On 14 February 2023, the Council of the European Union published an updated list of non-cooperative jurisdictions for tax purposes  (“EU Black List”). The list was first created and published on 5 December 2017 by the Code of Conduct Group (Business Taxation) commissioned by the Council, and each year revisions are implemented by adding new (non-compliant) and withdrawing old (compliant) jurisdictions that appear on it.

EU Black List

The following 4 countries have now been added to the EU Black List: British Virgin Islands, Costa Rica, Marshall Islands and Russia.

The Black List now contains 16 jurisdictions considered to have harmful tax practices and unsafe: America Samoa; Anguilla; Bahamas; British Virgin Island; Costa Rica; Fiji; Guam; Marshall Island; Palau; Panama; Russia; Samoa; Trinidad and Tobago;  Turks and Tobago Island; US Virgin Island; and Vanuatu.

Russia included in the EU Black List

It is ironic, but the Russian so called “de-offshorisation” measures (basically, measures against capital flight from Russia) resulted in the country itself being included in the EU Black List.

On August 3, 2018, special administrative regions (SARs) were created in Russia. The purpose of the SARs was to establish favourable conditions for direct foreign investments, making it possible to establish international funds and inviting the capital to return to the country. The state revenues from the economic activity in the SARs were to be used for infrastructure development of the 2 Russia’s geographically most remote regions where the SARs were established (Kaliningrad, Russia’s European exclave, and Russkiy Island in Primorsky Krai (Vladivistok) in the Far East of the country).

Before 2018 no re-domiciliation to Russia of companies established outside of the country had been possible. From 2018, the change of nationality for companies from FATF countries became an option, if they wanted to transfer their domicile to Russia.

The SARs regime inter alia provides for exemption of taxation of dividends and capital gains under certain conditions, if such dividends and capital gains are received from countries with comparable corporate income tax rate (i.e. not from tax havens). It offers reduced withholding tax on dividends paid out to foreign parent companies under certain conditions (companies from countries with comparable corporate income tax rate (i.e. not from tax havens). So, arguably tax reductions and exemptions offered by the SARs are comparable to existing world practices, including Luxembourg.

Until 2022, Russia and the EU had been in discussions and exchanged information on the SARs regime, certain recommendations has been implemented, but the dialogue between the EU and Russia came to a standstill after the events in Ukraine. The Code of Conduct Group made its final assessment of this regime and considered it a harmful tax practice.

The inclusion of the country in the EU Black List certainly has implications on the Luxembourg business, which had, and may still have, ties with Russia, but also on the Russian business in and with Luxembourg, but also on any capital stemming from Russia or having any Russian nexus. Luxembourg authorities and businesses obviously have to adapt correspondingly.

EU defensive measures

In the fight against tax fraud, evasion and abuse, the European Council’s intention is to encourage the non-cooperative countries to improve their legal framework, to be cooperative in tax matters and to align their tax practices with those of the EU countries.

The countries reached common ground – they shall apply at least one of the administrative measures:

• reinforced monitoring of transactions;
• increased risk audits for taxpayers who benefit from listed regimes;
• increased risk audits for taxpayers who use tax schemes involving listed regimes.

As of 1 January 2021, EU member states also committed to apply at least one of the following legislative measures in respect of the blacklisted countries:

• non-deductibility of costs incurred in a listed jurisdiction;
• controlled foreign company (CFC) rules, to limit artificial deferral of tax to offshore, low-taxed entities;
• withholding tax measures (WHT), to tackle improper exemptions or refunds;
• limitation of the participation exemption on shareholder dividends.

The inclusion in the EU Black List is also relevant to whether a cross-border tax arrangements is reportable under DAC 6 as falling under category C Hallmark.

From 2024, it will also be relevant to EU country-by-country reporting as separate reporting for each jurisdiction on the black list will be required.

Measures introduced in Luxembourg

In 2018, the Grand Duchy obliged corporate taxpayers to declare in their corporate tax returns whether they have entered into transactions with related parties located in blacklisted jurisdictions.

In 2021, Luxembourg passed the law introducing defensive measures in respect of countries listed in the EU Black List. Under certain conditions, the deductibility for corporate income tax purposes of interest and royalties paid out by Luxembourg companies to associated companies from the EU blacklisted countries is denied. The provision applies to interest and royalties accrued, irrespective of whether they were paid or are outstanding.

However, the law offers Luxembourg taxpayers a possibility to demonstrate that the transaction giving rise to royalties and interest is made for valid economic reasons which reflect economic reality, i.e. the GAAR main purpose test shall apply. This suggests that the tax advantage should not be the main purpose of the transaction, and the taxpayer should have real economic reasons for the transaction to be allowed a deduction.

In May 2022, a Circular was issued by the Luxembourg Direct Tax Administration in clarifying aspects of the application of the above measures, in particular:

• The rules apply to interest and royalties owed to collective undertakings within the meaning of article 159 Luxembourg income tax law. In principle, the rules shall not apply to distributions to partnerships, trusts and individuals;
• The rules apply to interest and royalties accrued after 1 March 2021;
• The valid economic reasons must be genuine and economically relevant. The taxpayer may request a tax ruling in this respect in order to get certainty of treatment of the transaction by the Luxembourg tax authorities.
• If the interest deduction is denied under the Law introducing defensive rules, the interest limitation rule shall not apply.

There are other measures introduced in Luxembourg and on the EU level with an aim of fighting tax avoidance and evasion. For example, controlled foreign company rules exist in Luxembourg since 1 January 2019, in furtherance of the European Union (EU) Anti-Tax Avoidance Directive (ATAD). These rules target to tax income of CFCs arising from non-genuine arrangements that have been put in place for the essential purpose of obtaining a tax advantage. CFCs are typically companies existing in the low tax jurisdictions with effective tax rate lower than 50% percent of the corporate income tax payable in Luxembourg, and most (if not all) of the countries on the Black List are normally referred to as tax havens with low or no taxation.

For European companies, transactions with counterparties from the EU Black List and generally those registered and existing in the countries considered as tax havens require care and proper analysis. Feel free to contact us for more information, legal and advice.