According to diplomats, cited by the Financial Times, EU27 ambassadors on Wednesday took a decision to place the Cayman Islands on a list of nine territories that do not effectively cooperate with the European bloc. European finance ministers are set to confirm the decision at a meeting on Tuesday, 18 Feb.

In order to avoid inclusion on the tax blacklist, the Cayman Islands government had agreed last year to address EU concerns over the economic substance of collective investment vehicles before the end of 2019.

The Legislative Assembly passed amendments to the Mutual Funds Law and a new Private Funds Law reforming the registration, administration and supervision of funds at the end of January 2020. Whether the delay in passing the legislation has caused the move is not clear.

According to unnamed officials quoted by the Financial Times, the Cayman Islands “did not pass legislation that adequately addressed concerns about companies who claim tax advantages but do not have a sufficient economic presence on the island”.

An EU official said the Cayman law was found to be “deficient”.

Given that EU finance ministers are expected to make the final decision next week, the Cayman Islands government said it has not received official confirmation of a blacklisting.

In a statement issued on Wednesday, the government said, “We believe that we have introduced the appropriate legislative changes to enhance our regulatory framework, in line with the EU’s requests.

“Over the past two years, the Cayman Islands Government has adopted a number of fundamental legislative changes to enhance tax transparency and cooperation with the EU, fully delivering on our commitment to strengthen our regulatory regime and addressing the concerns reflected in the EU Council conclusions of 12 March 2019. The Cayman Islands Government has offered to make itself available for further dialogue or clarification with the Commission and the EU Ministers of Finance,” the statement said.

The EU is targeting Cayman and two other British Overseas Territories – Bermuda and the British Virgin Islands – as well as the Bahamas for enabling structures that attract profits without having corresponding economic activity locally.

In response, all four territories introduced domestic legislation that requires certain companies, which want to take advantage of the zero- or low-tax regimes in these jurisdictions, to demonstrate they have a sufficient level of management, staff, offices or expenditures in the territories.

Cayman adopted the International Tax Cooperation (Economic Substance) Law in December 2018. In March 2019, the EU Council said Cayman, the Bahamas and the British Virgin Islands committed to addressing the concerns relating to economic substance in the area of collective investment funds. While the three jurisdictions had engaged in a positive dialogue with the EU Code of Conduct Group on Business Taxation and have remained cooperative, the EU Council said at the time, they will “require further technical guidance” and “were granted until end [of] 2019 to adapt their legislation”.

Bermuda was briefly blacklisted and then removed from the list last year after the territory passed additional amendments to its Economic Substance Regulation and thereby resolved an issue highlighted by the EU regarding the wording of core income-generating activities for intellectual property assets.

Paul Byles, director of consulting firm FTS, said the Cayman Islands had done “an extraordinary job” in the area of addressing concerns and perceptions in relation to its anti-money laundering and counter-terrorism financing regime.

“This blacklisting relates more to tax-competition issues which are susceptible to more discretion by overseas bodies and commercial politics between countries,” Byles said.

He added, “Without reading the analysis that led to the EU blacklisting, it is hard to comment on the tax issues, but it is surprising that Cayman would be blacklisted given the amount of effort and resources we have invested into that area as well.

“If we consider the extent of cross-border cooperation that has been in place for decades, plus the recent legislation on economic substance, as well as beneficial ownership, it is hard to conclude that we belong on such a list.”

The current list of countries that are deemed uncooperative in tax matters exempts EU members. Since the first EU blacklist was published in December 2017, it has been revised 10 times.

Only eight countries are currently blacklisted. Most of them have virtually no financial relations with the EU. They are American Samoa, Fiji, Guam, Oman, Samoa, Trinidad and Tobago, the US Virgin Islands and Vanuatu.