Europe’s pension funds shun blacklisted Cayman

The EU Council of finance ministers agreed on an EU list of non-cooperative jurisdictions in tax matters in a meeting.

Pension funds and institutional investors in Europe are putting the breaks on investments in Cayman-based entities following the decision by the European Union to add Cayman to its list of non-cooperative jurisdictions in tax matters.

Pension funds in three Nordic countries, Denmark, Norway and Sweden, said they would no longer invest in the jurisdiction but may not necessarily be able to unwind existing investments, financial magazine Investment & Pensions Europe reported.

Danish pension funds ATP and PFA said it was a “logical consequence” of the blacklisting to cease investments into holding companies in Cayman, as long as the jurisdiction remains on the tax list.

Sweden’s largest pension fund Alecta told IPE that it is taking the same stance and will not make any new investments until Cayman is removed from the list.

Danish fund Sampension said it was a matter of policy not to invest in listed countries, while Danica Pension responded to questions by the industry publication that it would rethink its position in light of the tax listing but had no plans to invest in Cayman at this stage.

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Norway’s pension funds KLP and DNB Liv are reconsidering how to deal with blacklisted jurisdictions.

Finnish pension and insurance company Varma is equally monitoring the situation and said it typically requires the jurisdictions it invests in to comply with tax information exchange rules and that funds pay taxes where they are due, IPE reported.

The Cayman Islands is meeting all the criteria in terms of tax transparency and reporting, as far as the both EU and the OECD Global Forum on Tax Transparency and the Exchange of Information are concerned. Cayman-based funds also pay taxes in the countries where they invest and investors in Cayman funds are still subject to tax in their home jurisdictions.

However, earlier this month EU finance ministers classified Cayman as a non-cooperative tax jurisdiction because the local legislative reform of the supervision and administration of funds did not enter into force in time to be considered by the EU Code of Conduct Group on Business Taxation in early February.

The Cayman Islands government and financial services industry believe that the amended Mutual Funds Law and the new Private Funds Law, which are now in effect, meet all EU requirements and therefore expect the EU to remove the jurisdiction from the tax blacklist at the next review in October.

Until then, the effect of the tax blacklisting is mainly reputational.

Cayman-registered funds are typically set up by fund managers in the US, who often use Cayman vehicles to attract international investors.

Data from the International Monetary Fund on portfolio holdings shows that investors from European countries had invested about US$250 billion in Cayman, about 10.6% of all portfolio holdings, at the end of 2018.

Nordic countries are among the smaller investors with about $9.25 billion coming from Sweden, $2.45 billion from Denmark, $2.3 billion from Norway and $640 million from Finland. The largest European investors in Cayman are coming from the UK ($80.9 billion), France ($58.9 billion) and Germany ($46.9 billion).

Private Equity News reported that it would pose a problem for private equity funds if Cayman is not removed from the tax list in October. Fund managers are already fielding calls from European investors about their Cayman structures, Private Equity News said quoting a partner with US law firm Sidley Austin.

Other law firms quoted by the financial news website said the main concern for Cayman private equity funds are reputational and stricter compliance checks.

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