Recent developments in the Netherlands and Luxembourg with respect to the EU list of non-cooperative tax jurisdictions

On 22 February 2021 the EU Finance Ministers updated the EU list of non-cooperative tax jurisdictions. Dominica has been added to the list of non-cooperative tax jurisdictions while Barbados was moved out from that list. Dominica joins American Samoa, Anguilla, Fiji, Guam, Palau, Panama, Samoa, Seychelles, Trinidad and Tobago, US Virgin Islands and Vanuatu that were already on the list.
 
The possible placement of Turkey on the blacklist was deferred to 30 June 2021. If Turkey would not solve its open issues with respect to effective exchange of information with all member states before this date, it would be placed on the blacklist as well.
 
Tax implications in the Netherlands
The Netherlands has a blacklist for jurisdictions without a statutory profit tax and states with a statutory profit tax rate of less than 9%. The Dutch blacklist also includes non-cooperative jurisdictions identified by the EU. The effects of being on the Dutch blacklist are:

1. the application of controlled foreign company (CFC) rules effective 1 January 2019 (subject to certain conditions);
2. the non-eligibility for obtaining an advance tax ruling when in a transaction or corporate structure a Dutch blacklisted jurisdiction is involved as from 1 July 2019; and
3. the application of the withholding tax of 21.7% on interest and royalty directly or indirectly paid to subsidiaries or permanent establishments effective 1 January 2021. 

In 2021, the Dutch blacklist includes Anguilla, Bahama’s, Bahrain, Barbados, Bermuda, British Virgin Islands, Cayman Islands, Fiji, Guernsey, Guam, Isle of Man, Jersey, Palau, Panama, Samoa, Seychelles, Trinidad and Tobago, Turkmenistan, Turks and Caicos Islands, the United Arab Emirates, the US Virgin Islands, US Samoa and Vanuatu.
If Dominica will remain on the EU list of non-cooperative tax jurisdictions and Turkey would be placed on the blacklist during the remainder of 2021 they will be included in the Dutch blacklist for the entire year 2022 when the annual revisit of the Dutch blacklist effective the following calendar year takes place.

Tax implications in Luxembourg
Differently from the Netherlands, Luxembourg does not have a domestic list of non-cooperative tax jurisdictions. Instead, a Luxembourg administrative circular (L.G. A No 64 of 7 May 2018, hereinafter the Circular) provides certain defensive measures that apply to countries or jurisdictions included in the EU list of non-cooperative tax jurisdictions.
As per the Circular, the Luxembourg tax administration pays special attention on transactions carried out by Luxembourg corporate taxpayers with related parties located in non-cooperative tax jurisdictions. For that purpose, Luxembourg corporate taxpayers are required to report in their annual tax return whether they carry out transactions with related parties located in non-cooperative tax jurisdictions.

Further, a new rule which entered into force on 1 March 2021 denies the deductibility, for Luxembourg income tax purposes, of interest and royalty charges paid or due by Luxembourg taxpayers to related party entities established in blacklisted countries or jurisdictions. In this respect, it should be noted that:

• this new rule would apply to the beneficial owner of the interest / royalties charges; i.e., it would also apply in the case where the interest / royalty charges are paid or due to an entity established in a non-blacklisted jurisdiction but for the benefit (in the sense of beneficial ownership) of a company established in a backlisted country or jurisdiction.  
• this new rule does not apply if the Luxembourg taxpayer can prove that the transaction giving raise to the interest / royalty charge has taken place for valid commercial reasons that reflect the economic reality; in this respect, it should be noted that, as per the legislative works of this new rule, it is not sufficient to simply list a number of commercial reasons that would motivate the transaction, but these commercial reasons should represent an economic benefit sufficiently important to justify the transaction.  

The new rule applies to countries and jurisdictions included in the latest version of EU list of non-cooperative tax jurisdictions available (i.e., published in the Official Journal of the EU) on 1 March 2021. This list is to be updated once per year on 1^st January of each subsequent year. In case a country or jurisdiction is excluded from the list of non-cooperative jurisdictions, the new rule ceases to apply as from the date of publication of the list in the Official Journal of the EU.