On 14 February 2023, the Council of the EU revised the EU list of non-cooperative jurisdictions for tax purposes (the “EU blacklist”) by adding British Virgin Islands, Costa Rica, Marshall Islands and Russia.
Following this update_, the EU blacklist comprises 16 jurisdictions:
- American Samoa
- The Bahamas
- British Virgin Islands
- Costa Rica
- Marshall Islands
- Trinidad and Tobago
- Turks and Caicos
- US Virgin Islands
The Council noted that Marshall Islands’ zero or nominal rate of corporate income tax facilitates offshore structures and arrangements aimed at attracting profits without real economic substance. It also raised concerns about the lack of transparency by Costa Rica regarding the automatic exchange of information and by British Virgin Islands regarding the exchange of information on request. Finally, the Council observed a failure to abolish or amend harmful tax regimes by Costa Rica, with its foreign source income exemption regime, and by Russia, with its international holding companies regime.
The Bahamas, which was placed on the EU blacklist in March 2018 and then removed in May 2018, was added back onto the list in October 2022 and remains on it.
The revised list becomes official upon publication in the Official Journal of the EU. The next revision is due in October 2023.
Impact on Luxembourg investment structures
While Luxembourg’s tax law does not include specific withholding tax provisions for (deductible) payments to entities set-up or resident in non-cooperative jurisdictions, this latest development may still trigger various consequences affecting investment structures in Luxembourg:
- Non-tax deductibility of interest and royalties due to a related party established in a country or territory on the EU blacklist (under certain conditions), unless there are valid business reasons that reflect the economic reality.
- Disclosure to the Luxembourg tax authorities of intra-group transactions with non-cooperative jurisdictions on the EU blacklist.
- DAC 6 – Hallmark C1 related to “cross-border transactions”: Hallmark C1(b)(ii) exists when tax-deductible cross-border payments are made to an associated enterprise resident in a jurisdiction on the EU blacklist (standalone hallmark requiring reporting of cross-border arrangements regardless of the main benefit test). Further, these arrangements should be monitored to ensure they do not fall under hallmark C1(b)(i), where deductible cross-border payments are made to an associated enterprise resident in a jurisdiction that does not impose corporate tax, or that imposes corporate tax at a rate of zero or almost zero.
See our newsflash for more details on Luxembourg’s defensive measures against blacklisted jurisdictions.
EU taxpayers carrying out transactions with related entities located in jurisdictions on the EU blacklist should assess the impact of the revised list on their operations, bearing in mind that this list is updated regularly and must be closely monitored.
How can we help?
The Tax Law partners and your usual contacts at Arendt & Medernach are at your disposal to further assess and advise on the impact of this new measure on your investments.