EU Ministers revise list of noncooperative jurisdictions for tax purposes

• On 20 February 2024, the European Union (EU) Finance Ministers adopted a revised list of noncooperative jurisdictions for tax purposes (EU List).
  
  
• Bahamas, Belize, the Seychelles and Turks and Caicos Islands were removed from Annex I, while six other jurisdictions (Albania, Aruba, Botswana, Dominica, Hong Kong and Israel) were removed from Annex II.
  
  
• The next revision to the EU List is expected in October 2024.

On 20 February 2024, the Council of the European Union (the Council) held an General Affairs Council meeting in which Ministers approved the Council Conclusions (pdf) on the revised EU List. Regarding Annex I, the Council decided to remove four jurisdictions (Bahamas, Belize, the Seychelles and Turks and Caicos Islands). Belize and the Seychelles moved to Annex II. The Council also removed from Annex II Albania, Aruba, Botswana, Dominica, Hong Kong and Israel.

The Council will continue to review and update the EU List biannually, with the next update due in October 2024.

Detailed discussion

Background

The EU started working on the list of noncooperative jurisdictions for tax purposes in 2016. On 5 December 2017, the Council published the first EU List of noncooperative jurisdictions for tax purposes, comprised of two annexes. Annex I includes jurisdictions that fail to meet the EU's criteria by the required deadline, and Annex II includes jurisdictions that have made sufficient commitments to reform their tax policies but remain subject to close monitoring while executing their commitments. Once a jurisdiction has executed all of its commitments, it is removed from Annex II.

The initial Annex I list included 17 jurisdictions that were deemed to have failed to meet relevant criteria established by the European Commission (the Commission).1 Since the release of the EU List, there have been multiple changes to its composition based on recommendations made by the Code of Conduct Group for Business Taxation (COCG). These changes may occur if, for example, the EU COCG identifies new jurisdictions or regimes or reassesses jurisdictions already on the EU List. A de-listing for both Annex I and Annex II is considered justified if an expert assessment establishes that the jurisdiction now meets all the conditions posed by the COCG.

The Commission also instituted the first countermeasures against listed noncooperative tax jurisdictions by adopting a Communication in March 2018 that set new requirements targeting tax avoidance in EU legislation governing, in particular, financing and investment operations.2 The requirements aim to ensure that EU external development and investment funds cannot be channeled or transited through entities in jurisdictions listed in Annex I without being confronted with countermeasures.

Moreover, in 2019, the Council released additional guidance on defensive measures toward noncooperative jurisdictions. Concurrently, it also released guidance on assessing jurisdictions with notional interest deduction regimes and the treatment of partnerships under criterion 2.2 (existence of tax regimes that facilitate offshore structures that attract profits without real economic activity).3 In accordance with the guidance on defensive measures mentioned above, EU Member States are required, as of 1 January 2021, to use Annex I in applying at least one of four specific legislative measures:

1. Nondeductibility of costs incurred in a listed jurisdiction
   
   
2. Controlled foreign company rules
   
   
3. Withholding tax measures
   
   
4. Limitation of the participation exemption on shareholder dividends

Many Member States have already adopted or drafted legislation for these defensive measures.

In October 2023, the COCG published its multiannual work package (2023 — 2028), which mentions that the group could explore how to facilitate the proper functioning of the Pillar Two rules by making use of the EU listing process. The COCG will also continue to discuss the new beneficial ownership criterion (criterion 1.4) and the extension of the geographical scope of its EU list screening process, which now encompasses approximately 95 non-EU jurisdictions.

Revised EU List

On 20 February 2024, the EU Ministers met in Brussels for a General Affairs Council meeting, during which the Ministers adopted the conclusions on the revisions of the EU List.

As noted, the Council adopted a revised Annex I of the EU List by removing Bahamas, Belize, Seychelles and Turks and Caicos Islands. According to the Council press release on the revised EU List, the reasons for removing the four jurisdictions from the list are the following:

• Bahamas and the Turks and Caicos Islands were delisted as they have made significant progress in enforcement of economic substance requirements (criterion 2.2).
  
