EU Member States adopt revised list of non-cooperative jurisdictions for tax purposes

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25 February 2022

Executive summary

On 24 February 2022, the Council of the European Union (the Council) updated the European Union (EU) list of non-cooperative jurisdictions for tax purposes (the EU List).

Annex I (the so-called “black” list) of the EU List remained unchanged and it still includes American Samoa, Fiji, Guam, Palau, Panama, Samoa, Trinidad and Tobago, US Virgin Islands and Vanuatu. With respect to Annex II of the EU list (the so-called “gray” list) and the state of play of pending commitments, the Council decided to add 10 jurisdictions (Bahamas, Belize, Bermuda, British Virgin Islands (BVI), Israel, Montserrat, Russia, Tunisia, Turks and Caicos, Vietnam). The 25 jurisdictions now listed on Annex II are Anguilla, Bahamas, Barbados, Belize, Bermuda, Botswana, BVI, Costa Rica, Dominica, Hong Kong, Israel, Jamaica, Jordan, Malaysia, Montserrat, North Macedonia, Qatar, Russia, Seychelles, Thailand, Tunisia, Turkey, Turks and Caicos, Uruguay and Vietnam.

The Council will continue to review and update the EU List biannually, with the next update due in October 2022.

Detailed discussion

Background

The EU started working on the list of non-cooperative jurisdictions for tax purposes in 2016. On 5 December 2017, the Council published the first EU list of non-cooperative jurisdictions for tax purposes, comprised of two annexes. Annex I includes jurisdictions that fail to meet the EU’s criteria by the required deadline, and Annex II includes jurisdictions that have made sufficient commitments to reform their tax policies but remain subject to close monitoring while they are executing on their commitments. Once a jurisdiction has executed on all of its commitments, it is removed from Annex II.

The initial list of Annex I included 17 jurisdictions that were deemed to have failed to meet relevant criteria established by the European Commission (the Commission).¹ Since the release of the EU List, there have been multiple changes to its composition based on recommendations made by the Code of Conduct Group for Business Taxation (COCG). Such changes may occur if for example new jurisdictions or regimes are identified and analyzed by the EU Code of Conduct Group, or if jurisdictions already on the EU List are re-assessed. A de-listing for both Annex I and Annex II is considered justified in light of an expert assessment if it is established that the jurisdiction now meets all the conditions posed by the COCG.

The Commission has also adopted the first countermeasures against listed non-cooperative tax jurisdictions by the adoption of a Communication in March 2018 that sets new requirements against tax avoidance in EU legislation governing, in particular, financing and investment operations.²The said Communication aims to ensure that EU external development and investment funds cannot be channeled or transited through entities in jurisdictions listed on Annex I without being confronted with countermeasures.

Moreover, the Council released in 2019 additional guidance on defensive measures towards non-cooperative jurisdictions. On the same date it also released guidance on the assessment of jurisdictions with notional interest deduction regimes and the treatment of partnerships under criterion 2.2 (existence of tax regimes that facilitate offshore structures which attract profits without real economic activity).³In accordance with the guidance on defensive measures mentioned above, Member States are committed, as of 1 January 2021, to use Annex I in the application of at least one of four specific legislative measures:

Non-deductibility of costs incurred in a listed jurisdiction
Controlled foreign company rules
Withholding tax measures
Limitation of the participation exemption on shareholder dividends

Many Member States have already moved forward with the adoption or drafting of legislation of such defensive measures.

Revised EU List

On 24 February 2022, the Council held a Competitiveness meeting during which the Ministers adopted the conclusions on the revisions of the EU List (the conclusions).

The Council decided to make no changes to Annex I of the EU List which includes nine jurisdictions: American Samoa, Fiji, Guam, Palau, Panama, Samoa, Trinidad and Tobago, US Virgin Islands and Vanuatu. According to the press release, the Council regrets that these jurisdictions remain non-cooperative on tax matters and invites them to engage with the COCG in order to resolve the identified issues.

The Council adopted a revised Annex II of the EU List which covers jurisdictions that have made sufficient commitments to reform their tax policies, but which remain subject to close monitoring while they are executing on these commitments. Accordingly, the Council decided to add 10 jurisdictions Bahamas, Belize, Bermuda, BVI, Israel, Montserrat, Russia, Tunisia, Turks and Caicos, and Vietnam. According to the Code of Conduct report that the Council approved:

Bahamas, Bermuda and Turks and Caicos committed to address the recommendations received on the implementation of economic substance legislation.
Bahamas, Belize, BVI, Israel, Montserrat, Tunisia and Vietnam committed to address the recommendations on the implementation of the OECD domestic Country-by-Country Reporting (CbCR) minimum standard.
Russia committed to reform some aspects of its International Holding Companies regime.
While Qatar updated its regimes in scope of the OECD Forum on Harmful Tax Practices and they are not harmful anymore, it remained listed on Annex II because it committed to modify or abolish its harmful foreign source income regime by 31 December 2022 along with Costa Rica, Hong Kong, Malaysia and Uruguay.

