Cayman Islands Tax Haven: How being added into EU’s blacklist will affect your business

Cayman Islands Tax Haven

The European council issued a press release on 18 February 2020 regarding the status of Cayman Islands Tax Haven.  EU announced that Cayman Islands (along with three other jurisdictions) were now added to the annex I of EU list of non-cooperative jurisdictions for Tax Purposes. The EU council deemed the decision was appropriate considering Cayman Islands has not implemented those expected legislative reforms within the stipulated time. The Cayman Islands does not have any income tax, capital gains tax nor corporation tax resulting it in not having any appropriate measures in place to prevent tax abuse. The lack of such measures resulted in firms having minimal presence in Cayman Islands registering in the territory for tax evasions. Prior to February, Cayman Island was on a grey list and was required to implement updates in relation to its tax rules to resolve the tax deficiencies. However, Cayman Island was not able to implement substantial reforms by the stipulated deadlines.

Reason for blacklist by EU

The Cayman Islands was able to adopt and implement approximately 15 legislative changes in line with the EU’s requirements since the establishment of the EU’s non-cooperative tax jurisdictions list.  The EU confirmed that Cayman Islands had satisfied its economic substance requirements with the exception of economic substance for investments funds/CIV in early 2019. Despite the above exceptions, The OECD’s forum on Harmful Tax practices rated Cayman Island as “not harmful in June 2019. The above rating was the highest positive rating by the OECD forum. To further address the EU’s concerns for CIV, the Cayman Islands government passed additional “private funds law and the mutual funds (amendments) law. The amendments were implemented and effective 7 February 2020. However, it was after EU stipulated deadlines of 4 February 2020. (the date of EU’s Code Of Conduct Group Meeting)

Cayman Islands Tax Haven: Consequences

There will not be specific penalties or sanctions imposed on a country that has been placed on the EU list. However, Cayman Islands entities will now be subjected to certain measures that will generally prevent firms to access to EU funding from the European Fund for Sustainable Development or the European Fund for Strategic Investments. These non-tax defensive measures are not expected to have a material impact on Cayman Islands organisations or entities. In addition, there might be additional reporting requirements under the EU mandatory rules (EU directive 2018/822, commonly referred to as “DAC 6). Such rules will require entities in EU to comply with additional reporting requirements on specific types of cross-border fund transfers, payments and tax arrangements with its associated entity in Cayman Islands. All EU member states are encouraged by the European Council to implement legislative defensive measures designed to impose specific penalties on Jurisdictions place on the EU list. Generally, each EU states must apply one or more of the following legislative measures effective 1 January 2021 in relation to a transactions involving Cayman Islands.

• Application of controlled foreign corporation rules;
• Limitation or dis-allowance of deductibility of costs;
• Limitation of any participation exemption on profit distributions; or
• Withholding tax.

Will Cayman Islands be removed from the EU blacklist?

Once the issues of concerns are addressed, Cayman Islands will be able to remove itself from the list . The Cayman Islands government is actively working with the EU official to commence the process of removing itself from the EU list. Considering that certain legislative amendments relating to the investment funds have taken effect, Cayman Islands is anticipating to remove itself from the list within October 2020. The EU list is updated twice annually and the next is expected to be in October 2020. The above inclusion in the EU list is anticipated to be temporary by the Cayman Islands governments. Organisation that are considering to restructure should factor the above anticipated timelines.

How does this affect your Cayman Islands business?

For international businessmen and investors with existing  entities in the Cayman Islands Tax Haven, it will now be more difficult to open international corporate bank accounts, especially with banks located in EU. If the Cayman Islands companies already have existing corporate bank accounts, you may face enhanced due diligence checks or account closures. In addition, it is widely expected that Cayman Islands government will introduce additional economic substance requirements in order to be removed from the EU blacklist. As such, like other offshore jurisdictions, Cayman Islands companies can expect to be required to meet additional economic substance requirements such as recruitment of local employees or leasing a local physical office. This will result in additional operating costs for all Cayman Islands businesses. For investors who are looking to set up a Cayman Islands offshore company, it is recommended to register your company in alternative reputable low-tax jurisdictions such as Hong Kong and Singapore. Properly structured, your business will be legally tax exempt. On the other hand, for investors with existing Cayman Islands offshore companies, it is suggested to consider re-domiciliate to another more reputable offshore jurisdiction.