Cayman Islands Blacklisted by EU as a “Non-Cooperative Tax Jurisdiction”

The Cayman Islands is one of the most preferred jurisdictions of the Israeli private investment funds industry. Israeli fund sponsors and experienced fund investors appreciate the Cayman Islands’ global status as a preferred jurisdiction for fund formation. However, in recent weeks, there has been much confusion and uncertainty among Israelis active in this space regarding the status of the Cayman Islands as a preferred jurisdiction. Needless to say, this confusion and uncertainty in Israel has been heightened even more in light of the global coronavirus crisis.

This development began when the European Union announced, following a meeting of its Economic and Financial Affairs Council (ECOFIN), that the Cayman Islands has been moved to Annex 1 of the list of “non-cooperative jurisdictions” for tax purposes. The reason for this move was that, according to the EU, the Cayman Islands does not have appropriate measures in place to ensure the “economic substance” principle as to investment funds. This move, or “downgrade,” became effective on February 18, 2020.

The Cayman Islands’ government has already announced that it has begun talks with EU officials to return the Cayman Islands to its previous status as soon as possible, i.e. by October 2020. The Cayman Islands’ government is relying in its efforts on certain local laws that came into effect on February 7, 2020. These laws meet the EU requirements as to the “economic substance” principle, but became effective after the deadline set by the EU. Therefore were not taken into account when ECOFIN made its decision.

According to local legal experts, this “downgrade” or delisting is a technical result of the delay in the enactment of these laws. Therefore it is expected the EU will agree to return the Cayman Islands to its previous status and remove it from the list of the list of “non-cooperative jurisdictions” as early as by October 2020. The media reports this delisting is related to Brexit, as the UK can no longer protect the financial ratings’ status of its overseas territories like the Cayman Islands.

The delisting of the Cayman Islands by the EU should not affect its status as one of the most preferred jurisdictions of the Israeli private investment funds industry.

• European investors may invest in existing investment funds as in the past and may also market these investment funds in Europe as in the past. The delisting does not change the status of Cayman Islands investment funds in this respect.
• The delisting does not trigger any sanctions nor any significant new reporting obligations on the EU level.
• It does not affect the status of the Cayman Islands in terms of Israeli investments regulation.

While certain Israeli fund sponsors are now refraining from forming investment funds in the Cayman Islands due to the delisting, the local investment fund industry, which regards the delisting as a temporary, technical issue, believes there is no reason to do so. Moreover, the Cayman Islands does not appear to have suffered a slow-down in fund formation activity following the delisting, other than certain postponements in fund launches due to the COVID-19.

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