On 14 February 2023, the EU Council’s Code of Conduct Group formally decided to add Russia, the British Virgin Islands, Costa Rica and the Marshall Islands to the EU list of non-cooperative jurisdictions for tax purposes (also referred to as the ‘EU tax haven blacklist’).
The EU tax haven blacklist now includes 16 countries: American Samoa, Anguilla, the Bahamas, the British Virgin Islands, Costa Rica, Fiji, Guam, the Marshall Islands, Palau, Panama, the Russian Federation, Samoa, Trinidad and Tobago, the Turks and Caicos Islands, the U.S. Virgin Islands and Vanuatu. The next revision of the list is scheduled for October 2023.
The addition of Russia to the EU tax haven blacklist does not come as a surprise. The EU has been closely monitoring Russia since it landed on the EU ‘grey list’ (a list that represents the jurisdictions that do not sufficiently meet the relevant standards but that committed to take remedying actions within a certain deadline) in February 2022. The reason for its addition to the EU grey list was its international holding company regime which was introduced in 2018 to shield companies from international sanctions. Russia made the commitment to the EU to reform its legislation, but in the assessment of Russia’s progress the European Commission noted that Russia did not meet its commitments. In addition, the dialogue with Russia on matters related to taxation had come to a standstill. As a result, the EU Finance Ministers have now decided to add Russia to the EU tax haven blacklist..
In terms of consequences from a European tax perspective, transactions or operations with a jurisdiction that is mentioned on the EU tax haven blacklist (from the moment the list is published in the Official Journal) trigger, amongst others, the following effects:
- EU mandatory disclosure rules (DAC6): The EU DAC6 reporting obligation for intermediaries with respect to cross-border arrangements applies automatically if deductible payments are made to associated enterprises in EU blacklisted jurisdictions.
- EU public country-by-country reporting (CbCR) rules: Additional disclosure requirements for each jurisdiction included on the EU blacklist or on the grey list for two consecutive years, as compared to aggregated reporting for other third countries.
At a domestic level, the competent bodies at EU level have, on various occasions, stated that it is important that the Member States put in place efficient defensive measures in non-tax and tax areas against countries included on the blacklist. In this respect, on 5 December 2019, the Council endorsed guidance in which it urged Member States to take action against blacklisted jurisdictions by taking at least one of four specific legislative measures:
- Non-deductibility of costs incurred when these costs and payments are treated as directed to entities or persons in blacklisted jurisdictions;
- Inclusion in the taxpayer company’s tax base the income of an entity resident or a permanent establishment situated in a blacklisted jurisdiction (in accordance with the Anti-Tax Avoidance Directive rules for controlled foreign companies);
- Application of a higher rate of withholding tax (for example on payments such as interest, royalties, service fees or remunerations) when these payments are treated as received in blacklisted jurisdictions;
- Denial of or limited access to domestic participation exemptions if the dividends or other profits are treated as received from a blacklisted jurisdiction.
To date, most Member States apply or have taken steps to apply at least one of the four defensive measures agreed upon in the 2019 Guidance. In terms of Belgian corporate income tax, the following measures are aimed at EU blacklisted jurisdictions:
- Reporting obligation for payments above EUR 100,000: Belgian corporate taxpayers will be required to report annually on payments made directly or indirectly to entities or branches established in EU blacklisted jurisdictions, or on bank accounts managed by or held with such persons or branches, if the total amount of the concerned payments in the tax year is above EUR 100,000. Payments that are subject to the aforementioned reporting obligation are in principle automatically non-deductible if the taxpayer fails to report them.
- Stricter application of the Belgian CFC rule: A foreign company in principle only qualifies as a ‘controlled foreign company’ (CFC) if participation and low taxation conditions are met. However, these two conditions do not apply if the foreign company is located in an EU blacklisted jurisdiction.
- Non-application of the dividend received deduction (DRD) and capital gains on shares exemption: The participation exemption does not apply to dividends (in)directly received by a Belgian corporate taxpayer from companies located in EU blacklisted jurisdictions. As the conditions to benefit from the capital gains exemption are, as such, almost entirely aligned with the conditions to benefit from the DRD, capital gains realised on shares of a company located in EU blacklisted jurisdictions will no longer be eligible for this exemption.
Are you wondering what the potential (cash tax) impact of the (updated) EU tax haven blacklist might be for you? Let’s discuss!