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Cayman Islands EU blacklisting briefing

24 February 2020

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The Cayman Islands has been added to the EU’s list of non-cooperative jurisdictions for tax purposes following the EU Member States finance ministers’ meeting (EcoFin) on 18 February 2020. In acknowledging the decision, the Cayman Islands government highlighted its long history of cooperation with the EU on issues of tax cooperation and reaffirmed its commitment to constructive engagement with the EU to ensure that Cayman is removed from the list at EcoFin’s next scheduled meeting in October 2020. While the immediate effect of the listing is to exclude the Cayman Islands government from accessing EU institutions such as the European Fund for Sustainable Development and the European Fund for Strategic Investments, the impact on Cayman domiciled collective investment vehicles and funds is expected to be limited.

Background

The published conclusions of the EcoFin meeting state that “[the] Cayman Islands does not have appropriate measures in place relating to economic substance in the area of collective investment vehicles.” After months of negotiations between the Cayman Islands government and the EU’s code of conduct group (CoCG), which has administrative responsibility for reviewing and assessing compliance with EU requirements, legislation in the form required by the CoCG to address its concerns was enacted by the Cayman legislature on 7 February 2020, three days after the CoCG’s final meeting to approve its report on compliance to EcoFin on 4 February 2020. The newly enacted Private Funds Law and Mutual Funds (Amendment) Law extend the existing regulatory regime to collective investment vehicles and funds which have been exempt historically and are seen as addressing previously held concerns within CoCG of the exemption of funds from wider economic substance laws which were introduced in Cayman in 2018.

Cayman Islands Government Response

The Cayman Islands government issued its own release promptly following the announcement of EcoFin’s conclusions and stated that it had “already contacted EU officials to begin the process of being removed from the EU list of non-cooperative jurisdictions”. Cayman Premier, the Hon Alden McLaughlin, added that “the Cayman Islands also remains fully committed to cooperating with the EU, and will continue to constructively engage with them with the view to be delisted as soon as possible,” which is understood to be at the next half yearly EcoFin meeting in October.

Consequences of Listing

The listing of established and reputable international financial centers by the EU is not unprecedented, with Bermuda being the most recent example of a jurisdiction listed before enacting required legislation and being delisted at the first available opportunity.

The short term impact of the listing is to exclude the Cayman Islands government from accessing certain EU funds. The EU has not currently developed sanctions for jurisdictions that are listed and so Cayman domiciled funds continue to be able to access EU investors on the basis of national private placement regimes, while such investors can retain or add to existing investments without any additional restrictions. While the EU has called upon Member States to establish penalties from a list of tax and non-tax measures which it has proposed, such penalties are to be introduced by 1 January 2021, well after the October date by which Cayman is expected to be delisted.

Nothing contained in this briefing constitutes legal, accounting or tax advice nor shall it be construed as representing that the legislative and/or regulatory position outlined herein is not subject to change following the date of publication of these materials.

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