The Council of the European Union ("EU") has announced that following a meeting of the EU's Economic and Financial Affairs Council ("ECOFIN"), the British Virgin Islands ("BVI") has been moved to Annex I of the EU's list of non- cooperative jurisdictions for tax purposes ("Annex I") effective 14 February 2023.

The rationale for the move is that the BVI was not sufficiently in compliance with the Organisation for Economic Co-operation and Development's ("OECD") standard on exchange of information on request ("EOIR") (criterion 1.2 of the list).

The BVI Government announced that it has requested a supplementary review be granted by the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes ("Global Forum") that would more accurately reflect the BVI's current legislative status, further to amendments made to the BVI Business Companies Act and the BVI Business Companies Regulations, which came into force on 1 January 2023.

Background

Whether a jurisdiction is added to Annex I is based on compliance with tax transparency criteria pursuant to the OECD's Common Reporting Standard ("CRS"). Specifically, the criteria require a jurisdiction to possess at least a "largely compliant" rating by the Global Forum with respect to both the CRS and the EOIR standard.

In November 2022, the Global Forum downgraded the BVI's rating from "largely compliant" to "partially compliant". A rating less than "largely compliant" means a jurisdiction is automatically added to Annex I.

Limited or no impact

The inclusion of the BVI on Annex I will have limited or no direct immediate consequences for investors or clients using BVI structures.

  • EU clients and investors can continue to invest and be marketed to as normal. In particular, inclusion on Annex I does not prevent a BVI investment fund from being marketed into the EU in accordance with the national private placement rules pursuant to the EU Alternative Investment Fund Managers Directive. It will prevent EU financial institutions from establishing a new securitisation special purpose entity in the BVI pursuant to the EU Securitisation Regulation but this is unlikely to be relevant to our clients.
  • There are no EU level sanctions resulting from being moved to Annex I. However, the EU provided guidance in 2019 on a number of types of administrative and legislative measures in the tax area that it recommended should be applied by EU member states from 2021. Administrative measures consist of reinforced monitoring of transactions and increased risk audits for taxpayers with connections
    to a listed jurisdiction. Legislative measures include non-deductibility of costs incurred in a listed jurisdiction, controlled foreign companies' rules, withholding tax measures and limitation of the participation exemption on shareholder dividends. To date, a number of member states have applied measures of both an administrative and legislative nature to Annex I jurisdictions. In practice, EU member states apply many if not all such measures in the case of non-double tax treaty jurisdictions, or tax neutral jurisdictions, such as the BVI, irrespective of any listing in Annex I.
  • EU requirements for mandatory reporting in respect of certain cross-border arrangements (DAC 6) means that tax deductible payments made by an EU entity to an "associated entity" in a low tax or zero tax jurisdiction are reportable in certain cases. The requirement to report such payments is broader if the associated entity is listed in Annex I. The detail of DAC 6 is left to local implementing law.
  • The EU intends that EU funding should not be made available to or through entities established in a listed jurisdiction. This is not anticipated to be relevant to the majority of our clients.

We are continuously monitoring the situation and will advise further in the event of any updates, but remain confident that the BVI has, and will continue to, address any concerns of the EU.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.