Cayman’s government and financial services industry professionals have had mixed reactions to the territory’s recently passed economic substance legislation, with some expressing cautious optimism that the new laws will increase investment in the islands, while others are bracing for an exodus of companies.

Similar feelings have permeated other offshore jurisdictions that have also passed substance legislation in an attempt to avoid being placed on a European Union blacklist. The EU wants offshore jurisdictions to implement legislation encouraging brick and mortar institutions, rather than the “shell companies” that comprise a large portion of the jurisdictions’ financial industries.

Along with Cayman, the British Virgin Islands, Bermuda, Jersey, Guernsey, the Channel Islands, and the Isle of Man have also passed such legislation.

Seemingly, the most negative public reaction to the EU requirements has come from the BVI, with some legislators there accusing the international pressure on the jurisdiction as an attempt to return it to “economic slavery.”

With more than 400,000 companies registered in the BVI – nearly all of them having no physical presence there – the BVI likely has the most to lose.

When BVI lawmakers debated the legislation last month, they described the EU and other international players as bullies.

“Why do we keep trying to please these people?” opposition member Archibald Christian asked, according to the territory’s newspaper, The BVI Beacon. “But we have no choice. If our children and their children and their children are to survive, this is the road we have to travel for now.”

The Beacon reported that Opposition Leader Ronnie Skelton took the description one step further.

“You get the feeling that this is another form of slavery – economic slavery, which has been here for a while – but this one is basically one to send you back into the dark ages,” Skelton reportedly said.

The BVI government has estimated that the substance legislation will lead to a 10 to 20 percent reduction in financial services business, which accounts for about 60 percent of the territory’s public revenue.

“Its effect on business in the BVI will be negative, and the question is how negative,” said Robert Briant, a partner at the law firm Conyers Dill & Pearman’s BVI office.

At a BVI Finance event in November, Harneys partner Peter Tarn described the substance requirements as “the most existential threat that the industry has faced since probably 1999,” the Beacon reported.

Compared to transparency initiatives and other regulatory hurdles put up during the past 20 years, “this is frankly the most difficult to deal with,” he said.

In its negotiations with the EU, the BVI and other overseas territories and Crown dependencies facing substance requirements had decided to “sacrifice” intellectual property-holding companies, Tarn said, because the EU was “obsessed” with them and they did not represent a critical part of the industry in the Virgin Islands or in other jurisdictions, the Beacon reported.

However, in return, important parts of the offshore business were kept outside of the relevant criteria for substance requirements. In addition, the substance tests apply only to tax resident businesses, and many businesses were simply not within the scope of the legislative changes.

As painful as the substance legislation may be, BVI officials still estimate that it will be far less damaging than an inclusion on the BVI’s blacklist. That would cause anywhere between a 20 and 80 percent drop in business, according to Neil Smith, the executive director of the BVI’s Office of International Business (Regulations).

Another jurisdiction that has chafed under the EU’s demands is Bermuda. That jurisdiction initially tabled its substance legislation on Dec. 7, but reportedly had it rejected by EU officials.

“Three sources have claimed that the European Code of Conduct Group said last week it was not satisfied with the Economic Substance Act 2018 tabled in the House of Assembly on December 7,” The Royal Gazette reported. “One source, who declined to be named, told The Royal Gazette: ‘The Code of Conduct Group met on December 11 and they flat out rejected Bermuda’s proposals.’”

When Bermuda legislators finally debated the bill some 10 days later, the territory’s opposition leader, Craig Cannonier, made similar statements as those made by BVI legislators, saying that the international community wants Bermudians to “go back to fishing.”

“Bermuda, someone’s trying to take your lunch and we need to stand up and say, ‘That’s not going to happen,’” he said.

Cannonier cited criticisms of the EU’s policy made in the Channel Islands by Anthony Mancini, a tax partner at the offices of KPMG there.

“Anthony Mancini, a tax partner with KPMG Channel Islands, said this, ‘So far the process has been an old overall failure because the process has been unfair and inconsistent,’” said Cannonier, “And I think that really sets the stage for Bermuda, that this has been unfair and inconsistent.”

However, with substantice banking and insurance industries, Bermudians are more confident than BV Islanders that they can weather the new requirements.

“Many Bermuda entities already meet the requirements,” Christian Luthi, chairman of offshore law firm Conyers Dill & Pearman, told the Gazette in December. “Indeed, for certain of our key industries, such as insurance and banking, the EU has expressly recognized the substantive nature of those industries in Bermuda.”

Likewise, Andy Sloan, deputy chief executive of strategy at promotional agency Guernsey Finance, said in October that substance rules were of the kind that “what doesn’t kill you, makes you stronger.”

He said, in the long term, the requirements could bolster the offshore industry by giving jurisdictions like Guernsey “a clean bill of health,” the Guernsey Press reported.

Jersey, which was the first offshore jurisdiction to publish its economic substance legislation, said last month that it was “delighted” to introduce the new law.

“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,” said Jersey External Relations Minister Ian Gorst when the bill was introduced. “[It] is committed to the development of new international standards in fair taxation and to the maintenance of a good-neighbour policy with the EU.”

However, the jurisdictions’ push to pass the substance legislation was not enough to keep them off of a recently published blacklist by the Netherlands. The only criterion for that list appears to be that these jurisdictions have a corporation tax rate of less than 9 percent or no corporation tax at all.

“With this measure, the government aims to prevent companies avoiding tax by moving mobile assets to low-tax jurisdictions,” the Dutch ministry of finance said.

The EU’s blacklist is expected to be released in February, according to Financial Services Minister Tara Rivers.