Cayman Islands Economic Substance Requirements – Overview
From 1 January 2019, new legislation came into effect in the Cayman Islands, requiring in-scope entities that carry on particular activities to have demonstrable economic substance in Cayman. The International Tax Co-operation (Economic Substance) Law (Law), 2018 was enacted after an extensive process of consultation with the EU Code of Conduct Group, the OECD and Cayman stakeholders. The Law is the latest in a series of steps by Cayman to meet its 2017 commitment as an Inclusive Framework member under the OECD’s global Base Erosion and Profit Shifting (BEPS) initiative, and corresponding EU requirements encompassing no or nominal tax jurisdictions. Other international financial centres such as the British Virgin Islands, Guernsey, Jersey, the Isle of Man and Bermuda have implemented similar legislation. Overview 1. The Law defines which Cayman entities are in-scope (Relevant Entities). Relevant Entities must make an annual report as to whether or not they are carrying on one or more of a defined list of activities (Relevant Activities). If they are, they must satisfy an economic substance test in Cayman in respect of such Relevant Activities. Cayman’s Tax Information Authority is responsible for determining if a Relevant Entity satisfies the economic substance test. Relevant Entities 2. Relevant Entities include most Cayman exempted companies, Cayman LLCs and registered foreign companies except: a) investment funds or entities through which investment funds directly or indirectly invest or operate; b) entities which are tax resident outside the Cayman Islands; c) entities which are authorised to carry on business locally in the Cayman Islands as a domestic company; or d) Cayman exempted limited partnerships and trusts. Relevant Activities 3. All Relevant Entities will have to make an annual declaration as to whether they have conducted any Relevant Activities in the preceding financial period. Relevant Activities are fund management, banking, insurance, finance and leasing, distribution and service centre business, headquarters business, intellectual property business, shipping, and holding company business. Economic Substance Test 4. Relevant Entities that carry on Relevant Activities must satisfy the economic substance test. To satisfy the economic substance test in relation to a Relevant Activity, a Relevant Entity must: a) conduct “Cayman Islands core income generating activities”; b) be “directed and managed” in an appropriate manner in Cayman; and c) having regard to the level of relevant income derived from the Relevant Activity carried out in Cayman:
- have an adequate amount of operating expenditure incurred in Cayman;
- have adequate physical presence (including maintaining a place of business or plant, property and equipment) in Cayman; and
- have an adequate number of full-time employees or other personnel with appropriate qualifications in Cayman.
- taking decisions on the holding and selling of investments;
- calculating risks and reserves;
- taking decisions on currency or interest fluctuations and hedging positions; and
- preparing reports or returns to investors and the Cayman Islands Monetary Authority.
- negotiating or agreeing funding terms;
- identifying and acquiring assets to be leased;
- setting the terms and duration of financing or leasing;
- monitoring and revising financing or leasing agreements and managing risks associated with such financing or leasing agreements.
- Relevant Entities in existence prior to 1 January 2019 must satisfy the economic substance test in relation to a Relevant Activity from 1 July 2019;
- Relevant Entities formed on or after 1 January 2019 must satisfy the economic substance test in relation to a Relevant Activity from the date on which the Relevant Entity commences the Relevant Activity.