Luxembourg's attack on Cayman structures

Although it feels like a lifetime ago, it was only last month that the EU added the Cayman Islands to its "blacklist" of non-cooperative jurisdictions in tax matters. For many this has led to concerns around DAC6 mandatory tax reporting.

We have been made aware of Luxembourg's intention to take blacklist sanctions beyond tax disclosures. We understand that yesterday the Luxembourg Government adopted a draft law introducing enhanced anti-abuse measures. 

The press release dated 25 March indicates that tax deductions will be denied in respect of interest and royalties paid to an associated enterprise established in a blacklisted country. The press release does not indicate when these rules will come into force but we would anticipate 1 January 2021.

Practical points

• It is expected that the Cayman Islands will not remain on the EU's blacklist long-term. In a statement released shortly after their blacklisting the Cayman Island's Government has said that they have "already contacted EU officials to begin the process of being removed from the EU list...as soon as possible, which we understood to be October this year." Provided that this can be achieved, structures involving deductible payments by Luxembourg companies to a Cayman entity should remain unaffected. 
• If, come October, the blacklisting for Cayman has not been revoked, firms will need to consider restructuring any arrangements that involve a payment of interest or royalties from Luxembourg to Cayman.
•  As a glimmer of hope, if these rules follow the approach taken for blacklisted countries under DAC6, these provisions may not capture payments to Cayman partnerships (because under the Luxembourg implementation of DAC6, the Cayman partnership is not treated as a "recipient").