European Union finance ministers have removed the Cayman Islands and Oman from its list of non-cooperative jurisdictions in tax matters, “after having passed the necessary reforms to improve their tax policy framework”, the EU Council said Tuesday.

The EU Code of Conduct Group, which monitors countries for inclusion in the tax list, informed the EU Council in September that Cayman had enhanced its framework for collective investment funds and recommended that Cayman be removed from the list. Cayman had previously already met all other EU tax criteria.

The EU uses its tax blacklist to exert pressure on countries to reform their laws with regard to tax transparency, fair taxation and the implementation of international standards against tax-base erosion and profit shifting.

Listed countries typically face reputational damage, greater scrutiny of their financial transactions and may lose access to EU funding.

The Cayman Islands government, in a statement, welcomed the EU’s decision.

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Premier Alden McLaughlin

Premier Alden McLaughlin said Cayman had addressed EU concerns related to the supervision of investment funds. “Cayman responded positively by expanding the scope of our funds regime to ensure that the Cayman Islands Monetary Authority, our financial services regulator, has the legal mandate to supervise all Cayman-based investment funds,” he said.

McLaughlin added that Cayman remains fully committed to international tax good governance standards and noted that the EU has joined the OECD in positively recognising Cayman’s tax regime.

In July 2019, the OECD’s Forum on Harmful Tax Practices assessed Cayman’s regime as “not harmful,” the highest possible ranking.

“We will continue collaborating with the EU, including through broadening our dialogue to topics of mutual interest,” McLaughlin said. “These include green financing and key topics outside of financial services, such as environmental matters and tourism.”

Since 2018 the Cayman Islands has passed almost 20 pieces of legislation to meet EU demands on tax matters. This included amendments to the Mutual Funds Law and a new Private Funds Law to implement new rules for the registration, administration and supervision of funds.

Under the Private Funds Law, closed-ended funds now have to register with CIMA, the financial services regulator.

Cayman had previously introduced economic-substance legislation in response to EU pressure to curb tax avoidance by companies who operate in low-tax jurisdictions without having staff, offices or other operations there.

Companies that are engaged in relevant activities – banking, insurance, fund management, financing and leasing, shipping, intellectual property, collective investment vehicles and holding companies – must demonstrate they have a minimum of economic activity locally to take advantage of the zero-income-tax regime.

Specifically, companies in these mobile business sectors must show that their core income-generating activities are managed locally and conducted with qualified employees, and sufficient infrastructure and expenditure in Cayman.

Jude Scott, CEO, Cayman Finance

Jude Scott, CEO of Cayman Finance, the organisation that represents Cayman’s financial services industry, said, “The EU’s recognition of the Cayman Islands as cooperative on both transparency and fair taxation is an important validation of Cayman’s commitment to a responsible policy of tax neutrality that poses no harm to other countries.”

Scott said the industry body actively supports the government’s efforts to ensure Cayman’s tax regime continues to meet global standards on transparency and information sharing.

“Our dedication to these standards differentiates us from other International Financial Centres and is a key reason institutional investors consistently prefer to access global investment opportunities through Cayman-domiciled collective investment vehicles,” he said.

Scott added Cayman had a key role to play in the global financial system and continues to provide key benefits to EU governments and citizens as they recover from the economic impact of COVID-19.

“Billions of Euros in investment capital from around the world are being pooled in Cayman [funds] and invested into Europe, providing much-needed liquidity to support innovation, R&D and jobs, and environmental initiatives, as well as supporting economic growth and recovery,” the Cayman Finance CEO said.

“European pension funds use Cayman [funds] to access global markets more efficiently, securing better returns for the pensioners who rely on them.”

Other industry associations also welcomed the EU’s recognition of the Cayman Islands’ cooperation and the removal of the jurisdiction from the tax blacklist.

Ronan Guilfoyle, chairman of AIMA Cayman, said, “This action by the EU acknowledges that the regimes established by the Cayman Islands for fund regulation and the wider economic substance requirement, as well as those for the exchange of tax and financial information, anti-money laundering and related measures, are fully in line with international standards.

“While we have always been fully confident that the EU would recognise the strength of Cayman’s legal and regulatory regime for both open and closed ended funds, it has been welcome that the Cayman Islands has remained the jurisdiction of choice for so many investment managers and institutional fund promoters around the world who have continued to use Cayman as a fund domicile in great numbers,” he said.

While removing Cayman and Oman, the EU added Anguilla and Barbados to the tax list, after the publication of peer review reports by the Global Forum on Transparency and Exchange of Information for Tax Purposes. The reviews downgraded the ratings of Anguilla and Barbados, respectively, to “non-compliant” and “partially compliant” with the international standard on transparency and exchange of information on request.

The EU list now comprises these jurisdictions: American Samoa, Anguilla, Barbados, Fiji, Guam, Palau, Panama, Samoa, Seychelles, Trinidad and Tobago, the US Virgin Islands and Vanuatu.