Luxembourg Tax Alert 2021-08

Revised EU list of non-cooperative jurisdictions

Revised EU list of non-cooperative jurisdictions

Hong-Kong added to the “grey list”, Anguilla, Seychelles and Dominica removed from the “blacklist”

The Economic and Financial Affairs Council of the European Union (ECOFIN) has adopted today a revised EU list of non-cooperative jurisdictions for tax purposes. Hong Kong has been added to the “grey list” (Annex II to the Council conclusions). Anguilla, Seychelles, and Dominica have been removed from the “blacklist” (Annex I to the Council conclusions) but added to the “grey list”, and no new jurisdictions have been added to the “blacklist”.

American Samoa, Fiji, Guam, Palau, Panama, Samoa, Trinidad and Tobago, U.S. Virgin Islands and Vanuatu are the nine jurisdictions that remain on the “blacklist”.  

Background

The EU list of non-cooperative jurisdictions for tax purposes, first adopted in the EU Council conclusions of December 5, 2017, is part of the EU’s efforts to clamp down on tax avoidance and harmful tax practices. Out of the ninety-two jurisdictions initially chosen for screening, seventeen jurisdictions were placed on the “blacklist” in December 2017. Over the course of 2018, 2019 and 2020, in light of commitments made by listed jurisdictions to comply with the EU’s criteria, both Annex I and Annex II to the Council conclusions were amended several times. Please refer to Euro Tax Flash issue 442 for details of the state of play following the previous revision of the lists (February 22, 2021). 

As an example, various jurisdictions such as Cayman Islands, United Arab Emirates, Jersey, Guernsey, Bahrain, and the British Virgin Islands have (successfully) implemented Economic Substance rules and were removed from the “blacklist” and the “grey list”.  

Hong-Kong added to the “grey list”

The EU Council has considered that some features of Hong Kong’s territorial tax system may facilitate tax avoidance or other tax practices regarded as harmful. In case Hong Kong, which has agreed to make changes to the relevant legislation by 31 December 2022, does not respect its commitment, it will be moved to the “blacklist”.  

Changes to the territorial system in Hong Kong will be one of the most significant changes to Hong Kong profits tax for many years. Companies operating in Hong Kong will need to properly monitor the related effects of such changes.

Costa Rica, Malaysia, North Macedonia, Qatar, and Uruguay have also been added to the “grey list” and Turkey still remains on it. After having implemented the required tax reforms, Australia, Eswantini and Maldives have been removed from the “grey list”.

Luxembourg tax implications

In December 2019 the EU Council issued guidance on coordination of national tax defensive measures against non-cooperative jurisdictions, whereby Member States were invited to apply legislative defensive measures as from 1 January 2021 (see Euro Tax Flash issue 419).

Luxembourg corporate taxpayers must confirm in their annual corporate tax return (starting as from tax year 2018) whether they are involved in transactions with associated enterprises located in countries listed on the “blacklist”.

On 28 January 2021, the Luxembourg Parliament passed the bill disallowing (under certain conditions) the tax deductibility of interest and royalties due to associated enterprises located in a country listed on the “blacklist”. The provisions of the related law dated 10 February 2021 (‘the Law’) are applicable since 1 March 2021 (please refer to our KPMG Luxembourg Tax Alert 2021-04).

For the first year, the blacklisted jurisdictions referred to in the Law are those listed in the “blacklist” as of 1 March 2021. For the following years, the “blacklist” as of 1 January should be consulted.

Jurisdictions added to the “blacklist” during a given year will only be considered as of 1 January of the following year. However, in case a jurisdiction is removed from the “blacklist” during a given year, the provisions of the Law would no longer apply as from the official day of the removal as published by the EU.

Hence, following the update of 5 October 2021, interest, and royalties due by a Luxembourg entity to Anguilla, Seychelles and Dominica will no longer fall within the scope of the Law as from the day on which the revised “blacklist” enters into force. Interest and royalties due to associated enterprises located in American Samoa, Fiji, Guam, Palau, Panama, Samoa, Trinidad and Tobago, U.S. Virgin Islands or Vanuatu should remain disallowed under certain conditions, unless the taxpayer requesting the deduction proves that the transaction has been entered into for valid commercial reasons, reflecting the economic reality.

Non-deductibility of certain types of payments is only one of the Luxembourg tax effects triggered by the blacklisting of some jurisdictions for tax purposes. In addition to the above, in order to increase the tax transparency and administrative cooperation, transactions (provided they meet certain criteria) between Luxembourg entities and listed on the EU and OECD “blacklists”, should be disclosed under the amended law of 25 March 2020 implementing DAC 6. Hallmark C.1.b.ii targets cross-border deductible payments to associated enterprises in blacklisted jurisdictions and is not subject to the main benefit test. 

Overview of defensive measures in EU Member States

Several EU countries have already introduced, or proposed measures targeted at jurisdictions on the EU list. For further information, please refer to our summary of defensive measures against non-cooperative jurisdictions for tax purposes which provides a high-level overview of defensive tax and administrative measures adopted by a selection of EU / EEA jurisdictions, plus the UK, against countries included on the EU list of non-cooperative jurisdictions for tax purposes as well as on equivalent national lists, where applicable.

Next steps

The updated list will take effect from the day of publication in the Official Journal of the European Union of the revised Annexes I and II. The list is updated twice a year by the EU Council.

The list is indicative of the increasing trend of the EU to fight tax avoidance and of its political willingness to end harmful tax practices. More is yet to come considering the recent EU initiatives (Business Taxation for the 21st Century) and in a broader sense, the OECD measures which should see the light in the near future (BEPS 2.0.).

Stay tuned!