Economic Substance and EU Blacklist Update

EU efforts and the work of international bodies targeting tax neutral jurisdictions are not a new policy. Following the EU’s inter-governmental Code of Conduct Group (Business Taxation) report in 2018, no or nominal tax jurisdictions including the Cayman Islands, the British Virgin Islands (BVI), Bermuda, Barbados, the Isle of Man, Guernsey and Jersey quickly introduced economic substance legislation late 2018 to avoid being blacklisted by the EU. The laws introduced sought to follow the recommendations set out by the OECD in its BEPS documentation. While they were still being reviewed by the EU, a number of amendment bills were pushed out to meet EU expectations.
What is economic substance and do I need to be concerned having an offshore company?
In the context of economic substance legislation, “substance” is a broad term that embraces various areas of a business, including management, control, operations, physical presence and decision-making procedures. The economic substance required varies for different types of relevant activities. Relaxed requirements apply to pure equity holding companies. The registered agent and office services may be already sufficient to satisfy the economic substance test. At the other end, stringent requirements apply to high risk IP business. A high degree of control over the development, exploitation, maintenance, protection and enhancement of the IP should be exercised in the jurisdiction by an adequate number of staff with suitable qualifications. Belize goes one step further and prohibits IBC’s from holding IP assets altogether.
It is thus crucial for entities incorporated in relevant jurisdictions to assess whether they are carrying out activities subject to economic substance requirements and what substance is required.
Regardless whether a company is caught by the new laws or can operate outside the scope of the requirements, directors of entities must demonstrate that they have considered the legislation by reporting that the company is either in or out of.
At Zetland we offer assistance to review the activities and advise on reporting requirements. Contact us for more information at
On 18 February 2020 the Council of the European Union added four new jurisdictions to the List of non-cooperative jurisdictions (“The EU blacklist”).
Cayman Islands, Palau and Seychelles were moved from the grey list to the black list. Panama was added to the black list.
The Council completely delisted Armenia, Antigua and Barbuda, Bahamas, Bermuda, Belize, British Virgin Islands, Cabo Verde, Cook Islands, Marshall Islands, Montenegro, St Kitts and Nevis, Vietnam.
The EU blacklist now consists of:
  1. American Samoa
  2. Cayman Islands
  3. Fiji
  4. Guam
  5. Oman
  6. Palau
  7. Panama
  8. Samoa
  9. Trinidad and Tobago
  10. US Virgin Islands
  11. Vanuatu
  12. Seychelles
According to the Council of the European Union, the Cayman Islands do not have appropriate measures in place relating to economic substance in the area of collective investment vehicles.
Palau does not apply any automatic exchange of financial information, has not signed the OECD Multilateral Convention on Mutual Administrative Assistance as amended, and has not resolved these issues yet.
Panama does not have a rating of at least “Largely Compliant” by the Global Forum on Transparency and Exchange of Information for Tax Purposes on Request and has not resolved this issue yet.
Seychelles has harmful preferential tax regimes and has not resolved these issues yet.
For more information, please feel free to contact us via email or call us at +852 3552 9085

Zetland Tax