Back off black

The EU removed the Cayman Islands from its blacklist of tax havens in October, after the British overseas territory was named a non-cooperative jurisdiction for tax purposes following a meeting of EU finance ministers in February this year. Did the blacklist affect its business or reputation? Putro Harnowo reports

The Cayman Islands is a popular jurisdiction among Asian investors, especially Chinese companies, looking to structure their overseas businesses and cross-border transactions for tax efficiency. The regulatory regime there, and the presence of many of the world’s leading financial services, have established Cayman as a top jurisdiction for international investment funds.

In recent years, the EU has taken action to scrutinize non-cooperative jurisdictions based on a criteria of tax transparency, fair taxation, and compliance with the Base Erosion and Profits Shifting (BEPS) requirements initiated by the Organisation for Economic Cooperation and Development (OECD).

A number of offshore jurisdictions have responded by reforming their economic substance requirements to comply with the EU’s fair taxation principle that “a jurisdiction should not facilitate offshore structures or arrangements, aimed at attracting profits, which do not reflect real economic activity in the jurisdiction”.

The EU blacklist, which is called Annex I, comprises non-EU countries that encourage abusive tax practices that could erode member states’ corporate tax revenues. This list, compiled by the Economic and Financial Affairs Council (ECOFIN), was earlier updated annually, but since 2020 the list is being updated twice a year, with 6 October being the latest update.

“Investors had been surprised by that news and have been supportive of Cayman as they understand the benefits of Cayman in connecting parties around the world to do business with each other,” says Jude Scott, chief executive officer (CEO) of Cayman Finance.

“Cayman was only added to the list of non-cooperative jurisdictions in February 2020 and it had been widely recognized at the time that this was more an issue of process, and not a broader concern about Cayman’s substantive commitment to co-operation with the EU on tax,” he says.

Fiona Chan, a corporate partner at Appleby’s Hong Kong office, says that the surprise was reasonable, as Cayman had just passed new regulations on 7 February 2020 to enhance its oversight of investment funds. The Private Funds Law, 2020, requires closed-ended funds formed to register with the Cayman Islands Monetary Authority (CIMA) and the Mutual Funds (Amendment) Law, 2020, removed the small fund exemption, for those with fewer than 15 investors. Cayman later registered more than 12,300 private funds with its monetary authority by August 2020.

“The October meeting was the first opportunity for the finance ministers of the EU member-states to revisit Cayman’s status on the EU List,” says Chan. “At that meeting, they endorsed the assessment of the EU’s code of conduct group on business taxation, that Cayman had addressed all the outstanding concerns.”

Paul Christopher, a managing partner at the Hong Kong office at Mourant, agrees. “This new legislation only came into force after the EU’s deadline on determination of compliance,” he says. “So the listing was an issue on timing, rather than substantive non-compliance.”