EU Adds Cayman Islands to Tax ‘Blacklist’

February 18, 2020

The European Union has updated its list of non-cooperative tax jurisdictions to include the Cayman Islands. This addition could have certain repercussions for fund managers, sponsors, and investors operating through the Cayman Islands.

The Cayman Islands had been on the “greylist” since the list’s inception in 2017, on the basis that the tax regime “facilitates offshore structures which attract profits without real economic activity”.

As anticipated following recent press speculation, the EU’s Economic and Financial Affairs (Ecofin) Council confirmed today that the Cayman Islands has been moved from the greylist to the “blacklist” of non-cooperative tax jurisdictions. This decision follows a widely reported recommendation last week by the EU Code of Conduct Group on Business Taxation, which is responsible for screening countries and revising the blacklist.

The stated reason for this decision is that the Cayman Islands has not sufficiently addressed issues relating to economic substance in the area of collective investment vehicles in the time frame required by the European Union.

What Is the Blacklist?

The list, first published in December 2017, is part of the EU’s wider efforts to tackle tax evasion, avoidance, and unfair tax competition. It was conceived to level the tax playing field between EU and non-EU countries. Countries are assessed on three main criteria: transparency, fair taxation, and real economic activity. It is updated twice a year, based on monitoring of, and ongoing dialogue with, listed jurisdictions by the Council of the European Union (the Council). The next update is expected in October 2020.

In this latest update, four countries have been added to the blacklist: Cayman Islands, Palau, Panama, and Seychelles. They join the eight countries already on the list.[1] The “greylist”, comprising countries that have committed to addressing EU concerns, has reduced to 13 jurisdictions after the removal of 16 jurisdictions, including the British Virgin Islands.

Consequences of Being Listed

The aim of the blacklist is to “encourage positive change through cooperation”.

Blacklisted countries face limited access to EU funding from international development financial institutions. In addition, those with activities involving blacklisted jurisdictions can expect to experience more transaction monitoring and audit risks within the European Union.

Some EU rules refer to the list. One such measure already in force is the new reporting obligation under rules known as “DAC 6”. DAC 6 requires the disclosure of certain cross-border arrangements to tax authorities, which must share the information with other EU countries. An arrangement may be reportable if it involves deductible cross-border payments from an EU entity to an associated entity in a blacklisted jurisdiction (whether or not this produces a tax benefit). As a result, investments involving Cayman Islands holding vehicles may now require a DAC 6 report to be made in connection with such structures.

In addition, the Council requires EU countries to use the blacklist in applying at least one new “legislative measure” by 1 January 2021. The proposed measures are set out below.

  • Denying tax deductions for payments made to persons in listed jurisdictions.
  • Taxing income of controlled foreign companies in listed jurisdictions.
  • Imposing withholding tax on payments to listed jurisdictions.
  • Limiting participation exemptions on profit distributions from entities in listed jurisdictions.

Consequently, should the Cayman Islands remain on the blacklist, the implications could become more significant once such measures are implemented.

Countries on the greylist are not subject to these measures, but are closely monitored by the Council and risk being blacklisted if they do not deliver on promised reforms.


This announcement comes at a somewhat surprising time, given the recent efforts by the Cayman Islands to bolster economic substance laws in the jurisdiction. It is clear that the Cayman Islands has been making efforts to cooperate with the European Union and the government had enacted new laws on the regulation of mutual and private funds as recently as early 2020. We expect that these efforts will continue with a view to ensuring that the Cayman Islands does not remain on the blacklist for long. (It is not yet clear if these changes simply came in too late for the recent update to the blacklist, and will suffice for the Cayman Islands to be removed from the list in due course.)

Fund managers are feeling the impact of these changes, with some observing that it is now easier to operate elsewhere than meet the increasingly stringent requirements in the Cayman Islands. As the substance regime becomes more robust, this is likely to further increase the compliance burden associated with being established there.

There may be no immediate economic impact for fund investors, as the blacklist does not prohibit continued or new investment through the Cayman Islands. Greater tax accountability is very much the trend of today, and the making of a report under DAC 6 rules may become fairly common. While some investors may be sensitive for reputational reasons, under current English law there are generally no legal repercussions to being named as an investor in a DAC 6 report.

If and when the list is imported into other national tax regimes, in the European Union or elsewhere, further tax leakage could arise. (Some EU countries already have such lists, including Italy and Spain.) This may include the imposition of withholding tax within structures where treaty relief is denied to an otherwise eligible holding company being owned directly or indirectly by a Cayman Islands entity. The funds industry will also be concerned to see how EU countries implement the Council’s proposed “legislative measures”. Such developments may increase costs and reduce returns for sponsors and investors alike.

Looking ahead, certain investors may have concerns about investing through the Cayman Islands, as a result of tax changes (actual or potential) or perceived reputational risk. Such considerations may result in new funds or investors preferring to offer, or use, an alternative EU vehicle.

Is there a Brexit angle to this development? The UK and its overseas territories are now likely to receive increased scrutiny from the Council. However, it may be premature to attempt to draw too many political inferences from this decision, and in the meantime, it will probably be business as usual for most.


Morgan Lewis would be happy to discuss any specific concerns you have regarding Cayman Islands entities or feedback you may have received from sponsors or investors. If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Kate Habershon
Neil McKnight
Grace Tan

[1] American Samoa, Fiji, Guam, Samoa, Oman, Trinidad and Tobago, Vanuatu, and US Virgin Islands.