Executive summary

On 17 October 2023, the Council of the European Union (the Council) held an Economic and Financial Affairs Council (ECOFIN) meeting in which Finance Ministers approved the Council Conclusions on the revised EU List. Regarding Annex I, the Council decided to add three jurisdictions (Antigua and Barbuda, Belize and the Seychelles) due to the exchange of tax information on request (criterion 1.2) and remove three other jurisdictions (the British Virgin Islands, Costa Rica and the Marshalls Islands). With respect to Annex II and the state of play of pending commitments, the Council removed Jordan, Qatar, Montserrat and Thailand.

The Council will continue to review and update the EU List biannually, with the next update due in February 2024.

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 executing their commitments. Once a jurisdiction has executed 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).¹Since 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, the EU COCG identifies and analyzes new jurisdictions or regimes or jurisdictions already on the EU List are reassessed. 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 also adopted the first countermeasures against listed non-cooperative tax jurisdictions by the adoption of a Communication in March 2018 that set new requirements against tax avoidance in EU legislation governing, in particular, financing and investment operations.² The requirements aim to ensure that EU external development and investment funds cannot be channeled or transited through entities in jurisdictions listed in Annex I without being confronted with countermeasures.

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

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

Many Member States have already adopted or drafted legislation for these defensive measures.

Recently, the COCG published its multiannual work package (2023—2028), which mentions that the group could explore how to facilitate the proper functioning of the Pillar Two rules by making use of the EU listing process. The COCG will also continue to discuss the new beneficial ownership criterion (criterion 1.4) and the extension of the geographical scope of its EU list screening process, which now encompasses approximately 95 non-EU jurisdictions.

Revised EU List

On 17 October 2023, the EU Finance Ministers met in Luxembourg for an ECOFIN meeting, during which the Ministers adopted the conclusions on the revisions of the EU List.

As noted, the Council adopted a revised Annex I of the EU List by adding Antigua and Barbuda, Belize, and the Seychelles. According to the Council press release on the revised EU List, the reason the three jurisdictions are included on the list is that they were found to be lacking with regard to the exchange of tax information on request (criterion 1.2).

The Council also decided to remove three jurisdictions (British Virgin Islands, Costa Rica and Marshall Islands) from Annex I:

• British Virgin Islands was removed from the list as it has amended its framework on exchange of information on request (criterion 1.2) and will be reassessed in accordance with the OECD standard.
• Costa Rica was delisted because it has amended the "harmful" aspects of its foreign source income exemption regime (criterion 2.1).
• Marshall Islands was delisted as it has made significant progress in enforcement of economic substance requirements (criterion 2.2).

The revised Annex I of the EU List now includes 16 jurisdictions: American Samoa, Anguilla, Antigua and Barbuda, the Bahamas, Belize, Fiji, Guam, Palau, Panama, Russia, Samoa, Seychelles, Trinidad and Tobago, the Turks and Caicos Islands, the US Virgin Islands, and Vanuatu.

The Council also amended the list of jurisdictions included on Annex II of the EU List, which covers jurisdictions that have made sufficient commitments to reform their tax policies but remain subject to close monitoring while they are executing on these commitments. Following the delivery of the commitments given, the Council removed Jordan, Qatar, Montserrat and Thailand:

• Jordan and Qatar fulfilled their commitments by amending a harmful tax regime.
• Montserrat and Thailand fulfilled all their pending commitments related to country-by-country reporting (CbCR) of taxes paid.

As a result, the revised Annex II now comprises 14 jurisdictions: Albania, Armenia, Aruba, Botswana, British Virgin Islands, Costa Rica, Curaçao, Dominica, Eswatini, Hong Kong, Israel, Malaysia, Turkey, and Vietnam.

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. Until 2019, the EU List was regularly updated without a fixed 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 (i) a more stable listing process, (ii) business certainty and (iii) that Member States can effectively apply defensive measures against listed jurisdictions. Accordingly, the next revision to the EU List is expected in February 2024.

Implications

With its listing process, the EU continues to exert pressure on third states to enhance transparency and remove harmful elements from their tax systems. Businesses with activities in jurisdictions listed as non-cooperative are advised to understand the implications of a jurisdiction's being included in Annex I, including:

• Reporting obligations that 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 require, in part, the disclosure of cross-border arrangements that involve cross-border deductible 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.
• EU Member States may consider applying one or more defensive measures, including taxation measures and measures outside the field of taxation, to prevent 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 EU Member States⁴ and all jurisdictions included in Annex I (on the first of March of the financial year for which the report should be drawn up) and Annex II (on the first of March of the financial year for which the report should be drawn up for two years consecutively) of the EU List.⁵ Also, companies cannot delay the publication of commercially sensitive information for up to five years by making use of the safeguard clause included in the public CbCR rules 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 closely monitoring developments, including the introduction of defensive measures toward non-cooperative jurisdictions by the other Member States.

ANNEX: EU List as of 17 October 2023

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For additional information with respect to this Alert, please contact the following:

EY Société d'Avocats, Paris

• Jean-Pierre Lieb | jean.pierre.lieb@ey-avocats.com

Ernst & Young Belastingadviseurs LLP, Rotterdam

• Marlies de Ruiter | marlies.de.ruiter@nl.ey.com
• Maikel Evers | maikel.evers@nl.ey.com

Ernst & Young Belastingadviseurs LLP, Amsterdam

• Konstantina Tsilimigka | konstantina.tsilimigka@nl.ey.com

Ernst & Young LLP (United Kingdom), London

• Chris Sanger | csanger@uk.ey.com

Ernst & Young LLP (United States), Global Tax Desk Network, New York

• Jose A. (Jano) Bustos | JoseAntonio.Bustos@ey.com

Published by NTD's Tax Technical Knowledge Services group; Carolyn Wright, legal editor

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ENDNOTES

¹ See EY Global Tax Alert, Council of the European Union publishes list of uncooperative jurisdictions for tax purposes, dated 6 December 2017.

² See EY Global Tax Alert, European Commission adopts first counter-measures on listed non-cooperative tax jurisdictions, dated 22 March 2018.

³ See EY Global Tax alert, EU Code of Conduct Group issues update report, including new guidance, dated 12 December 2019.

⁴ It is also expected that this will be expanded to the European Economic Area, consisting of the 27 EU Member States plus Iceland, Liechtenstein and Norway.

⁵See EY Global Tax Alert, EU Member States adopt public CbCR Directive, dated 28 September 2021.