Private Equity

On February 18, 2020, the EU updated its list of non-cooperative and semi-cooperative jurisdictions, in terms of tax reporting transparency and economic substance standards. Cayman Islands slipped from its prior designation as a semi-cooperative jurisdiction onto the non-cooperative list (the “EU Blacklist”).

Key action points for Private Fund Sponsors are:

• Undertake an existing side letter review to check for any provisions on the use of EU Blacklist jurisdictions in investment structures
• For any EU deals, confirm that under the relevant domestic EU law there are now no issues with Cayman entities or investors in the structure. Certain EU countries have their own blacklists (e.g. Spain, France, Cyprus) and impose tax consequences if, for example, payments are made by those countries to countries included on the EU Blacklist. Three main sub-points to note here:
  • Where a country’s blacklist is by reference to the EU Blacklist, Cayman Island’s inclusion on the EU Blacklist may mean there is an increased tax cost in an underlying structure that includes Cayman vehicles.  One example of this is France – France maintains a list of states or territories which it considers to be non-cooperative for tax purposes (the “NCST List”). Jurisdictions on the EU Blacklist are added to the NCST List when the NCST list is revised periodically (most recently, on January 7, 2020). Sanctions may include the imposition of a 75% withholding tax on payments to or for the benefit of a resident of a jurisdiction included on the NCST List.
  •  Where a country’s blacklist is standalone, it very often closely resembles the EU Blacklist. Cayman Islands being added to the EU Blacklist may mean that it will eventually be added to the local blacklist if Cayman remains on the EU Blacklist.
  •  All EU member states are supposed to be introducing at least one legislative “defensive measure” against jurisdictions included on the EU Blacklist by 2021.  Such defensive measures could include, for example, (i) restrictions on the certain tax deductions, (ii) enhanced CFC rules, (iii) more onerous withholding taxes, and (iv) additional taxes on the receipt of distributions (i.e., “switching off” the participation exemption in respect of profits paid to Cayman vehicles).

Some additional points to consider are:

• It is not clear yet whether Cayman Islands has been listed simply because it missed deadlines for amending its laws (which it achieved on February 7, 2020) or because there are also technical deficiencies in the laws that it did adopt.
• Notwithstanding the inclusion of Cayman Islands on the EU Blacklist, Cayman vehicles are not barred from investing into the EU nor from accepting investments from the EU. However, certain Private Fund investors may have their own policies that restrict making investments into EU Blacklist entities directly or indirectly.

Cayman Islands is generally expected to cooperate with the EU to achieve de-listing from the EU Blacklist. Unfortunately, the first opportunity to de-list would be October 2020. Please feel free to reach out to us with any questions. We would be happy to discuss the impact of Cayman Island’s inclusion on the EU Blacklist on your specific Private Fund or its investments.