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Cayman Islands Added to Annex 1: What Managers Need to Know

Cayman Islands Added to Annex 1: What Managers Need to Know
  • United Kingdom
  • Financial services and markets regulation
  • Financial services and markets regulation - Hedge funds
  • Investment funds and asset management


On 18 February 2018, the EU added the Cayman Islands to its list of noncooperative jurisdictions for tax purposes (“Annex 1”). This has come as a surprise, but is unlikely to have any immediate impact on Cayman-domiciled funds. In this briefing we run through what this announcement means, how it might affect funds and what steps (if any) Investment Managers need to take in the coming months.


Annex 1, also known as the EU’s ‘blacklist’, already included Fiji, Oman, Samoa, Trinidad and Tobago, Vanuatu, along with the US territories of American Samoa, Guam and the US Virgin Islands. The Cayman Islands has now been added to the list along with Panama, Palau and the Seychelles. The decision followed a meeting of EU finance ministers (“ECOFIN”) and appears to have been triggered by the Cayman Island’s failure to enact new legislative measure designed to shore up the regulation and oversight of fund vehicles by 4 February 2020. This was the date the EU’s Code of Conduct Group (“CoCG”) met to determine its official Annex 1 recommendations for ECOFIN.

The move came as a surprise, particularly given the Cayman Islands’ recent efforts to align its financial industry with European and International best practice. Since 2018 the three island chain has implemented substantial legislative and regulatory reforms, including the introduction of a new economic substance regime based on the OECD Base Erosion and Profit Shifting (“BEPS”) standards. In January of this year measures were put before the Cayman legislature to further bolster this economic substance regime, giving more power to the Cayman tax authority.

That said, the EU has previously highlighted the fact that Cayman economic substance requirements for collective fund vehicles do not meet the bloc’s standards. Following ECOFIN’s meeting, the European Commission Vice President for Economy Valdis Dombrovskis accused the Cayman Islands of “not living up to their commitments” on this issue.

Of course, the blacklisting of a British Overseas Territory could also be interpreted as a ‘shot across the bows’ ahead of EU-UK Brexit negotiations over the UK’s future relationship with the trading bloc. This was certainly the tone struck by Markus Ferber MEP and EPP Group Spokesman on Economic and Monetary affairs, who urged the UK to “take note” of the listing, ahead of a meeting of EU finance ministers.

In either case, the Cayman Islands government has signalled its firm intention to seek removal from Annex 1 by October 2020, the earliest possible date for re-assessment.

What does this mean?

The announcement will have little to no immediate impact on Cayman Islands domiciled funds. The EU does not currently enforce EU-level sanctions on Annex 1 listed jurisdictions. Furthermore, inclusion on Annex 1 does not prevent a Cayman Islands investment fund from being marketed into the EU in accordance with AIFMD national private placement rules.

However, this announcement does pave the way for individual Member States to implement one of ECOFIN’s so-called ‘defensive measures’. These include:

  • monitoring certain transactions involving backlisted jurisdictions more closely;
  • increasing the audit risk for taxpayers benefiting from the tax regimes of backlisted jurisdictions; and
  • increasing the audit risk for taxpayers using structures or arrangements involving backlisted jurisdictions.

Member States agreed to apply at least one of these measures for every Annex 1 jurisdictions when the blacklist was first created in December 2017. More contentious are the recommendations made by the CoCG in 2019 (this is the same body credited with the Cayman Island’s re-designation as a non-cooperative jurisdiction), which include:

  • denying deductions for costs and payments otherwise deductible (non-deductibility of costs);
  • including income from entities resident or established in blacklisted jurisdictions in the tax base of taxpayer income (controlled foreign companies’ rules);
  • applying higher rate withholding taxes to payments received from a blacklisted jurisdiction (withholding taxes);
  • denying or limiting exemptions on profit distribution received from subsidiaries from backlisted jurisdictions in certain circumstances (exemption restrictions);
  • introducing special documentation requirements; and
  • introducing new anti-abuse provisions.

These measures are not formally binding on EU Member States. However, if the Cayman Islands fails to securing its removal from Annex 1 by October 2020 (see below), plans to coordinate an EU-wide response to Annex 1 jurisdictions by June 2021 may compel Member States to formally adopt at least one of the measures listed above. However, most Member States already apply many (if not all) of these measures for non-double tax treaty jurisdictions, or tax neutral jurisdictions (such as the Cayman Islands). For this reasons, while the announcement may shake investor confidence, the Annex 1 listing is likely to have a limited impact on the Cayman Islands’ status as a global financial centre.

How should Investment Managers respond?

Investment Managers are advised to review the proportion of EU domiciled investors in each fund they manage. While the practical impact may be limited, managers should still assess how any of the defensive measure listed above could affect their investors individually, or the fund as a whole. Following this re-assessment it may be necessary to revise the fund documentation to include new risk factors, or review existing tax-related commentary. If new defensive measures are implemented by key member states then the suitability of the Cayman Islands as a domicile may be called into question. However, while a fund can be re-domiciled, this would almost certainly be a disproportionate response in this case, particularly if the Cayman Islands managed to secure their removal from Annex 1 in October.

Unless EU Member States introduce specific measures in national law, Cayman Islands funds will be able to access European national markets on the same basis as before. EU investors should be able to remain and even increase their investment in Cayman Islands funds without impediment.

Funds hoping to raise capital in Europe may find that the Annex 1 listing bars access to EU development funding. Of course, on an informal basis, this has been true for Cayman-domiciled funds for some time.

What happens next?

As mentioned above, the Cayman Islands government has signalled its firm intention to seek removal from Annex 1 by October 2020, the earliest possible date for re-assessment. Cayman Premier McLaughlin confirmed that the government has already contacted EU officials to discuss the process of de-listing, noting that there is clear precedent for this re-classification. For example Bermuda and the Bahamas have both been added and subsequently removed from Annex 1. Perhaps unsurprisingly, the EU has not issued any announcements confirming plans to ‘de-list’ at this stage.

How Eversheds Sutherland can help

Our team has been at the forefront of regulatory interpretation and product development for the fund management industry since the 1980s. We advise on all types of fund structures and prepare all documentation necessary to achieve a successful fund launch.