The EU blacklist: Consequences for Tax Havens

On the 14th of February 2023, the European Union published the new updated version of what is colloquially known as the “EU blacklist” – officially called “the EU list of non-cooperative jurisdictions for tax purposes”.

In this article we will explain what the EU blacklist is, the criteria that led to it, which countries are included in it and the effects it has.

What is the EU blacklist?

The European Commission describes the black list as follows: “the EU list of non-cooperative countries and territories for tax purposes is part of the work undertaken by the EU to fight tax evasion and avoidance.”

Firstly, although in our opinion taxes are a form of robbery, we can understand why countries try to make tax evasion more difficult: if you live in a country and you have your centre of vital interests there, you will have no choice but to comply with the laws that are imposed there, which naturally includes paying taxes.

However, the fact that the list also intends to help combat tax avoidance is more surprising. At the end of the day, tax avoidance is nothing more than “tax optimisation” or better tax structuring, and it should be a completely legal practice.

Some known forms of tax avoidance are the option to choose whether to invoice as a self-employed person or through a limited company, or to file a joint or individual tax return when you are married. Both forms are used to optimise or avoid personal taxation to a certain point. In these cases, a list of “non-cooperative individuals” does not exist because of the legal use of loopholes or more advantageous tax options. On an international level, however, things are different. The idea is that paying more or less taxes should not be by intention or because there was a plan behind it, but simply because it has worked out that way.

Naturally, Denationalize.me’s aim is to prevent you from paying taxes so that you can reach 0% taxation. To do so, we use the flag theory and work with countries that are also on the EU blacklist – although, depending on your situation, you may want to choose a country that is not on the list -.

What are the consequences for a country that is included on the EU blacklist?

The blacklist is not just a mere symbol and an opportunity to single out certain countries, but now it also carries far-reaching consequences for those who have links with the countries on the list: you yourself may be affected if you have any private or commercial relationship with a country included in this list.

Having a residency permit in one of the non-cooperative tax havens (such as Panama) is not harmful per se, as long as you can avoid identifying yourself as a resident there when opening bank accounts. If you say to a European bank that you have an address in Panama (or in any other country on the list), it is possible that the bank will not want to open an account for you, or even worse, that they want to close your existing bank accounts. If you want to live permanently in countries included in the blacklist, you should try to get additional paper address in a non-blacklisted country to avoid losing access to certain banks and financial institutions.

What happens on a personal level can also happen to businesses. Companies of jurisdictions on the list are faced with possible cancellation of their accounts in the EU. Therefore, using a SEPA account to open your company in the British Virgin Islands or Costa Rica, for example, could become a problem, which greatly reduces the appeal of these destinations. The EU financial institutions will not be very open to having people residing in blacklisted counties as clients, regardless of verified residence or registered office.

As well as this already substantial restriction of access to banks, some countries – including Germany – have adopted even more far-reaching measures. If you have a German company, maintaining a commercial relationship with companies in non-corporative countries is already considerably more difficult in itself, but if you are a tax resident in Germany, maintaining a company in these countries is practically impossible.  The punitive measures of the German “Tax Haven Protection Act” are as follows:

• Inhability to deduct business expenses and income-related expenses: expenses arising from business operations related to tax havens can no longer be deducted for tax purposes.
• Stricter taxation on profit transfer: there is additional, stricter taxation if the so-called “intermediate company” is located in a tax haven. All asset and liability income of the intermediate company is subject to additional taxation.
• Measures in the case of profit distributions and disposals of assets: in the case of profit distributions and sales of shares, tax exemptions and double taxation treaty provisions will be restricted or denied if these payments are made by a company resident in a tax haven or if shares of a company resident in a tax haven are sold.
• Documentation requirements: The draft also contains extensive cooperation obligations for trade transactions with listed states. However, unlike the previous regulation, no exemption is foreseen in case of compliance. More specifically, the deduction of business expenses would be denied despite documentation, even in the case of the import of goods from an affected state, for example.

However, there are two important points to keep in mind:

1. After the law comes into effect in 2022 – or 2023 for new countries – affected states will have until 2027 to get themselves removed from the European blacklist. In other words, right now (until 2027) there is no problem doing business with companies from Panama, Costa Rica, the British Virgin Islands and so on.
2. This is the case in Germany. This does not mean that it is going to be the same in other countries in the European Union. In the case of Spain, for instance, they do not have countries such as Costa Rica or Panama on their list of tax havens.

How does the European Commission decide which countries should be on the list?

The aim of the list is, firstly, to identify all the countries that could potentially be used for tax evasion or avoidance, as mentioned at the beginning of the article. In order to do so, the EU commission has developed a set of criteria that they use to assess countries. The EU is particularly concerned with tax transparency, tax fairness and profit erosion or profit shifting.

