EU Finance Ministers adopted a revised “black list” of non-cooperative tax jurisdictions, adding ten new jurisdictions, including Bermuda. The new list now includes American Samoa, Aruba, Barbados, Belize, Bermuda, Dominica, Fiji, Guam, Marshall Islands, Oman, Samoa, Trinidad and Tobago, the U.S. Virgin Islands, United Arab Emirates and Vanuatu.
Why and how was Bermuda added on the black list?
- The EU “black list” was set up in December 2017 and the monitoring of jurisdictions is done by the Code of Conduct Group (Business Taxation). Bermuda was added on the EU’s “grey list” as of 2018. This means that Bermuda had committed to take certain actions in order to avoid a “black list” designation (see here the Bermuda Government’s letter of commitment dated 16 November 2017, which was only made public by the Council on 1 June 2018). According to the letter, the EU’s concern was with a de facto lack of substance for entities doing business in or through Bermuda. Bermuda committed to pass legislation addressing this concern by end-2018.
- The Bermuda Government passed this legislation (The Economic Substance Act), with effect from 31 December 2018, requiring relevant entities based in Bermuda to comply with certain obligations in regard to economic substance in the jurisdiction. It was generally-expected that this legislation would lead to Bermuda’s de-listing.
- Surprisingly, over the last few days, it became clear that the EU was not entirely satisfied with the provisions of the Economic Substance Act and was therefore considering black-listing Bermuda, along with several other jurisdictions. At this stage, it is not entirely clear what the EU’s specific concerns with Bermuda’s Economic Substance Act are, even though in the Council conclusions published today, the following is stated: “Bermuda facilitates offshore structures and arrangements aimed at attracting profits without real economic substance and has not yet resolved this issue. Bermuda’s commitment to addressing the concerns relating to economic substance in the area of collective investment funds by the end of 2019 will be monitored.”
- It was also surprising that, despite intense speculation that some countries may use their veto power to block the expansion of the “black list”, unanimity was achieved at today’s meeting of Finance Ministers.
What happens to a blacklisted jurisdiction?
- Blacklisted jurisdictions face a number of “defensive measures”. In the non-tax area, these are primarily restrictions on EU funding and investments from the European Investment Bank. In the tax area, EU countries must apply at least one of the following administrative measures: reinforcing transaction monitoring, increasing audit risks for tax payers benefiting from the respective regimes and increasing audit risks for tax payers using structures or arrangements involving these jurisdictions.
- As for legislative measures, EU countries could apply defensive measures such as non-deductibility of costs, controlled foreign company (CFC) rules or withholding tax measures. However, not many Member States have chosen to do so yet; the secretariat is only aware of two: Finland (CFC rules) and Spain (non-deductibility of costs).
- Therefore, blacklisted jurisdictions are primarily faced with reputational damages at this stage.
What are the next steps?
- A letter will now be sent to all jurisdictions on the EU list, explaining the decision and what they can do to be de-listed.
- The Code of Conduct Group is monitoring the commitments made by jurisdictions. The outcome of this monitoring will be reflected in updates to the EU list of non-cooperative jurisdictions at the start of 2019 and 2020.
- Therefore, Bermuda must now improve their economic substance regime to the Code of Conduct’s satisfaction, this being (most likely) the only way in which it will be removed from the EU “black list” in 2019.
Follow-up on Bermuda’s blacklisting by the EU
Following the surprising inclusion of Bermuda on the EU’s “black list” of non-cooperative jurisdictions on 12 March, the secretariat gathered the following additional information:
- Bermuda was blacklisted due to a consequential typographical error in its Economic Substance Act, which was flagged by the EU’s Code of Conduct group on 27 February and was subsequently remedied by the Bermuda Government; an updated Economic Substance Act was sent to the EU on 4 March, but this was not deemed quick enough to avoid a blacklisting at the 12 March ECOFIN Council meeting.
- The issue identified had nothing to do with the economic substance of (re)insurance operations, which is significant in Bermuda, but rather with the economic substance of entities holding intellectual property.
- The Bermuda Government accepted responsibility for this situation and is fully committed to address it as soon as possible. As of March 12, the Economic Substance Act and Regulations are in force and final. These are deemed by the Bermuda Government to completely address all concerns raised by the EU and should result in Bermuda being removed from the “black list” at the first practical opportunity.
- The EU’s Code of Conduct group will now re-assess Bermuda’s Economic Substance Act at one of its meetings planned on 27 March (today), 10 April and 6 May. If the Group considers that Bermuda is indeed fully compliant with commitments, it will then recommend that the ECOFIN Council remove Bermuda from the “black list”. The next meetings of the ECOFIN Council are scheduled on 17 May and 14 June, so a de-listing may occur rather soon, even though this is not guaranteed.
- There are no immediate consequences stemming from Bermuda’s blacklisting, particularly because there is an expectation that Bermuda will be deemed compliant relatively soon. EIOPA has also confirmed to the secretariat that they are not concerned by this topic at all, given that a tax issue is totally different from Solvency II equivalence.