Importance of conformity to international tax standards – Cayman Islands added to the EU blacklist of non-cooperative jurisdictions

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The EU’s Economic and Financial Affairs Council (ECOFIN) maintains a list of non-cooperative jurisdictions for tax purposes; the purpose of which is to contribute to ongoing efforts to promote tax good governance worldwide. On 18 February 2020 the Cayman Islands was added to the list, on the basis that it “does not have appropriate measures in place relating to economic substance in the area of collective investment vehicles.” ECOFIN’s decision appears to be based on Cayman’s delay to the introduction of its new private funds legislation, rather than a lack of cooperation with the EU’s compliance requests on tax cooperation and transparency. Although new legislation for private funds was introduced by the Cayman Islands Government on 7 February 2020, this was after the date of the ECOFIN meeting and decision. Therefore, it is hoped that the blacklisting is short-lived, with Cayman being delisted at next review in October 2020.  

However, for those with Cayman entities in their fund structures, there are still some practical and action points to consider in the short/medium term - which we have set out below.

Practical and action points

  1. Fund managers will want to ensure that they comply with the Cayman Islands’ private funds laws (for instance, that apply new economic substance rules and new reporting requirements to certain entities), which may also increase firms’ compliance costs.
  2. The Council of the EU produced updated guidance in November 2019 inviting member states to apply at least one defensive legislative measure towards non-cooperative jurisdictions by January 2021 - comprising controlled foreign companies legislation; non-deductibility of costs; withholding taxes measures; and limitation of participation exemption on distribution of profits. It also suggests defensive administrative measures, such as reinforced monitoring of transactions and increased audit risks for taxpayers benefitting from or using structures or arrangements in the Cayman Islands. Firms will want to consider, on a case-by-case basis, how these measures are implemented by individual member states, so that they can assess the potential impact, alongside any other domestic provisions.
  3. Fund managers will want to consider the impact of the Cayman Islands being on the EU list of non-cooperative jurisdictions for tax purposes in the context of any specific references in existing contracts, investment agreements and side letters.
  4. In addition, fund managers should continue to monitor developments. If Cayman remains on the blacklist following ECOFIN’s next review, they should consider if they want to make more fundamental changes to their investment structures.
  5. Some transactions that involve EU member states (or the UK) and the Cayman Islands will potentially be brought into the scope of DAC6, an EU Directive requiring disclosure of reportable cross-border arrangements to the relevant EU tax authority. For example, a tax deductible cross border payment between associated enterprises where the recipient of the income is resident in Cayman will now automatically be reportable as the recipient is in a “non-cooperative” jurisdiction listed by the EU or OECD (and there is no need for the tax main benefit test to be met). Although the reporting regime goes fully live on 1 July 2020, a retrospective test also applies, as the reporting obligation also applies to transactions that were first implemented from 25 June 2018. 
  6. This listing should not impact on the ability of a Cayman fund to market into the EU under the AIFMD national private placement rules (on the basis that the relevant conditionality under the AIFMD marketing rules is not being a non-cooperative jurisdiction with reference to the list established by the Financial Action Task Force, not the EU).
  7. Although the listing of a country on the list of non-cooperative jurisdictions for tax purposes does not necessarily lead to adverse tax consequences elsewhere, there may be wider issues to recognise, such as reputational concerns and the fact that EU-related development agencies may not be able provide funding to Cayman entities. In practice however, we would expect the main impacts of Cayman’s listing to be around compliance, risk and administrative issues and treatment.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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