Cayman Islands added to the EU list of non-cooperative jurisdictions: practical impact for Cayman Islands funds and their managers

The European Union added the Cayman Islands to its list of non-cooperative jurisdictions for tax purposes (the “EU blacklist”) on 18 February 2020. The industry view is that Cayman’s addition to the EU blacklist is due to a “foot fault” by the Cayman Islands on its timing in introducing certain new private funds laws, and that funds’ day-to-day operations should not be materially affected. This update looks at why the Cayman Islands has been added to the EU blacklist and what it means in practice for Cayman Islands funds and their managers.

Why has the Cayman Islands been added to the EU blacklist?

The EU press release sets out that the Cayman Islands was added to the EU blacklist as it does not have “appropriate measures in place relating to economic substance in the area of collective investment vehicles”.

The Cayman Islands has been cooperating with the EU since 2017 to introduce various legislative changes to enhance tax cooperation and transparency, so as to meet the EU’s requests in this area. The changes include new laws on economic substance of relevant entities which came into force at the start of 2019 and further laws which came into force on 7 February 2020 requiring certain private funds to register with the Cayman Islands Monetary Authority.

Industry sentiment is that the Cayman Islands has been added to the EU blacklist partly due to a “foot fault” on the timing of the introduction of the private funds laws in February 2020 (rather than by the agreed deadline of the end of 2019), as well as being due to broader geopolitical factors that are currently of concern for the EU. However, the new private funds laws are understood to comply with the EU’s requirements, following detailed discussions between the EU and the Cayman Islands.

What is the de-listing process and when could the Cayman Islands come off the blacklist?

The EU Council regularly reviews and updates the EU blacklist, with the next review due in October 2020. The expectation is that the Cayman Islands’ compliance with EU requirements will be reviewed as part of this ongoing process and that the Cayman Islands could then be removed from the EU blacklist in October. The review could include further (minor) changes being required by the EU to the Cayman Islands’ new private funds laws.

Other jurisdictions have in the past been added to the EU blacklist and then removed after further review and discussions. For example, Bermuda was added to the EU blacklist in March 2019 following a similar “foot fault” on the timing of its introduction of economic substance legislation and was then removed in May 2019 once further amendments had been made to the relevant Bermudan laws and reviewed by the EU. It is hoped that the Cayman Islands will be reviewed in the same way later in 2020 and then removed from the blacklist.

Defensive measures may be taken by individual EU member states

The EU Council issued (non-binding) guidance in December 2019 inviting all EU member states to apply legislative defensive measures against jurisdictions on the EU blacklist from 1 January 2021 or earlier, to encourage blacklisted jurisdictions’ compliance with EU requirements on fair taxation and transparency.Under that 2019 guidance, defensive measures could include administrative measures such as:

• Reinforced monitoring of transactions.
• Increased audit risks for taxpayers benefiting from or with structures or arrangements in the Cayman Islands.

And legislative measures on:  

• Non-deductibility of costs.
• Application of CFC rules.
• Imposition of withholding tax.
• Limitation of any participation exemption on profit-distribution.

Although it remains to be seen whether defensive measures will be adopted by individual EU member states by January 2021, the Netherlands and France have introduced some measures against jurisdictions on the EU blacklist, including the Netherlands applying new CFC rules to entities in blacklisted jurisdictions and France imposing a 75% withholding tax on various payments to certain entities resident in blacklisted jurisdictions. If the Cayman Islands is removed from the EU blacklist in October 2020, any defensive measures introduced by individual EU member states should not then apply.

No change to marketing Cayman Islands funds in the EU under AIFMD or OECD rules

The addition of the Cayman Islands to the EU blacklist does not impact or change how Cayman Islands investment funds are marketed in the EU under AIFMD. It also does not affect the conclusion of the OECD’s Forum on Harmful Tax Practices in July 2019 that the Cayman Islands’ domestic legal framework is in line with the OECD’s standard and not “harmful” to the global economy. Neither does the EU consider the Cayman Islands to be a “tax haven”.

DAC 6 reporting

Additional reporting of certain cross-border tax arrangements and payments by an EU entity to an associated entity in the Cayman Islands may also be required under the EU Mandatory Disclosure Rules (“DAC 6”) from 31 August 2020, following the addition of the Cayman Islands to the EU blacklist.

Reputational and administrative issues

The Cayman Islands remains an effective jurisdiction for establishing investment funds and its addition to the EU blacklist is not expected to impact Cayman Islands funds ability to raise capital from global investors. Compliance checks on Cayman Islands funds' may now treat those funds as being higher risk, but little is expected to change in practice on a day-to-day basis for Cayman Islands funds and their managers, including in relation to setting up or transferring funds from bank accounts held in the EU.

We will continue to monitor these developments with Cayman Islands counsel and provide further updates as they evolve.

Dechert thanks Oliver Cooper and Richard Hay of Stikeman Elliott and Hughie Wong of Walkers for their contributions to this piece.