EU blacklist

Life on the naughty step

Being put on the EU’s blacklist of non-cooperative jurisdictions was a relatively minor inconvenience, but Caymanians were still relieved to be taken off the list in October. Captive International reports.

When looking back on the year 2020, as well as memories of the pandemic some people may recall it as the year that the Cayman Islands spent six months on the EU’s blacklist of non-cooperative jurisdictions.

Cayman was added to the blacklist in February, following a meeting of EU finance ministers, who concluded that “Cayman Islands does not have appropriate measures in place relating to economic substance in the area of collective investment vehicles”.

The move was not completely out of the blue, but neither was it expected. At the end of 2017, the Council of the EU had published its first blacklist of non-cooperative jurisdictions for tax purposes. Jurisdictions were added to the list according to a list of criteria, including tax transparency, fair taxation and a commitment to curbing issues of base erosion and profit shifting (BEPS).

Cayman Islands was left off the list, but was placed on a ‘grey list’ of cooperative jurisdictions—a kind of halfway house for jurisdictions not uncooperative enough to be put on the blacklist, but certainly worthy of keeping an eye on.

Cayman had been deemed cooperative, but it had to demonstrate that it was addressing certain concerns surrounding tax and regulation. The Cayman government, led by the Ministry of Financial Services, worked hard to ensure it meets all necessary regulatory standards, addressing the concerns the EU laid out in the EU council’s conclusions in March 2019.

Cayman adopted a number of legislative measures, including the Cayman International Tax Co-operation (Economic Substance) Law in 2018, designed to address EU concerns. It also passed the Private Funds Law on January 31, 2020, with that law coming into effect on February 7, 2020.

That was not quite soon enough. The Private Funds Law was designed to satisfy EU concerns about Cayman’s funds industry, but missed a deadline by mere days. That was enough to ensure Cayman’s inclusion on the blacklist. In this sense its experience was much like Bermuda’s, which also spent some months on the EU blacklist, essentially for missing a deadline.

“We definitely wanted to be off the list at the earliest opportunity.”

Jarrod Farley, Carey Olsen

‘We are cooperative’

Jarrod Farley, partner at Carey Olsen in Cayman, says: “We went on the blacklist for technical reasons and since we satisfied the obligation, by implementing the Private Funds Law, within days of the missed deadline, it was always assumed that we would come of the list in October.”

Sure enough, in October, having satisfied EU concerns within days of being put on the blacklist, Cayman was taken off again at the first opportunity. At this point Cayman was again deemed a cooperative jurisdiction for tax purposes, as the EU formally recognised the efforts the Cayman government and financial services industry had made.

Specifically, the EU said Cayman had enhanced its framework on collective investment funds, thereby fulfilling its commitment to address concerns that it facilitated offshore structures which attract profits without conducting real economic activity.

For captive insurers, the impact of being on the blacklist had always been extremely limited. According to the law firm Simmons and Simmons, EU member states are encouraged to apply additional administrative measures for tax purposes to transactions or structures involving jurisdictions on the blacklist, but this had few negative implications for captives.

Kevin Poole, managing director for Cayman at Artex, says: “The EU list of non-cooperative tax jurisdictions had no effect on Cayman’s captives industry. Most of our clients are US-based so the issue did not impact them directly. Some clients asked a few questions about it but that was it.”

Farley agrees, saying: “While there may have been some impacts around the edges, such as the occasional structure involving EU institutional investors that had to use a different jurisdiction during the six months we were on the blacklist, there was very little actual impact.”

“The EU formally recognised the efforts the Cayman government and financial services industry had made.”

The potential impact for the funds industry was more serious, but even here, according to Simmons and Simmons in a note in February, shortly after Cayman had been added to the list, there was “no practical impact with regard to the management or operation of Cayman Islands funds nor upon EU marketing”.

Of greatest concern was the possibility that the EU, or EU member states, might choose to take more drastic action against blacklisted jurisdictions in the future. The EU had debated a number of potential measures, including applying a withholding tax or denying or limiting exemptions for dividends or other profit distributions received from subsidiaries in Cayman.

Farley says: “There was certainly a concern that over the next year the EU may exert increasing pressure on member states to introduce more adverse consequences for jurisdictions that are on the blacklist, so we definitely wanted to be off the list at the earliest opportunity.”

There was a huge collective sigh of relief, therefore, when it was confirmed that the EU had removed Cayman from its blacklist.

Colin Robinson, chair of Cayman International Insurance and the Insurance Managers Association of Cayman, said: “The EU’s decision was testament to Cayman’s continued commitment as a leading jurisdiction to adhere to international compliance standards and ongoing cooperation with international tax authorities.”

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