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Finance Business Service

From “paradise” to “black list”. EU has approved a new list of offshore jurisdictions


From “paradise” to “black list”. EU has approved a new list of offshore jurisdictionsOn Tuesday, at the meeting of the Ministers of Finance of the European Union, the long-awaited list of low-tax countries which included 17 countries was approved. This list was finally approved at the meeting in Brussels on December 4, 2017 after 10 months of investigation and two years of struggle for obtaining national support from the EU countries.
So, the black list of offshore states of the EU includes: American Samoa, Barbados, Bahrain, Grenada, Guam, Macau, Marshall Islands, Mongolia, Namibia, Palau, Panama, UAE, Samoa, Saint Lucia, Trinidad and Tobago, Tunisia, and South Korea.
It is noteworthy that the British Overseas Territories such as the Cayman Islands and Bermuda are not included in the black list, even though they have been in the previous list of June 2015. The methodology for identifying countries in the list of 2015 was strictly criticized, which resulted in the need to refuse from the old list and replace it with a new one.
At the same time, real activity is directed to 47 countries that have been included in the so-called “gray list” and promise to amend their taxation rules in order to bring them in line with EU requirements, and also to cooperate more in information exchange and disclosure. This list includes Bermuda, Vanuatu, Guernsey, Jersey, the Cayman Islands and the Isle of Man (corporate tax in all these territories is 0%).
The six areas mentioned above were allotted because they failed the most important test - fair taxation. So, this is where the encouragement for the creation of offshore structures takes place that attract profit, but do not conduct any real economic activity. The laws of these territories allow companies to make profit without conducting activities in their territories.
The countries included in the “gray list” promise to amend their legislation by the end of 2018 (or until the end of 2019 for developing countries) in order to eliminate tax discrimination, achieve transparency (transparency), etc. It is planned that the process will be controlled by a mysterious body called the Group of the European Code of Conduct on Business Taxation. This group will consist of tax experts from different countries under the leadership of the Italian official Fabrizia Lapecorella.
In the event if the changes by the countries are not visible, they will be included in the blacklist that will be updated annually.
Of course, both lists have been criticized for the exclusion of the most well-known low-tax jurisdictions. But they emerged directly after the disclosure of the Panama Papers and the so-called
“Paradise Papers”, the documents that shed light on how companies and individuals hide their fortune from the tax authorities on the accounts of offshore companies around the world.
In order to determine whether a particular country is a “non-cooperating jurisdiction”, the European Union has used such criteria as the tax regime, tax rates, and whether the tax system gives the possibility to encourage transnational corporations in their intention to transfer unfairly their profits to the countries with lower tax rates in order to avoid higher fees in other countries. In particular, it concerns the states that propose a corporate tax rate for foreign companies at 0% level.
The EU Member states had to decide what actions to take against violators. As a result, at their meeting on Tuesday, the EU finance ministers decided to tax at the source of the transaction on transferring funds to low-tax countries, as well as apply other financial sanctions. For example, profit can not be transferred if it is “disguised” as interest on a loan or royalty without taxation in the country of origin. In addition, tax inspectors may decide to check any structures that include countries from the list. In principle, many of them are doing it now.
The EU calls on its Member States to take the so-called active “defensive actions” against countries that refuse to reform their tax systems.
So, for example, the British charity company Oxfam published its own list of 35 countries a week earlier, which should be blacklisted, according to the company.
What awaits us with the adoption of the new list?
Panama is the most popular among the Ukrainian “consumers” of the countries included in the “black list”. At the same time, it should be noted that the UAE has been in a greater demand in the market recently.
Panama is interesting to the client because the prices for services in this jurisdiction are relatively low. In addition, Panama is known for the lack of transparency of business, which is contrary to the recommendations of the Organization for Economic Cooperation and Development.
As for the UAE, free economic zones which operate almost in all Emirates are of interest to the customers. The companies registered in such zones are exempt from taxation, as well as employees of such companies. Information about the company, its shareholders and directors is not available as the register of the companies is closed. The company must obtain a license to be able to conduct a certain type of activity in the UAE. But outside the United Arab Emirates, the company can conduct any activity without a license.
Of course, the approval of the list will affect the relationships that have been established for years between the companies, as well as the transactions that have been taken place between them. At the same time, we expect that it will not stop the activities of the groups of companies, but on the contrary, it will motivate to look for new options for doing business taking into account the needs of a client.

Алёна Каменецкая
Senior Lawyer
Finance Business Service