  
• Belize and the Seychelles were removed from the list as the Global Forum has granted them both a supplementary review with regard to exchange of information on request, which will be undertaken in the near future. Pending the outcome of this review, Belize and the Seychelles have been included in the relevant section of Annex II.

The revised Annex I of the EU List now includes 12 jurisdictions: American Samoa, Anguilla, Antigua and Barbuda, Fiji, Guam, Palau, Panama, Russia, Samoa, Trinidad and Tobago, the US Virgin Islands and Vanuatu.

The Council also amended the list of jurisdictions included on Annex II of the EU List, which covers jurisdictions that have made sufficient commitments to reform their tax policies but remain subject to close monitoring while they are fulfilling these commitments. The Council removed Albania, Aruba, Botswana, Dominica, Hong Kong and Israel from Annex II after they satisfied their requisite commitments:

• Albania and Hong Kong fulfilled their commitments by amending a harmful tax regime.
  
  
• Aruba and Israel fulfilled all their pending commitments related to the automatic exchange of financial account information in the framework of the common reporting standard.
  
  
• Botswana and Dominica received a positive rating by the Global Forum with regard to the exchange of information on request.

As a result, the revised Annex II now comprises 10 jurisdictions: Armenia, Belize, British Virgin Islands, Costa Rica, Curaçao, Eswatini, Malaysia, the Seychelles, Turkiye and Vietnam.

Next steps

The Council will periodically review and update the EU List, taking into consideration the evolving deadlines for jurisdictions to deliver on their commitments and the evolution of the listing criteria that the EU uses to establish the EU List. Until 2019, the EU List was regularly updated without a fixed schedule to reflect the reforms undertaken by third countries. However, beginning in 2020, Member States agreed that the EU List will be updated no more than twice a year to ensure (i) a more stable listing process, (ii) business certainty and (iii) that Member States can effectively apply defensive measures against listed jurisdictions. Accordingly, the next revision to the EU List is expected in October 2024.

Implications

With its listing process, the EU continues to exert pressure on third states to enhance transparency and remove harmful elements from their tax systems. Businesses with activities in jurisdictions listed as noncooperative are advised to understand the implications of a jurisdiction's being included in Annex I, including:

• Reporting obligations arising from the mandatory disclosure rules (MDR) contained in Directive 2011/16/EU as amended by Council Directive (EU) 2018/822 (MDR Directive or DAC6) require, in part, the disclosure of cross-border arrangements that involve cross-border deductible payments when the recipient of the payment is tax resident in a jurisdiction included on the EU List of noncooperative jurisdictions for tax purposes.
  
  
• EU Member States may consider applying one or more defensive measures, including tax and non-tax measures, to prevent the erosion of their tax bases. These may include measures such as nondeductibility of costs, enhanced controlled-foreign-company rules or withholding tax measures, among others.

The lists will also have implications for public country-by-country reporting (CbCR), under which information should be disclosed on a country-by-country basis and thus be disaggregated for all EU Member States4 and all jurisdictions included in Annex I (on the first of March of the financial year for which the report should be drawn up) and Annex II (on the first of March of the financial year for which the report should be drawn up for two years consecutively) of the EU List.5 Further, companies cannot delay the publication of commercially sensitive information for up to five years by making use of the safeguard clause included in the public CbCR rules if the information relates to jurisdictions listed on Annex I and Annex II of the EU List.

As the work on the EU List is a dynamic process, companies should continue to closely monitor developments, including other Member States' introduction of defensive measures toward noncooperative jurisdictions.

Annex: EU List as of 20 February 2024

Contact Information

For additional information concerning this Alert, please contact:

EY Société d'Avocats, Paris

• Jean-Pierre Lieb

Ernst & Young Belastingadviseurs LLP, Rotterdam

• Marlies de Ruiter
  
  
• Maikel Evers

Ernst & Young Belastingadviseurs LLP, Amsterdam

• Konstantina Tsilimigka

Ernst & Young LLP (United Kingdom), London

• Chris Sanger

Ernst & Young LLP (United States), Global Tax Desk Network, New York

• Jose A. (Jano) Bustos

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor

For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.