The European Union has not added the Cayman Islands to an expanded EU tax blacklist, but the council of EU finance ministers said Cayman will have to amend its legislation by the end of this year.

On Tuesday, EU governments added 10 new jurisdictions to the tax blacklist, including Aruba, Barbados, Belize, Bermuda, Fiji, the Marshall Islands, Oman, the United Arab Emirates, Vanuatu and Dominica.

The Cayman Islands government last year passed a new economic substance law to fulfill commitments made to the EU in 2017 in order to avoid being classed as uncooperative in tax matters. The new law requires certain Cayman companies that are active in defined business areas to pass an economic substance test by demonstrating sufficient economic activity on island, in terms of staff, office space and expenditure.

The EU is targeting Cayman and other offshore financial centers for maintaining tax regimes that facilitate offshore structures which attract profits without requiring real economic activity locally.

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 dialog with the EU Code of Conduct Group on Business Taxation and have remained cooperative, the EU Council said, they will “require further technical guidance” and “were granted until end [of] 2019 to adapt their legislation.”

The Cayman Islands government said in a statement that the EU Council’s decision reaffirms Cayman’s cooperation in tax matters. “The Government is pleased that the Cayman Islands has not been included on the EU’s updated list of noncooperative jurisdictions for tax purposes (known commonly as the EU blacklist),” the statement said.

“This was expected as the Cayman Islands has lived up to the December 2017 commitments made by the Government to implement legislation to introduce substance requirements for relevant Cayman entities; to remove the restriction on certain types of Cayman companies from conducting business locally; and to introduce additional accounting and regulatory requirements for Cayman entities.”

At the same time, the government noted that the EU expressed concerns regarding economic substance requirements for investment funds and that further discussions are needed to define acceptable requirements for collective investment vehicles.

“While the government has committed to continuing its engagement and dialogue with the EU on this issue, it should be borne in mind that the global standard requiring economic substance for relevant financial and corporate entities, set by the OECD’s Forum on Harmful Tax Practices, does not include [collective investment vehicles].”

The government statement added, “As such, Cayman’s legislation is based on the global standards, and we will continue to adhere to global standards with regard to economic substance requirements for relevant entities.”

Expanded blacklist

The addition of the 10 new jurisdictions to the tax blacklist brings the total number of listed countries to 15, including the previously listed Samoa, Trinidad and Tobago, and three U.S. territories: American Samoa, Guam, and the U.S. Virgin Islands.

Citing the minutes of a meeting of EU envoys, news agency Reuters reported earlier this week that Britain had pushed other EU states not to include Bermuda on the list, but then lifted its objections after the European Commission argued that the island had “been playing games” to dodge EU requirements.

According to the document, the Commission noted that Bermuda was required to change its tax rules by the end of February, but had added new loopholes in its revised legislation and did not provide a final text by the deadline.

The EU Council said it will also monitor how Bermuda addresses economic substance concerns in the area of collective investment funds by the end of 2019.

Blacklisted countries face restrictions on EU funding and investments from the European Investment Bank. They are likely to be subject to stricter controls on transactions with the EU, but member states have not agreed any uniform sanctions as yet. The Cayman Islands Chamber of Commerce welcomed news that Cayman was not included on the revised list of noncooperative tax jurisdictions, stating that, given the islands’ history of commitment to cross-border cooperation, this result was expected.

“The Cayman Islands has always struck the right balance between meeting truly global international standards while ensuring that the jurisdiction remains attractive to legitimate international business,” said Chamber President Chris Kirkconnell in a statement.

Mr. Kirkconnell said over the past months various Chamber representatives have worked with the government in industry working groups on the EU initiative. “The Chamber of Commerce remains committed to working closely with the public sector and other industry bodies to ensure that the jurisdiction maintains its success as a leading international financial services center,” he added.

Eugen Teodorovici, minister for finance of Romania, which currently holds the EU presidency, said the council of finance ministers completed its first comprehensive revision of the EU list of non-cooperative jurisdictions.

“Since it was first adopted in late 2017, the list has proven its worth in promoting forward in a cooperative manner the EU’s agenda of improving global tax practices, fighting tax avoidance and improving good governance and transparency: more than 30 jurisdictions have already delivered on their commitment to pass tax reforms,” he said.

Currently, the EU requires that non-EU jurisdictions meet certain standards in connection with tax transparency, fair taxation and the OECD initiative against tax base erosion and corporate profit shifting (BEPS).

However, the EU says that its list of non-cooperative jurisdictions is “a dynamic process.” The EU Council plans to regularly review and update the list in the coming years, taking into consideration both how jurisdictions deliver on their commitments, as well as changes to the criteria that the EU uses to establish the blacklist.

When it was first released in December 2017, the blacklist originally included 17 jurisdictions. After some listed states changed their tax rules, the list was whittled down to five, before the latest expansion to 15.

Editor’s note: This story has been amended from the original to correct an error relating to the types of companies the Economic Substance Law 2018 applies to.