The European Union ("EU") has announced that following a meeting of the EU's Economic and Financial Affairs Council ("ECOFIN"), the Cayman Islands has been moved to Annex 1 of the EU's list of non-cooperative jurisdictions for tax purposes ("Annex 1") effective 18 February 2020 due to not having appropriate measures in place relating to economic substance in the area of collective investment vehicles ("CIVs").
The Cayman Islands Government ("CIG") has announced that it has commenced discussions with EU officials to begin the process of having the Cayman Islands removed from Annex 1 as soon as possible, which in practice means October 2020. The CIG refers to the fact that the Cayman Islands passed legislation relating to CIVs (in the form of the Private Funds Law and Mutual Funds (Amendment) Law) on 31 January 2020, which came into force on 7 February 2020, to address the EU's requirements in relation to CIVs.
The move to Annex 1 appears to be a technical issue arising out of the delay in enacting this legislation and it is therefore expected that the Cayman Islands will be removed from Annex 1 at the first available opportunity. The Cayman Islands' economic substance legislation had already been evaluated in June 2019 by the OECD's Forum on Harmful Tax Practices as "not harmful", which is the highest rating possible.
The inclusion of the Cayman Islands on Annex 1 will have limited or no direct immediate consequences for investors or clients using Cayman Islands structures.
- EU investors can continue to invest and be marketed to as normal. In particular, inclusion on Annex 1 does not prevent a Cayman Islands investment fund from being marketed into the EU in accordance with the national private placement rules pursuant to the EU Alternative Investment Fund Managers Directive. Nor does it prevent a Cayman Islands entity being used as a securitisation special purpose entity pursuant to the EU Securitisation Regulation.
- There are no EU level sanctions resulting from being moved to Annex 1. However, the EU provided guidance in 2019 on a number of types of administrative and legislative measures in the tax area that it recommends should be applied by EU member states from 2021 (by which point we anticipate that the Cayman Islands will no longer be listed). Administrative measures consist of transaction reporting and increased tax audits for taxpayers with connections to a listed jurisdiction. Legislative tax measures include non-deductibility of costs, controlled foreign companies' rules, withholding taxes, restrictions on any participation exemption, special documentation requirements and anti-abuse provisions. However, in practice, EU member states apply many if not all such measures in the case of non-double tax treaty jurisdictions, or tax neutral jurisdictions, such as the Cayman Islands, irrespective of any listing in Annex 1.
- EU requirements for mandatory reporting in respect of certain cross-border arrangements (DAC 6) means that tax deductible payments made by an EU entity to an 'associated entity' in a low tax or zero tax jurisdiction are reportable in certain cases, with reporting to commence on 31 August 2020. The requirement to report such payments is broader if the associated entity is listed in Annex 1. The detail of DAC 6 is left to local implementing law.
- The EU intends that EU funding should not be made available to or through entities established in a listed jurisdiction. This is not anticipated to be relevant to the majority of our clients.
We are continuously monitoring the situation and will advise further in the event of any updates, but remain confident that the Cayman Islands has, and will continue to, address any concerns of the EU.
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