Tax havens, also known as countries with zero or very low tax, are important from a strategic point of view in crafting tax strategies. They become exponentially more significant not just for multinational corporates having multiple overseas companies, but also for individual digital nomads with location-independent businesses.
We have discussed various tax havens around the world and their usage in our earlier blog post. If you haven’t checked out the post, be sure to check it out here.
However, as much as zero-tax countries are beneficial for taxpayers, they are detrimental to the tax revenue of countries where the incomes are generated. Hence, countries are constantly creating new rules and regulations to offset the loss of tax revenue arising from such tax-havens.
One such measure is the EU Blacklist.
What is the EU Blacklist and how does it work?
The EU Blacklist, as the name suggests, is a list of countries that in the view of the EU are negatively affecting the EU, global taxation, and compliance laws.
It was formed in 2017 and it keeps a constant watch on laws concerning transparency in taxation, adherence to international standards, and information exchange on tax.
The 3 criteria defined by the EU for determining whether a country should be put on the Blacklist or not are as follows:
- Tax Transparency – All countries need to follow the international tax treaties which make it necessary to furnish information asked by other countries and follow the treaties for stopping profit shifting to zero or low tax countries.
- Fair Tax Competition – While forming their tax laws, countries should keep in mind that they don’t negatively impact other countries.
- Implementation of anti-BEPS measures.
The list is updated regularly by its governing council, twice a year, from 2020 onward. The countries are given time to improve their tax regulations according to prescribed standards to avoid the Blacklist. The countries showing improvement are moved from the Blacklist to Greylist.
For instance, the Cayman Islands was included on the Blacklist in 2020 due to delaying the required regulations of Investment Funds. However, it was removed from the Blacklist after passing the required legislation by the Cayman Islands government, while countries like Barbados and Anguilla are still on the list to this day.
What are the Implications of getting added to The Blacklist
When a country is put on the infamous Blacklist, it may have serious effects on the EU home companies that are doing business via overseas companies located on the Blacklist. Once a country is included on the Blacklist, the EU member nations can put various types of sanctions on these countries, including:
- Increasing the withholding tax on payments made to countries from the EU member countries.
- Disallowing the deduction of costs relating to transactions between overseas companies of
- Removing any exemption given to investors from countries in EU member countries.
- Additional auditing requirements and inspection of transactions involving Blacklisted
- Increasing the compliance requirements for companies dealing in countries like disclosure
requirements of related party transactions.
- High taxes on remittance made to and from Blacklisted countries.
Apart from the above negative impacts, Blacklisted countries lose their reputation as a fair tax territory, causing a decrease in foreign investments, and the EU puts restrictions on development funds provided to such countries.
These restrictions damage the economies of the zero-tax countries severely. They also make the tax benefits available to overseas companies non-beneficial.
Thus, it is very important for tax planners to keep an eye on the EU Blacklist and Greylist prior to deciding their tax structure. In any case, the compliance cost and withholding taxes negate the low taxes of these ‘tax-haven’ countries.
A thorough cost-benefit analysis is required to be done before establishing an overseas company in these countries or acquiring tax residency of such countries by digital nomads.
What to do when your Tax Jurisdiction is Blacklisted?
As stated above, the Blacklist is updated regularly and used as a temporary measure to pressure governments to change their rules.
Cayman Island was put on the list in February 2020 and removed in September 2020, immediately after it passed the reforms required in the disclosure requirements of investment fund schemes.
The UAE and Oman addressed the issues raised by the EU Blacklist, and they were also promptly removed from the Blacklist.
Similarly, Barbados was included on the Blacklist in September 2020 after it was declared ‘non-compliant’ by the Global Forum on Transparency and Exchange of Information for Tax Purposes’ report. However, it has since been removed from the list and is in good standing.
Thus, before jumping to any conclusion haphazardly, you should check whether the reasons stated for blacklisting are temporary or structural in nature. If it can be reasonably assured that the blacklisted country is working towards solving the issue, it will be a short-term issue which does not require any large changes in tax strategy.
However, if the government of the blacklisted country is non-cooperative and does not show any intent to resolve the issue, it is advised to check various options available as a company.
Countries like Fiji, Panama, Vanuatu, and others, have been on the Blacklist for a long time, and are expected to stay on it for some time into the future.
If you plan to use a country on the Blacklist as your tax haven, be sure to be extra cautious. Creating overseas companies in these countries may prove to be a bad financial decision if the Blacklist is not taken into consideration.
In the extreme cases where the country of your overseas company has a hostile government, there will arise a need to shift the jurisdiction base of your overseas company.
Businesses should keep an attentive watch on the EU Greylist as well. Generally, countries that are put on the Greylist are under constant vigil of the EU and have a high probability of getting shifted over to the Blacklist.
Companies also need to keep a track of the Double Tax Treaties made by their home country and overseas company country. A strict treaty may render the low tax of tax haven useless, and we wouldn’t want that to happen to your company!
The EU Blacklist and Greylist play an important part in determining the tax strategy for location-independent entrepreneurs and businesses. These lists and the laws governing these lists are constantly amended as and when new situations arise around the world.
As you can see, there are plenty of different factors involved in deciding a sound tax plan apart from tax rates. For a new digital nomad business, it can be very painful to misjudge these international laws and treaties.
This Blacklist is especially important for our European digital nomads as it is enforced by EU member states, but can also serve as an international guiding tool for other countries in determining the tax cooperation of a country.
We always advise seeking professional guidance prior to deciding a new tax structure strategy, where your business licenses, personal citizenships and residencies, and geographic preferences can all be taken into consideration.
If this is something you need help with to get your business structure optimized, feel free to reach out to us!
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NOTICE: The content of this article is not to be considered as a legal opinion or tax advice. Wanderers Wealth does not hold itself out as a legal or tax advisor. If you want to receive a legal opinion or tax advice on the matter in this article please contact us directly and we will refer you to a legal practitioner.