Back in 5 December 2017, the European Union (EU) proposed their list of “non-cooperative” taxation jurisdictions, popularly referred to as the ‘EU Black List’. The list comprised of 17 countries at that time, however, the EU had stated that they aim to review the list at least once a year, removing countries as they show commitment and compliance towards the EU’s agreed upon standards.
In early 2018, several countries were moved from the Black List and moved to the “Grey List”. Criterion 2.2 jurisdictions (largely traditional offshore jurisdictions) are a subset of the Grey List that the EU deems to ‘facilitate offshore structures or arrangements aimed at attracting profits that do not reflect real economic activity (‘substance’) in the jurisdiction’.
As a result, many international finance centres have had to introduce so-called economic substance legislation by the end of 2018 in order to stay off the EU Black List. This includes all the traditional offshore jurisdictions, including the UK’s Crown Dependencies and Overseas Territories, (CDOTs), such as the BVI, Cayman, Jersey and others.
These substance requirements are expected to apply to the following categories of geographically mobile financial and other service activities, identified by the EU and more recently by the OECD:
- Fund Management
- Financing & Leasing
- Distribution and Service Centres
- Holding Company
- Intellectual Property
The expectation is that if companies are conducting any of the above activities, then substance may be required in the jurisdiction of incorporation; if not, then additional substance may not be required. This may apply to all legal entities that carry on relevant activities unless they are resident for tax purposes in another jurisdiction.
Most jurisdictions, including the UK’s CDOTs, introduced substance legislation by the end of 2018.
EU publishes full Black List and 'Grey List' conclusions
The EU met on March 12, 2019 to assess compliance with its Black List criteria. Below are their conclusions:
- Bermuda has been added to the Black List. The EU Council’s conclusions do not expand on the rationale for this, other than to state that this was solely due to criterion 2.2.
The full list of Black Listed jurisdictions is: American Samoa, Aruba, Barbados, Belize, Bermuda, Dominica, Fiji, Guam, Marshall Islands, Oman, Samoa, Trinidad & Tobago, United Arab Emirates, the U.S. Virgin Islands, and Vanuatu.
- All three Crown Dependencies have been given the all-clear – Jersey, Guernsey, and the Isle of Man have all been removed from the ‘Grey List’ altogether, having been assessed as having fully implemented their commitments.
The full list of jurisdictions taken off the ‘Grey List’ due to implementing their commitments in full is: Andorra, Bahrain, Faroe Islands, Greenland, Grenada, Guernsey, Hong Kong, Isle of Man, Jamaica, Jersey, Korea, Liechtenstein, Macao SAR, Malaysia, Montserrat, New Caledonia, Panama, Peru, Qatar, San Marino, Saint Vincent & the Grenadines, Taiwan, Tunisia, Turks & Caicos, and Uruguay.
- BVI and Cayman (along with The Bahamas) remain on the ‘Grey List’ and will be monitored for implementation of substance requirements. They are now expected to adapt their legislation with regards to funds by the end of 2019. The ‘Grey List’ does not carry any sanctions itself, although remaining on it will mean BVI and Cayman remain subject to the EU’s scrutiny for the coming year.
The full list of jurisdictions on the ‘Grey List’ is: Albania, Anguilla, Antigua & Barbuda, Armenia, Australia, Bahamas, Bosnia & Herzegovina, Botswana, British Virgin Islands, Cabo Verde, Costa Rica, Curacao, Cayman Islands, Cook Islands, Eswatini, Jordan, Maldives, Mauritius, Morocco, Mongolia, Montenegro, Namibia, North Macedonia, Nauru, Niue, Palau, Saint Kitts & Nevis, Saint Lucia, Serbia, Seychelles, Switzerland, Thailand, Turkey, and Vietnam.
Local Economic Substance Legislation
Following the EU’s assessment, jurisdictions are now adapting their local substance legislation.
The BVI recently published a draft Economic Substance Code. The Code is supplementary to the Economic Substance (Companies and Limited Partnerships) Act, 2018 and contains rules on how the economic substance requirements may be met and guidance on the interpretation of the legislation and the manner in which the BVI will carry out its obligations.
BVI has also announced that the final Code will be issued in May following a brief education campaign and will incorporate any amendments deemed necessary by the BVI Government.
In Cayman, Guidance Notes have been issued, but these are to be amended with additional details shortly. In Jersey and Guernsey, the expectation is for Guidance Notes to be issued in the coming weeks.
Vistra will be contacting our clients and working closely with them as more details become available from jurisdictions.
Does this impact you?
Do you have an entity in one of these jurisdictions? And if so, do you need assistance in determining whether all this is relevant to you? Understanding the new legislation and its implications are key to ensuring you make the right decisions for your entity.
The first step will be to determine whether an entity is in scope of the legislation.
If so, to then determine if it is conducting a 'relevant activity'.
The team at Vistra can assist you in making this determination; provide preliminary assessments of your company’s current compliance obligations, and assist with possible future strategies, in response to this new legislation.
Please contact us at one of the email addresses below and one of our technical experts will contact you.
- For BVI specific inquiries: BVIsubstance@vistra.com
- For Cayman specific inquiries: CAYsubstance@vistra.com
- For other jurisdiction inquiries, please contact us
Common Reporting Standard
Automatic Exchange Of Information and global tax transparency continues to be at the forefront of the governments and advisory bodies minds, with the pull for information on tax payers and their business dealings ever increasing. FATCA & CRS remain at the heart of this, with over 110 jurisdictions now committed to exchange tax payer information with each other on an annual basis; both in terms of the individual as well as the entity vehicle being utilised to hold their assets. With large fines and prosecutions starting to be issued, ensuring that the entity is accurately classified and has registered and reported correctly (where required) have never been so important to prevent investigation for non-compliance and incorrect reporting.
Country by country reporting
We have seen an ever increasing number of Countries introducing the Country by Country Reporting initiative year on year, and the concept becomes more familiar with multi-national companies ensuring they make all the necessary reports and notifications in each jurisdiction they have a presence. The concept is based on Group revenue of EUR750 Million or above and should the Group meet this criteria there becomes a requirement annually to compile and submit a full, consolidated, Group report containing information of revenues and assets to the local authorities of where the Group has its “Ultimate Parent Entity”. There is also a requirement that any subsidiaries need to make notifications to their local authorities where they are located detailing their part in the Group structure, again on an annual basis.
How Vistra can support you
We have deep experience in working closely with clients to help them understand their options, associated risks, and business implications. Our global network and local expertise will help ensure that our clients have the most relevant solutions for their business.
We are best placed to assist clients with their classification and reporting needs. We’d love to hear from you https://www.vistra.com/contact-form
To learn more about Vistra and how we can help you maximize your business opportunities, please visit us at https://www.vistra.com/
Vistra Launches BVI Economic Substance Classification Solutions
17 July 2019
We are delighted to officially launch our Economic Substance Services and Solutions, starting with the British Virgin Islands (BVI) Economic Substance Classification Questionnaire designed to help clients determine the classification of their BVI company as it applies to the…
Reporting requirements under Economic Substance – BVI
04 July 2019
How to Comply With Economic Substance Laws in the BVI and Cayman
27 June 2019
Invitation: Economic Substance Update - BVI and Cayman Islands
31 May 2019