Updated list of non-cooperating states with the EU, February 2023

On February 14, 2023, the EU added four jurisdictions, the British Virgin Islands, Costa Rica, the Marshall Islands and Russia, to its list of non-cooperative jurisdictions for tax purposes (the “EU Black List”). There are currently 16 jurisdictions on the EU Black List, which can be found here.

Reasons given by the EU Council for adding jurisdictions to the EU Blacklist

The Council of the EU gave the following reasons for adding these jurisdictions to its blacklist:

British Virgin Islands – found to be insufficiently compliant with the OECD standard for information exchange on request;
Costa Rica – found to have failed in its obligation to eliminate or modify harmful aspects of its exemption from foreign-sourced income regime;
Marshall Islands – found to have no economic substance requirements; And
Russia – has found that it has not fulfilled its obligation to eliminate harmful aspects of the special regime for international holding companies. The EU Council also noted that the dialogue with Russia on issues related to taxation has stalled after Russian aggression against Ukraine.
The next EU blacklist is due to be revised in October 2023. It remains to be seen whether these jurisdictions can demonstrate sufficient cooperation with the EU before then to be removed from the EU Black List.

EU gray list

In addition to the revision of the EU Black List, the Council of the EU also announced that four jurisdictions, North Macedonia, Barbados, Jamaica and Uruguay, have been removed from the status document (the so-called “EU Gray List”). The EU’s gray list keeps an eye out for jurisdictions that do not yet meet all international tax standards, but have committed to reforms. In particular, two EU jurisdictions, Hong Kong and Malaysia, have been granted deadline extensions to complete the reform of their foreign-sourced income exemption regimes for capital gains.

Developments related to EU Greylist jurisdictions (including Hong Kong and Malaysia) should be monitored as they may affect the EU Blacklist when it is next reviewed and revised in October 2023.

Key Action Points for Private Fund Sponsors

The EU blacklist has a number of practical implications for sponsors of private foundations. Two points of immediate action include:

Conduct a review of side letters to check any provisions on the use of blacklisted EU jurisdictions in investment vehicles; And
For any transactions with the EU, confirm that, in accordance with the relevant internal EU legislation, there are currently no problems using organizations or investors from the British Virgin Islands, Costa Rica, the Marshall Islands or Russia in the structure. Some EU countries (eg Germany, the Netherlands and Luxembourg) have introduced measures targeting EU Blacklisted jurisdictions, such as (i) limits on the deductibility of expenses on certain payments made to companies in a blacklisted jurisdiction; (ii) extended controlled foreign company (“CFC”) rules; (iii) more onerous income taxes; and (iv) additional taxes on receipt of distributions (i.e., “off” participation exemption on profits paid to vehicles in blacklisted jurisdictions).