Tax transparency

Tax transparency refers to the possibility of accessing information on tax payments and practices of companies and individuals. The assessment here is mainly based on the OECD standard. The OECD advocates greater tax transparency to promote tax fairness and integrity, as well as to combat tax evasion and avoidance.

An important aspect of tax transparency is the exchanging of information between countries. The OECD has developed the Common Reporting Standard (CRS) for this purpose. The CRS allows tax authorities in certain countries to automatically exchange information on taxpayers’ financial accounts and assets. This makes tax evasion and avoidance more difficult and increases transparency in the international tax landscape.

Tax fairness

Tax fairness refers to what they call the “fair” distribution of tax burdens and the equitable application of tax laws to all taxpayers. The OECD works for tax fairness in order to ensure that everyone pays the taxes they are entitled to and to finance public budgets in a sustainable way.

Therefore, the EU commission adds countries with more favorable tax regimes to the list. In addition, countries are classed as “non-cooperative” if they allow offshore structures without real economic activity. Disappointingly, it seems that bureaucrats have not realised that there are digital nomads who do not need offices or employees to conduct their business. In this regard, from 2024 the EU will also count on ATAD3, a regulation on the establishment of business substrates in the EU to take advantage of local tax benefits. We might talk about this in a future article.

Profit erosion or shifting

Profit erosion can arise through various methods, such as overspending or shifting profits to other business units or subsidiaries. In this way, a company can erode its taxable profit and thus its tax burden.

Profit shifting refers to the practice of certain companies shifting profits to countries with lower tax rates in order to reduce their tax burden. This can be done, for example, by creating subsidiaries in low-tax countries or by shifting intellectual property or other intangible assets to countries with lower tax rates.

These practices can result in significant tax breaks, as companies artificially reduce their tax burden and therefore do not pay the taxes that, depending on who you ask, they should be paying. The OECD has therefore implemented various initiatives to regulate and prevent these practices, such as the Base Erosion and Profit Shifting (BEPS) project, which aims to close loopholes in international tax rules and improve tax transparency and cooperation between tax authorities.

The EU offers you a detailed list of tax havens

The funny thing about this EU list is that it essentially lists all the possible emigration destinations or countries to settle in for you. Given that these countries do not comply with one or various of the criteria for transparency and data exchange with the EU, they are providing you with exactly what you need as a Perpetual Traveller or migrant: information on how to reduce or eliminate your tax burden.

Of course, not all the countries on the list are appealing, nor do they offer everything that is necessary for us at Denationalize.me to recommend them. However, the current list of 16 countries offers a good overview in which certain things are still possible. Some of these countries have already been the subject of a separate blog post – although, in most cases, before they were included in this blacklist.

Below, we will explain why these countries are in the blacklist and what advantages they continue to offer to migrants or Perpetual Travellers. In most cases, there are better alternatives because there are still a few countries that offer the same advantages as blacklisted countries without even being on this or any other list. Therefore, if you want to settle down in a tax haven with all its advantages, do not hesitate to contact us.

The interesting thing is that while certain US jurisdictions, such as American Samoa, Guam or the US Virgin Islands, are affected, the biggest tax haven of all – i.e. the United States – is spared from appearing on this list. Of course, this will continue to be the case for a very long time, which is why we are so confident in the sustainability of our tax and accounting-free LLCs.

What countries are included on the list?

Below, we will provide you with some information on the countries that the EU have decided to add to its blacklist.

American Samoa

American Samoa is located just east of Australia. It is on the list because it decided not to apply the OECD’s minimum standards on Transparency and Tax Fairness. To be considered “cooperative” by the EU, the country would have to sign the OECD’s multilateral convention, which has not happened so far. In addition, American Samoa refuses to implement the BEPS minimum standards on profit shifting and profit transfer.

American Samoa is not considered a tax haven, because it is not 100% tax-free. However it still has interesting advantages, especially for companies. There you can set up a Samoa International Company (IC) and a Samoa Limited Life Company (LLC), which offers excellent offshore options in a very favourable jurisdiction.

Offshore companies in American Samoa pay 0% cooperative tax, they do not have to maintain accounting and, therefore, exempt from any audit.

For residents, the income tax rate is only 28%.

The American Virgin Islands

The American Virgin Islands, located in the Caribbean Sea, are not a member of the Global Forum, have not signed the OECD Multilateral Convention on Mutual Administrative Assistance as amended, have “harmful tax haven” regimes, apply preferential tax rates for regional or international corporate headquarters, and have not adhered to the inclusive framework or implemented the BEPS minimum standards.

