On 14 February 2023, the EU added four jurisdictions, the British Virgin Islands, Costa Rica, Marshall Islands and Russia, to its list of non-cooperative jurisdictions for tax purposes (the “EU Blacklist”). There are now 16 jurisdictions on the EU Blacklist, which can be found here.
Reasons given by the EU Council for adding the jurisdictions to the EU Blacklist
The EU Council cited the following reasons for adding these jurisdictions to its blacklist:
- British Virgin Islands – found not to be sufficiently in compliance with the OECD standard on exchange of information on request;
- Costa Rica – found not to have fulfilled its commitment to abolish or amend the harmful aspects of its foreign source income exemption regime;
- Marshall Islands – found to be lacking in the enforcement of economic substance requirements; and
- Russia – found not to have fulfilled its commitment to address the harmful aspects of a special regime for international holding companies. The EU Council also noted that dialogue with Russia on matters related to taxation has come to a standstill following the Russian aggression against Ukraine.
The EU Blacklist is next due to be revised in October 2023. It remains to be seen whether these jurisdictions will be able to demonstrate sufficient cooperation with the EU before then in order to be removed from the EU Blacklist.
EU Grey List
In addition to revising the EU Blacklist, the EU Council also announced that four jurisdictions, North Macedonia, Barbados, Jamaica and Uruguay, have been removed from the state of play document (the so called “EU Grey List”). The EU Grey List monitors jurisdictions that do not yet comply with all international tax standards but have committed to implementing reforms. Notably, two EU Grey List jurisdictions, Hong Kong and Malaysia, have been granted an extension of the deadline to complete the reform of their foreign source income exemption regimes as regards capital gains.
Developments with regard to EU Grey List jurisdictions (including Hong Kong and Malaysia) should be monitored as these may impact the EU Blacklist when it is next reviewed and revised in October 2023.
Key action points for private fund sponsors
The EU Blacklist gives rise to a number of practical implications for private fund sponsors. Two immediate action points include:
- Undertake a review of side letters to check for any provisions on the use of EU Blacklist jurisdictions in investment structures; and
- For any EU deals, confirm that under the relevant domestic EU law there are now no issues with the use of entities or investors from the British Virgin Islands, Costa Rica, Marshall Islands or Russia in the structure. Certain EU countries (e.g. Germany, the Netherlands and Luxembourg) have introduced measures targeted at jurisdictions on the EU Blacklist, such as (i) restrictions on the deductibility of costs for certain payments made to companies in a blacklisted jurisdiction; (ii) enhanced controlled foreign company (‘CFC’) rules; (iii) more onerous withholding taxes; and (iv) additional taxes on the receipt of distributions (i.e., “switching off” the participation exemption in respect of profits paid to vehicles in blacklisted jurisdictions).