EU black-white-grey palette
On 14 February 2023, the news came out that Russia was included into one more list made by the EU. Some sources mention the grey list, some – the black one; future consequences also vary from source to source. In this article we will try to understand the shades of lists and their consequences.
Now, Russia was officially included in Annex 1, which is part of the EU strategy aimed at countering tax evasion and profit shifting. In Annex 1, the EU included countries that provide no tax cooperation (black list). Apart from Russia, this list includes such countries as Panama, British Virgin Islands, Marshall Islands, Trinidad and Tobago.
In addition to Annex 1, there is also Annex 2 to the same strategy on taxes. This annex includes countries whose cooperation calls for critical remarks (grey list). Annex 2 includes such countries as Albania, Thailand, Seychelles, Botswana, Eswatini. While, for example, Uruguay, having remedied all EU critical remarks on tax administration, was removed from the list.
CONSEQUENCES of being included in the black list
At the national level
Since 1 January 2021, member states have committed to using the EU list when applying at least one of four specific legislative measures:
- non-deductible expenses incurred in the jurisdiction included in the list;
- rules of a controlled foreign company (CFC) to limit artificial deferral of tax payment to offshore organizations with low taxation;
- measures of withholding tax at source to combat improper exemptions or refunds;
- restriction on the application of exemption from taxation of dividends.
Therefore, at the national level, EU countries are obliged to include at least one of the EU-proposed measures in the legislation.
At the EU level
In addition to reputational consequences for jurisdictions included in the black list, EU legislation restricts allocation of certain EU development and investment funds through organizations in the countries included in the black list. Moreover, the EU Directive on Administrative Cooperation in the Field of Taxation (DAC 6) requires to disclose and exchange information related to certain transactions between interdependent companies that are residents of jurisdictions that are included in the black list, including cross-border payments between such enterprises. Furthermore, country-by-country reporting includes stricter reporting requirements for transnational corporations operating in countries included in the black list.
Cyprus case study
As a rule, Cyprus does not impose withholding tax on payments to non-residents of Cyprus, however, certain types of payments to countries included in the EU black list are subject to withholding tax. Particularly, in such cases, payments of dividends, interest and royalties made by Cyprus tax residents to tax residents of jurisdictions included in this list are subject to withholding tax in the amount of 17%, 30% and 10%, respectively. The question of the application of the double taxation agreement remains open. There have been no clarifications on this issue so far, however, as a general rule, international rules and agreements have priority over the norms of national legislation.
Before and After options are presented below in the diagrams on the example of dividend payment.
On the example of royalties the difference will be more dramatic, as with the double taxation agreement priority the rate at the source will be 0%, otherwise – 10%.
Moreover, the revision of the list has implications for DAC6 reporting, especially with regard to the trigger concerning deductible cross-border payments when the recipient is a tax resident of the jurisdiction included in the EU black list. It would be wise for Cyprus organizations operating in any of the listed jurisdictions to consider potential implications for DAC6 reporting.
So now, when building relationships between tax residents of the Russian Federation and the EU, it is necessary to take into account restrictive measures established by the EU for jurisdictions included in the black list, with Russia being among them.
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