EU blacklists the Cayman Islands: What does this mean for Cayman structures?

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EU blacklists the Cayman Islands: What does this mean for Cayman structures?

EU blacklists the Cayman Islands: What does this mean for Cayman structures?

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February 18, 2020

What has happened?

The EU maintains a list of jurisdictions that it considers non-cooperative for tax purposes. This list is to encourage change through transparent tax practices.

The Cayman Islands have been blacklisted for failing to introduce economic substance requirements for collective investment vehicles.

What does this mean?

In short, there are currently few consequences from this, aside from the reputational risk of being associated with a blacklisted jurisdiction.

Whilst in the longer term, the EU wishes member states to enact "defensive measures" against the blacklisted jurisdictions, the majority of member states have not yet taken any action and have until 1 January 2021 if they follow the EU's request.

The primary consequence of being blacklisted relates to the new mandatory disclosure rules which have been introduced across the EU (including the UK). This regime is commonly known as "DAC6".

These rules require the disclosure of transactions to tax authorities (with steep penalties for compliance failures in certain jurisdictions) where those transactions fall within certain pre-defined hallmarks.

A large number of the hallmarks require a tax avoidance motive. However, where a "blacklisted" jurisdiction is involved, the blacklisting itself can trigger the disclosure obligation. Therefore, any structure involving payments between a Cayman entity and a related EU (or UK) entity requires careful consideration.

The disclosure obligation does not itself trigger any adverse tax consequences. It simply increases the risk of scrutiny by tax authorities.

There is also a general prohibition on EU funding being channelled through blacklisted jurisdictions. However, this seems less relevant in the context of the Cayman Islands because these funds are generally destined to countries which are less well developed.

What next?

The EU's list is updated twice a year and the Cayman Islands have already contacted the EU with a view to being removed from the blacklist in the next update (October 2020). In particular, the Cayman Islands believe that legislation which came into effect locally on 7 February 2020 addresses the EU's concerns in the area of collective investment vehicles.

By October, therefore, it seems likely that the Cayman Islands will be removed from this list.

Approach in various member states

The table below contains the status of defensive measures in some of the EU member states (including the UK):

Country	Active defensive measures (other than DAC6)
France	France has a defensive list, which was updated before the EU list, so the Cayman Islands are not currently blacklisted. This could potentially change for 2021 if the substance reforms introduced by the Cayman Islands are not considered sufficient.
Germany	Although Germany has defensive measures in place against uncooperative countries, these measures are related to an absence of information exchange agreements and not automatically linked to the EU blacklist. The Cayman Islands have entered into such an information exchange agreement with Germany. Therefore, the blacklisting of the Cayman Islands should not have any adverse tax consequences in Germany, apart from the mandatory disclosure rules mentioned above.
Ireland	Ireland already has in place defensive measures such as withholding tax, CFC rules, certain restrictions on tax deductibility and no participation exemption on profit distributions against jurisdictions outside the EU with no tax treaty in place. It is therefore not expected that Ireland will implement any further measures and there should be no impact to the treatment of Cayman entities in light of the blacklisting.
Italy	The Italian defensive measures are similar to those of Germany, in that Italy has an information exchange agreement with the Cayman Islands and has included the Cayman Islands on its list of countries that provide for a sufficient exchange of information.
Luxembourg	Luxembourg has in place specific reporting requirements in relation to transactions involving entities located in blacklisted jurisdictions. Luxembourg companies have to indicate on their tax returns if they have transacted with companies in such jurisdictions, in which case the transactions will be subject to increased review and audit.
Netherlands	The Netherlands has implemented defensive measures against countries or territories it has listed on its own blacklist. These measures include the application of CFC rules, the denial of Dutch tax rulings to such countries and, from 2021, enforcing a withholding tax on interest and royalty payments to blacklisted countries or territories. The Cayman Islands are already included on the Dutch blacklist, so the EU blacklisting should not impact the current treatment of Cayman entities in the Netherlands.
Spain	Like the Netherlands, Spain has implemented its own blacklist for countries and territories deemed to be non-cooperative, low tax jurisdictions. The Cayman Islands are also already featured on this list, meaning that transactions with entities located in the Cayman Islands are already subject to defensive measures in Spain, such as the disapplication of the participation exemption regime, withholding tax and CFC rules.
United Kingdom	None