Cayman Islands and three other jurisdictions added to EU blacklist

• On 18 February 2020, the European Council (the "Council") revised its list of non-cooperative jurisdictions for tax purposes (the "EU blacklist) by adding Cayman Islands, Palau, Panama and Seychelles to the existing list.
• The Council found that these jurisdictions failed to implement their commitments within the agreed deadline.
• After this revision the total number of jurisdictions on the EU blacklist currently stands at 12 and consists of American Samoa, Guam, Samoa, US Virgin Islands, Cayman Islands, Fiji, Oman, Palau, Seychelles, Vanuatu, Panama, Trinidad & Tobago.

Blacklisted countries may face stricter monitoring on transactions with the EU, additional tax- and anti-abuse measures.

Background:

• The first EU list of non-cooperative jurisdictions for tax purposes was adopted on 5 December 2017 by the EU Council, following work of the EU Code of Conduct Group (CoCG) on Business Taxation. The list included originally 17 countries which were not found to comply with agreed or internationally widely accepted standards in the tax area. 
• In addition to the black list, the EU Council adopted also a grey list containing a number 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 laws within specific deadlines (in most cases the deadline was the end of 2018). 
• The black and grey list (also called Annex I & Annex II respectively) has been updated several times, most recently in December 2019. As of 2020, the list is expected to be updated twice a year (next update being scheduled for October 2020).
• The list is designed to combat tax evasion and avoidance. It aims to enable the European Union to address more effectively external threats to Member States' tax bases and to take coordinated action against third countries that refuse to act fairly in tax matters.

What does it mean to be on the EU blacklist?

EU countries can choose to apply certain defensive measures against the blacklisted countries. Tax-specific defensive measures may include (but are not limited to):

• Increased monitoring and audits from tax authorities,
• Greater scrutiny on withholding tax rates (e.g. denying reduced rates or imposing higher/penal rates)
• Non-deductibility of costs
• Controlled Foreign Company (CFC) rules
• Special documentation requirements in respect of transactions with blacklisted countries, and
• Automatic information exchange with relevant tax authorities.

Where a blacklisted country has a double tax treaty with the relevant EU country, the effect of any withholding tax measures may be mitigated. Increased scrutiny is, however, expected when an entity in a blacklisted country would seek relief from taxation under a double tax treaty.

Further, certain transactions between associated enterprises in the EU and the blacklisted countries would trigger a reporting obligation and automatic exchange of information under the EU’s Directive on Administrative Cooperation in the field of taxation (known as “DAC6”).

• DAC6 provides for the mandatory disclosure to EU tax authorities of certain cross-border arrangements, and mandates the automatic exchange of this information among the EU Member States’ tax administrations.
• An arrangement would be “reportable” under DAC6 if it meets certain “hallmark” criteria. One specific hallmark is where there is an arrangement that involves deductible cross-border payments from the EU to an associated enterprise resident in a country that is on the EU blacklist, irrespective of whether the payment results in a tax advantage. Accordingly, the inclusion on the EU blacklist has direct implications for the disclosure of transactions between those countries and associated enterprises in the EU.

In addition, the EU blacklist is linked to EU funding under new provisions in the Financial Regulation and in the European Fund for Sustainable Development (EFSD), the European Fund for Strategic Investment (EFSI) and the External Lending Mandate (ELM). Funds from these instruments cannot be channelled through entities in listed countries.

Why was Cayman Islands added to the Black List and what are the next steps?

• The EU had completed its assessment of the Cayman's new implemented economic substance legislation, noting certain concerns in the area of collective investment vehicles. 
• Cayman Islands enacted on 7 February certain revisions to its fund legislation, however apparently this enactment happened after the CoCG's meeting of 4 February, which also formed the basis of the decision of the EU Finance Ministers to add Cayman into the black list. 
• The Cayman Islands Government has already published a communication stating that it has contacted EU officials to begin the process of being removed from the black list as soon as possible, emphasizing its full commitment to cooperate with the EU. 
• As the EU will only revisit the blacklist twice a year, the expectation is that Cayman Islands will be on the list at least until October 2020.
• Even if such listing may be for a short time, this could be a concern for companies and funds with operations in the territory, although it is still unclear whether and what concrete sanctions will be imposed by EU Member States.