits distributed from blacklisted countries. However, there is
currently no obligation on EU Member States to follow that recommendation and,
to date, we are not aware of a significant movement amongst Member States to
implement any of these measures (including with respect to existing EU
blacklisted countries).
Nevertheless, the EU has stated that it will review the
position in 2021 and, over time, more coordinated action on tax measures in
relation to blacklisted jurisdictions is possible.
Q. Are there any likely immediate tax consequences of which
the funds industry should be particularly aware?
A. We believe that, generally speaking, it is unlikely that
there will be any immediate tax impact for fund structures which include Cayman
entities. The most significant of the EU recommended measures – imposition of
withholding taxes and loss of deductions – might typically arise on a payment
by a fund subsidiary to a parent fund. However, based on conversations with
counsel in Luxembourg and Ireland, two jurisdictions which are often utilized
by Cayman funds as platforms or holding companies for European activities,
there will be no immediate technical impact.
Nevertheless, it is possible that, in specific cases,
payments by portfolio companies to EU blacklisted parent entities, or lenders,
could also be or become an issue. In addition, EU investors in Cayman funds
could potentially suffer adverse consequences under their home country CFC
regimes, if the relevant Member State implements that applicable EU
recommendation and, in any event, the blacklisting may affect investor
perception of structures which include Cayman entities. Sponsors that have
agreed to side letter provisions relating to blacklisted or non-cooperative
jurisdictions will also need to consider those on a case-by-case basis. There
may also be enhanced reporting requirements, including under DAC 6. From a
European regulatory perspective, it’s worth noting that this development is not
expected to directly impact the ability to market Cayman investment funds in
the EU in accordance with existing National Private Placement Regimes.
Q. What is likely to happen next?
A. We would expect the Cayman Islands to take all necessary
steps to satisfy the EU Council that it should be taken off the blacklist. We
believe that the earliest possible opportunity for this is likely to be later
in 2020. The result may be increased substance requirements for funds or SPVs
established in the Cayman Islands. Any other longer term impact of the listing,
assuming it is temporary, is likely to depend principally upon any lasting
effect on investor perception of the Cayman Islands as a fund jurisdiction.
Tax implications in the Netherlands
Individual nations also have a blacklist. For example, the Netherlands has a blacklist
for jurisdictions without a statutory profit tax and states with a statutory
profit tax rate of less than 9%. The Dutch blacklist also includes
non-cooperative jurisdictions identified by the EU. The effects of being on the
Dutch blacklist are:
·
the application of controlled foreign company (CFC)
rules effective 1 January 2019 (subject to certain conditions);
- ·
the non-eligibility for obtaining an advance tax
ruling when in a transaction or corporate structure a Dutch blacklisted
jurisdiction is involved as from 1 July 2019; and - ·
the application of the withholding tax of 21.7%
on interest and royalty directly or indirectly paid to subsidiaries or
permanent establishments that will be introduced as from 1 January 2021.
In 2020, the Dutch blacklist includes Anguilla, Bahama’s,
Bahrain, Barbados, Bermuda, British Virgin Islands, Fiji, Guernsey, Guam, Isle
of Man, Jersey, Cayman Islands, Oman, Samoa, Trinidad and Tobago, Turkmenistan,
Turks and Caicos Islands, the United Arab Emirates, the US Virgin Islands, US
Samoa and Vanuatu.
If Cayman Islands, Palau, Panama and Seychelles will remain
on the EU list of non-cooperative tax jurisdictions during the remainder of
2020, they will (remain to) be included in the Dutch blacklist for the entire
year 2021 when the annual revisit of the Dutch blacklist effective the
following calendar year takes place.