Anguilla

Anguilla does not apply the corporate substrate requirements of the OECD guidelines and therefore favours offshore companies. In the case of tax transparency, a review by the Global Forum on Transparency and Exchange of Information for Tax Purposes (better known as the “Global Forum”) is currently underway.

Anguilla is located in the Caribbean and it is an authentic tax haven: neither residents nor non-residents have to pay taxes here. Only a few indirect taxes apply, such as stamp duty (ranging from 0.01% to 5%), property tax (0.75%) and transfer tax (5%). Non-resident purchasers of real estate may be required to obtain a real estate licence and pay stamp duty of up to 12,5% of the value of the property.

The types of business that Anguila offers include the Anguilla Limited Liability Company (LLC) and the Anguilla International Business Company (IBC). Only one person is needed for the incorporation of both of these companies and they have no accounting or auditing obligations.

In addition, there is a digital nomad visa that is valid for up to one year.

The Bahamas

The Bahamas, with more than 700 islands, is located in Central America. According to the EU’s list, this jurisdiction favours offshore structures by allowing companies without an economic substance. This is not surprising, given that only one partner is required to set up the company and it can even be done remotely – therefore, it is not even necessary to be present in the country. Moreover, the minimum share capital is $1 and there are no local substance requirements (minimum number of employees or physical office) to benefit from the tax exemption.

With 0% income tax, capital gains tax, corporation tax and withholding tax on interest and dividends, the Bahamas is a tax haven in every sense of the word.

With “BEATS” – Bahamas Extended Access Travel Stay -, the Bahamas also offers a digital nomad visa for 3 years.

The British Virgin Islands

The Global Forum has not assigned the British Isles, located in the Caribbean Sea, a “Largely Compliant” rating despite their efforts. In fact, they have been given a “Not Compliant” rating. This is the first time that the island group has appeared on the EU’s list of non-cooperative states.

The reasons for this “bad” rating are obvious: the British Virgin Islands are one of the most popular offshore jurisdictions because it is easy and quick to set up a company there. In certain circles, the British Virgin Islands are considered the most common structuring option, which can now take a toll on many: the access to accounts is very restricted by the blacklist and doing business with certain EU jurisdictions has become virtually impossible.

Capital gains are not taxed in this destination. According to the Income Tax Act 2004, corporate income tax, personal income tax and all other income taxes payable under the Income Tax Ordinance are taxed at a rate of 0%.

Costa Rica

Located in Central America, Costa Rica has still not solved the issue of having harmful rules that allow tax exemptions for foreign income.

This EU assessment is based on the fact that Costa Rica has territorial taxation, in other words, it only taxes domestic profits. Moreover, in Costa Rica an activity can be carried out locally with residence, office and even employees in the country without its profits being considered domestic. This constitutes “extended territorial taxation”. Other countries are more strict in defining when income comes from abroad and when it does not. As long as the money does not come from a domestic source, it is unconditionally exempt from tax in Costa Rica – here it does not matter where the activity is really carried out -.

It is important to mention that, according to the EU, damaging territorial taxation is (for the time being) only envisaged at corporate level. States that want to territorially tax their citizens have the right to do so. Currently, it is only harmful if companies are also taxed territorially. For the same reason, a few years ago Paraguay – for example – introduced the worldwide income principle on local companies, but renounced to apply it on individuals, which is why Paraguay is not on the list today.

Fiji

Fiji is located north of New Zealand and is not a member of the Global Forum. It has not signed the OECD’s Multilateral Agreement on Mutual Administrative Assistance as amended, has harmful tax haven regimes, preferential tax rates for regional and international corporate headquarters, and has not become a member of the inclusive framework nor implemented the BEPS minimum standards.

As can be seen in the EU commission’s assessment, the island nation is in breach of a wide range of rules that have placed it on the EU blacklist since 2019. Apparently, offshore companies are an important economic factor for the small Pacific island state – although we personally do not recommend having anything to do with it.

Guam

Guam is part of Micronesia and is located north of Australia. It is included on the list because it has opted not to apply the OECD’s minimum standards on tax transparency and fairness. To be considered “cooperative” by the EU, the country would have to sign the OECD Multilateral Agreement, which has not happened yet. Guam has been on the list since it was first published. Moreover, similar to American Samoa, it refuses to apply the BEPS minimum standards on profit shifting.

Marshall Islands

The Marshall Islands, in Micronesia, does not apply the business substance requirements under the OECD guidelines, which favours offshore companies. The Marshall Islands has been on the list once before, in 2018.

On a cooperative level, the Marshall Islands is quite discreet. A single person is sufficient to found an International Business Company (IBC), and can be both director and shareholder. Naturally, the Marshall Islands IBC is completely tax-free, requires no accounting and has a minimal administrative burden – a mere annual report that only needs to confirm the continued existence of the company and its ownership.

