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Cayman Islands

10 May 2019

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The Cayman Islands Publishes Guidance on Economic Substance Requirements

On 2 May 2019, the Cayman Islands Department of International Tax Cooperation published the Economic Substance for Geographically Mobile Activities Guidance, which has been issued pursuant to the International Tax Co-operation (Economic Substance) Law 2018 that was approved in December 2018 and entered into force on 1 January 2019.  The guidance provides a summary of the economic substance law and regulations to support understanding of the law's scope and how to comply. This includes the economic substance test, which requires that a relevant entity conducting a relevant activity:

  • Conducts Cayman Islands core income generating activities in relation to that relevant activity;
  • Is directed and managed in an appropriate manner in the Islands in relation to that relevant activity; and
  • Having regard to the level of relevant income derived from the relevant activity carried out in the Islands:
    • has an adequate amount of operating expenditure incurred in the Islands;
    • has an adequate physical presence (including maintaining a place of business or plant, property, and equipment) in the Islands; and
    • has an adequate number of full-time employees or other personnel with appropriate qualifications in the Islands.

With certain exceptions, a relevant entity generally means:

  • a company that is incorporated under the Companies Law (2018 Revision) or a limited liability company registered under the Limited Liability Companies Law (2018 Revision);
  • a limited liability partnership that is registered in accordance with the Limited Liability Partnership Law, 2017; or
  • a company that is incorporated outside of the Islands and registered under the Companies Law (2018 Revision).

This does not include an investment fund or an entity that is tax resident outside the Cayman Islands. Further, this does not include a "domestic company" carrying on business in the Cayman Islands, subject to a number of conditions, or companies referred to in sections 9 and 80 of the Companies Law, namely companies limited by guarantee and not for profit associations.

Relevant activities include the following:

  • banking business;
  • distribution and service centre business;
  • financing and leasing business;
  • fund management business;
  • headquarters business;
  • holding company business;
  • insurance business;
  • intellectual property business; and
  • shipping business.

Investment fund business is specially excluded from relevant activities.

A relevant entity is subject to the economic substance test from the date on which the relevant entity commences a relevant activity unless the relevant entity was in existence prior to 1 January 2019, in which case it must comply with the economic substance law by 1 July 2019.

Starting in 2020, relevant entities must notify the authority annually of whether they carry on a relevant activity, whether all or part of its income is subject to tax outside the Cayman Islands and the date of the end of its financial year. Relevant entities must also prepare and submit a report for the purpose of the authority's determination of whether the economic substance test is met. The report is due within 12 months following the end of the financial year, for years beginning on or after 1 January 2019.

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