Tax

The EU has today removed the Cayman Islands from its list of non-cooperative jurisdictions for tax purposes (the “EU blacklist”).

Cayman was put on the EU blacklist in February this year (please see here and here) and its removal from the list today will be a relief to many who have entities, arrangements and/or investments involving the Cayman Islands and who have been waiting for the outcome of today’s review meeting.

Other changes to the EU’s blacklist announced today include Anguilla and Barbados having been added to the blacklist.

The EU blacklist is next due for review and possible change in February 2021.

Impact

The removal of the Cayman Islands from the EU blacklist will be welcomed by private fund sponsors who often structure their investment funds using Cayman Islands entities, passive investors who invest in such funds or who otherwise make investments through Cayman Island vehicles and by active businesses for whom the Cayman Islands features in their corporate structures.

Since February a minority of taxpayers, for example those under contractual obligations to avoid EU blacklist jurisdictions, have undertaken restructurings or redomiciliations for existing Cayman structures, or have opted for alternative holding jurisdictions over the Cayman Islands for new structures. Most private fund sponsors, investors and businesses with existing structures involving the Cayman Islands have however opted to take more of a ‘wait and see’, optimistic approach particularly given hopes that the Cayman Islands would take the necessary steps to be de-listed following the October 6, 2020 scheduled review meeting.

Key considerations in relation to today’s announcement include the following:

• EU Member States are encouraged to adopt “defensive measures” in respect of jurisdictions which are on the EU blacklist. These include additional monitoring of structures using such jurisdictions and non-deductibility or withholding taxes imposed on payments to such jurisdictions. As Cayman has now been removed from the EU blacklist, such EU blacklist related measures should no longer be applicable.

• Investment structuring through Luxembourg was thought to be potentially problematic if Cayman remained on the EU blacklist from January 1, 2021 given Luxembourg’s proposed draft law to implement new measures against countries on the EU blacklist effective January 1, 2021 (please see here).  This development should continue to be monitored since the proposed new rules in Luxembourg are still in draft but at this stage it is anticipated that Cayman entities (e.g. funds or subsidiaries of funds) that invest through Luxembourg entities into portfolio companies should not be affected now that Cayman has been removed from the EU blacklist. The Luxembourg developments should also be monitored by those who use Luxembourg investment platforms or other holding structures if any EU blacklist jurisdictions are involved, including the newly added jurisdictions of Anguilla and Barbados.

• Some European jurisdictions have their own domestic “blacklists” that can result in adverse tax consequences for entities resident in, or in arrangements with, certain non-cooperative jurisdictions. Where these local blacklists are based on the EU blacklist, the removal of the Cayman Islands from the EU blacklist should be helpful.  Where the Cayman Islands have already been added to any such local blacklist it could now be removed – although note that some countries have included the Cayman Islands into their domestic blacklists independently of the status of the EU blacklist.

• The removal of the Cayman Islands from the EU blacklist may reduce the risk of enhanced local tax audits of Cayman funds.

• The removal of the Cayman Islands from the EU blacklist should also reduce the level of DAC 6 reporting (the new EU and UK mandatory regime that requires certain persons to disclose cross-border arrangements featuring certain “hallmarks” to the relevant tax authority) as transactions involving Cayman structures will no longer meet certain of the DAC 6 “strict” hallmarks applicable to non-cooperative jurisdictions.

Final Remarks

Today’s development will be a relief for the Cayman Islands and for those who invest in or through Cayman entities or structures. However it remains to be seen whether there are any residual effects, for example whether private fund sponsors and investors now take a more searching look at structuring new investments through Cayman going forward given its historic EU blacklist association. Alternatively, the successful steps taken by the Cayman Islands to improve its tax policy framework resulting in its being removed from the EU blacklist may be perceived by many as reinforcing the choice of the Cayman Islands for their structures and arrangements.  In all cases this should be carefully weighed up taking into account all relevant factors and with input from tax and other advisors.

The text of today’s EU announcement is at: https://www.consilium.europa.eu/en/press/press-releases/2020/10/06/eu-list-of-non-cooperative-jurisdictions-for-tax-purposes-anguilla-and-barbados-added-cayman-islands-and-oman-removed/