Eonoren /
12 November 2018Analysis

Captives and economic substance: too many shades of grey

With only one month to go until the EU updates its list of uncooperative tax jurisdictions, aka the blacklist, the clock is ticking for countries placed on its watch list—the so-called ‘grey list’—to meet certain requirements concerning tax matters to be deemed cooperative.

Jersey is the first jurisdiction to introduce legislation designed to meet requirements set out by the EU by filing an economic substance bill to both avoid the blacklist and get off the grey list.

Set to come into force on January 1—subject to the Jersey government’s approval—minister for external relations Ian Gorst lodged a draft Taxation Companies Economic Substance Law for debate by the States Assembly at its sitting on December 4.

The bill aims to address concerns relating to the possibility that profits from relevant activities are registered in Jersey without adequate economic activity taking place on the island.

Law firm Ogier stated that the bill tests whether companies are carrying out “relevant activities” to demonstrate that they are “directed and managed” in Jersey, and that their “core income generating activities” take place in Jersey.

“As well as meeting the commitment made in 2017, the lodging of this legislation demonstrates Jersey’s well-deserved reputation as a jurisdiction of substance that is committed to the development of new international standards in fair taxation and to the maintenance of a good neighbour policy with the EU,” says Gorst.

Jersey, along with Bermuda, the Cayman Islands, Guernsey and the Isle of Man, have all been put on the EU’s grey list with specific regard to meeting economic substance requirements, meaning they have agreed to modify their tax regimes to comply with the rules set by the EU Code of Conduct Group, lest they be deemed a non-cooperative jurisdiction and placed on the blacklist.

There is a great deal of uncertainty with regard to what the blacklist would mean for jurisdictions that have captive insurance companies domiciled within them, but there are concerns over whether the list could result in reputational damage or even sanctions.


In December 2017, the Council of the EU published the list with the aim cracking down on tax avoidance, and addressing deficiencies in the tax systems of non-EU jurisdictions. In assessing whether a jurisdiction is cooperative or not, the EU has set requirements that must be met, including tax transparency, fair taxation, and the commitment to anti-base erosion and profit shifting (BEPS) measures.

Over the past year, a number of jurisdictions that used to be on the blacklist have now been moved to the grey list, as they have made commitments to address the EU’s concerns.

On January 23, 2018, eight jurisdictions were removed from the blacklist: Barbados, Grenada, the Republic of Korea, Macao SAR, Mongolia, Panama, Tunisia and the United Arab Emirates, following commitments made at a high politics level to remedy EU concerns.

On March 13, the Council of the EU removed Bahrain, the Marshall Islands and Saint Lucia from the list as they made similar commitments, but it also added three: the Bahamas, Saint Kitts & Nevis, and the US Virgin Islands—all captive insurance domiciles.

These three had been previously been put on hold with regard to a screening of their tax systems due to the hurricanes that hit the region in September 2017.

However, on May 25, the Bahamas and Saint Kitts & Nevis were removed after making high level commitments—all of which will be carefully monitored by the EU Code of Conduct Group.

The jurisdictions that remain on the blacklist include: American Samoa, Guam, Namibia, Samoa, Trinidad and Tobago, US Virgin Islands.

Notable captive insurance domiciles that fall into the grey list include Anguilla, Bahamas, Barbados, Bermuda, the British Virgin Islands, the Cayman Islands, Guernsey, Hong Kong, the Isle of Man, Labuan, St Lucia, Saint Kitts & Nevis, Switzerland, and Turks and Caicos Islands.

Economic substance and impact

In terms of the impact caused by the EU’s blacklist, there are concerns over whether reputations will be damaged or that jurisdictions could even face sanctions from the EU and its individual member states.

Beyond being named, however, the jurisdictions have faced few, if any consequences from the blacklist.

However, the EU-driven debate over substance in business activities could strengthen the captive insurance market, according to a panel at the Guernsey Insurance Forum held in October in London.

The debate around BEPS has resulted in jurisdictions taking different approaches to how they view business substance, it noted.

Speaking at the panel, Paul Owens, managing director of the global captive practice of Willis Towers Watson, explains that BEPS is driving much of what the sector should already be doing.

“Insurance companies should not be a brass plaque on the door with nothing there,” he says.

Guernsey lawyer Kate Storey, partner at Walkers, adds: “This is an opportunity once again to demonstrate that this sector has, and always has had, substance.

“New substance requirements are not a big deal for Guernsey—we have always been a jurisdiction of substance in insurance. We have 50 years of history in insurance management.

“Pretty much every international insurer uses an insurance manager in Guernsey; we employ chartered insurers and the skills are all there within the management in Guernsey.”

Some argue that there are inconsistencies in how the EU has curated the blacklist and grey list, particularly with jurisdictions that fall within European borders.

In November 2017, Oxfam published a report, Blacklist or whitewash?, which showed that, according to the EU’s own criteria, four countries within the EU should be blacklisted but are not. These countries are Ireland, Luxembourg, the Netherlands, and Malta.

Oxfam criticised the EU list and suggested that by taking aim at countries outside the EU, this step has strongly harmed the credibility of the process—with Ireland, Luxembourg and the Netherlands being among the most powerful tax havens in the world, enabling the largest corporations to pay minimal tax.