EU Blacklist - Cayman Islands: What does this mean for Asset Managers?

The Cayman Islands was yesterday placed on the EU list of non-cooperative tax jurisdictions. However, the Cayman Islands passed legislation on 4 February which they believe deals with the EU's concerns over lack of economic substance for collective investment schemes, but it was not enacted before the EU's Code Of Conduct Group met.

What does this mean for Funds?

• The blacklisting of the Cayman Islands is expected to be shortlived. The Cayman Island expects to be off the blacklist by October 2020. Fundamental change to existing structures should be considered in this light.
• Some LPs may have increased reputational concerns about investing in Cayman funds. New funds, or funds looking for new investors, may therefore wish to consider an EU alternative for the fund vehicle (although they may already have an EU fund vehicle if they are seeking to rely on an EU passport for marketing the fund).
• LPs may also have increased concern over the audit risk and risk of increased tax leakage if there are Cayman blockers or other Cayman corporate vehicles in fund structures. Funds may wish to consider alternative jurisdictions for such vehicles if the Cayman Islands remains on the blacklist.
• Side letter requests which mention the EU blacklist should be reviewed.
• DAC 6 reporting obligations should be addressed in every transaction involving a cross-border deductible payment between an EU or UK entity and a Cayman entity.
• Funds with Cayman companies in their structure may need to factor in additional compliance costs. This is because the new legislation passed in February attempts to address the EU’s concerns on the economic substance of collective investment vehicles and the Cayman Islands may also take further steps to amend its economic substance rules further, which could result in additional compliance costs for Cayman companies.

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