As noted above, the revised Annex II of the EU List now includes 25 jurisdictions: Anguilla, Bahamas, Barbados, Belize, Bermuda, Botswana, BVI, Costa Rica, Dominica, Hong Kong, Israel, Jamaica, Jordan, Malaysia, Montserrat, North Macedonia, Qatar, Russia, Seychelles, Thailand, Tunisia, Turkey, Turks and Caicos, Uruguay and Vietnam.

Turkey remained on Annex II and was not included on Annex I despite failing to make the EU’s requested changes and repeatedly missing deadlines to start exchanging tax information with EU Member States. In February 2021, the EU Ministers had warned that Turkey would be added to Annex I with one of the next updates if it did not fulfill its commitments by the agreed deadlines.⁴ Also, the conclusions of the October 2021 update⁵ mentioned that even though progress has been made since the previous update, further steps need to be taken. With this update, the Council explained that Turkey has made substantive progress and activated the exchange of data with 26 Member States. Despite that, Turkey is still not fully in line with the commitments required with regard to the exchange of information with all Member States and that is why it remains listed on Annex II.

Next steps

The Council will continue to periodically review and update the EU List, taking into consideration the evolving deadlines for jurisdictions to deliver on their commitments and the evolution of the listing criteria that the EU uses to establish the EU List. Up until 2019, the EU List was regularly updated without a set schedule, to reflect the reforms undertaken by third countries. However, from 2020, Member States have agreed that the EU List will be updated no more than twice a year, to ensure a more stable listing process, business certainty and so that Member States can effectively apply defensive measures against listed jurisdictions. The next revision to the EU List is expected in October 2022.

In its 15 July 2020 Communication, the Commission made concrete proposals for enhancing tax good governance within and outside the EU. The proposals included, among others, an announcement of a reform of the Code of Conduct mandate as well as a review of the EU List to ensure that it is still effective and able to address today’s challenges.⁶ Also, in November 2020, the Council approved conclusions on fair and effective taxation with which the Council expressed its support for a process which would lead to a revision of the Code of Conduct mandate.⁷ Following this, a draft for a revised mandate for the Code of Conduct was published by the Slovenian Presidency in December 2021. However, it was not adopted because some Member States did not agree with the revisions.

For now, Member States continue their negotiations on the scope of the mandate and discuss in working groups. A reform of the Code of Conduct is more likely to be agreed following the adoption of the Pillar Two Directive⁸ which will also result in changes in the criteria used for the EU Listing to take into account the agreed global minimum tax rules.

Implications

With its listing process, the EU continues to exercise pressure on third states to enhance transparency and to remove harmful elements from their tax systems. It is expected that the jurisdictions that have made commitments in relation to their foreign-exempt income regimes will also take account of the broader negotiations on global minimum taxation triggered by the BEPS 2.0 project.

Businesses with activities in jurisdictions listed as non-cooperative are advised to understand the implications of a jurisdiction being included on Annex I, including:

Reporting obligations which arise from the mandatory disclosure rules (MDR) contained in Directive 2011/16/EU as amended by Council Directive (EU) 2018/822 (MDR Directive or DAC6), which inter alia require the disclosure of cross-border arrangements that involve deductible cross-border payments when the recipient of the payment is tax resident in a jurisdiction included on the EU List of non-cooperative jurisdictions for tax purposes.
Member States may consider applying one or more defensive measures, including both taxation measures and measures outside the field of taxation, aimed at preventing the erosion of their tax bases. These may include measures such as non-deductibility of costs, enhanced controlled foreign company rules or withholding tax measures, among others.

The lists will also have implications for the public CbCR as under these rules information should be disclosed on a country-by-country basis, and thus be disaggregated, for all 27 EU Member States and all jurisdictions included on Annex I and Annex II of the EU List.⁹Also, companies cannot delay the publication of commercially sensitive information for a period of up to five years if the information relates to jurisdictions listed on Annex I and Annex II of the EU List.

As the work on the EU List is a dynamic process, companies should continue to monitor developments closely, including the introduction of defensive measures towards non-cooperative jurisdictions by other Member States.

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