The EU Council has released its assessment that led to Cayman’s removal from the EU list of uncooperative jurisdictions in tax matters in early October.

The document was sent on 9 Nov. to the Code of Conduct Group on Business Taxation, which assesses countries against the EU’s tax criteria. The EU Council concluded that the Cayman Islands had revised its legislative framework for collective investment vehicles and as a result now complies with the requirements set out in technical guidance issued in May 2019.

In that guidance, the EU Code of Conduct Group advised that it would scrutinise Cayman’s fund legislation against four pillars: the authorisation and registration of funds; supervision and enforcement; valuation, accounting and auditing of funds; and depositary rules.

In a September 2019 analysis, the EU found Cayman’s framework for funds was inadequate in three of the four pillars and that there was not enough information to assess the remaining one relating to supervision and enforcement.

Cayman was reassessed in February 2020, taking into account that Cayman lawmakers were in the process of adopting new legislation for private funds and amending the Mutual Funds Law to bring more funds under the supervision of the Cayman Islands Monetary Authority.

While these reforms addressed most of the deficiencies identified in September 2019, they were still inadequate under three pillars, raised new concerns regarding the supervision and enforcement of funds, and were made after the deadline set for the update of the EU tax list, the document said.

In response, the Cayman Islands government further amended its funds regime and adopted rules for the calculation of net asset values; the segregation of assets; audit waivers; and exemptions from valuation requirements.

The EU Council noted that registration requirements were now applied to mutual funds incorporated, established or marketed to retail investors in Cayman Islands. In addition, Cayman had removed exemptions, extended registration requirements to close ended funds, and introduced notification requirements for foreign funds.

It found that CIMA had the necessary staff, resources and significant supervisory and enforcement powers, and that its powers to make exemptions are limited.

As a result of the reforms, Cayman funds’ valuation policies should adhere to specific principles with limited exemptions. In addition, funds must prepare their accounts according to the IFRS or GAAP accounting rules of the US, Japan, Switzerland or other non-high-risk jurisdictions. Where audit requirements apply, auditors must be internationally qualified with well-recognised institutions.

In addition, Cayman mutual funds must appoint a service provider for the safekeeping of each fund’s portfolio and must comply with segregation obligations. These segregation obligations also apply to private funds and any exemptions are clearly limited, the document said.

Taken together, these reforms were sufficient to meet the criteria set by the EU, but EU member states also noted that in certain areas continued scrutiny is needed.

“Member States agreed that these reforms in their totality addressed the concerns pending as of February under all 4 pillars, while emphasising that certain aspects should be monitored,” the outcome statement said.

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