On a personal level, income is taxed at a range between 8 and 12%.

Palau

Palau is located in the Pacific Ocean, north of Australia, and does not apply the automatic exchange of financial information, nor has it signed the OECD’s Multilateral Agreement on Mutual Administrative Assistance.

From a fiscal point of view, Palau is not unattractive for tax residents. With an income tax up to a maximum of 12%, Palau is a destination to keep in mind: Income up to $8,000 is taxed at 6%, between $8,001 and $40,000 is taxed at 10% and from $40,001 the tax rate rises to 12%.

In January 2023, the Palau government introduced the GST (Goods and Service Tax). It is a 10% tax on all goods and services purchased in Palau. Companies in Palau pay BPS (Business Profit Tax), which is calculated at 12% of profits. It replaces the previous 4% tax on turnover.

In January 2022, Palau launched the initiative “Palau Digital Residency” that allows you to gain digital residence in the country.

Panama

The Global Forum on Information Exchange has not assigned Panama a “Largely Compliant” rating despite its request, as it has harmful foreign income exemption rules.

The basis of the Panamanian tax system is territorial taxation, which means that only money generated from Panamanian sources is subject to tax. All foreign income is completely tax-free. As in Costa Rica, this also applies to companies, and is after all the main reason for their presence on this list. Unfortunately, Panama’s reforms with mandatory accounting and so on have made the country much less attractive without even changing its blacklist status.

Panama, located in Central America, is well known or being an optimal residence for Perpetual Travellers, but due to its blacklisting it may no longer be interesting for those with a strong business relationship with the EU. On the other hand, the country harmonises perfectly with US LLCs and the US market. You can find more detailed information about Panama and its advantages in our blog.

Russia

According to the EU, the Russian Federation has a harmful tax incentive regime (international holding companies). In February 2023 Russia was added to the EU’s list of non-cooperative countries for the first time. However, for Perpetual Travellers or expatriates, Russia can be a good option. With only 13% flat taxation on income and profit distribution, Russia is very attractive, even if most of its citizens are now completely cut off from Western markets.

The truth is that Russia’s inclusion on the list can best be explained as one more sanction to add to the existing ones. In itself, Russia has little to offer our regular clients in terms of tax structuring.

Samoa

The independent state of Samoa is located east of Australia and north of New Zealand. According to the EU list, this jurisdiction has harmful tax regimes (offshore operations).

A resident company is taxed at a rate of 27% on its total taxable income, while a non-resident company is taxed at a rate of 27% on its taxable income derived exclusively from Samoa. The issue here is that there is specific territorial taxation for offshore companies.

The maximum income tax rate is 20% on income of $15,001 or more, and the country applies VAT at 15%.

Trinidad and Tobago

Trinidad and Tobago are located in the Caribbean. The Global Forum on Information Exchange has not assigned this jurisdiction a “Largely Compliant” rating despite its request, because the country refuses to participate in international information exchange, has established tax concession regimes (free zones) and has not signed the OECD’s multilateral convention. It remains one of the few Caribbean countries that still does not exchange information, but sadly it does not have any recommendable banks. The territory’s free zones are not very attractive to stateless people either.

The Turks and Caicos Islands

The Turks and Caicos Islands, located in the Caribbean, do not apply the business substrate requirements of the OECD guidelines, which favours offshore companies.

In the Turks and Caicos Islands you do not pay income tax, corporation tax, capital gains tax or VAT. You only have to contribute to the national health care system. In addition, this contribution is limited to a maximum of $468 per month, or 6% up to an income of $7,800 – income above $7800 is tax exempt. The self-employed pay a flat contribution of only $250 into the system.

Vanuatu

Vanuatu is located in the South Pacific, east of Australia and north of New Zealand. It applies the business substance requirements of the OECD guidelines, which favours offshore companies. However, we cannot really recommend you to start up your business in this destination, as you will only be able to have a local bank account.

Vanuatu is a fully autonomous country with zero tax, which means that it is not administered by larger nations, like New Zealand, France or the US – as tends to be the case in this region. Vanuatu is especially appealing in terms of citizenship, as you can obtain citizenship by investing in Bitcoin or paying with Bitcoin.

Conclusion

And that is all we have for today. The European Union blacklist is certainly something to be aware of, but, depending on your personal case, it should generally not be difficult to restructure so that it does not affect you. Actually, it is a flexible list that is likely to keep changing.

If you need our help to avoid possible problems derived from this list or to analyse whether the inclusion of a certain country can really be a problem, you can use your consultation services.