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Economic substance – Cayman Islands laws in force

11 Jan 2019

The Cayman Islands has passed legislation requiring certain legal entities carrying on relevant activities to demonstrate adequate economic substance in the Cayman Islands. Any company, LLC[1] or LLP[2] registered or incorporated in the Cayman Islands should be aware of this legislation and consider how it may be affected.

The new Laws[3] came into force on 1 January 2019 to address the concerns of the EU Code of Conduct Group and recent OECD guidance on the economic substance of certain entities in jurisdictions with low or (like the Cayman Islands) zero corporation tax. The Laws demonstrate the continued commitment of the Cayman Islands to international best practice, including Cayman’s implementation of the OECD’s Base Erosion and Profit Shifting (BEPS) framework and related EU initiatives.

The Laws follow closely the approach taken to address the same issue by the Crown Dependencies of the UK (Jersey, Guernsey and the Isle of Man) and the other UK Overseas Territories including the British Virgin Islands and Bermuda.

Further detail, in the form of principles based guidance notes, is expected to be finalised over the next few weeks with sector specific guidance being developed during 2019, and we will provide further updates when guidance is approved and available from the Cayman Islands Tax Information Authority (TIA).

Relevant entities that existed before 1 January 2019 and that are conducting relevant activities on that date must comply with the economic substance requirements from 1 July 2019. Relevant entities that are established from 1 January 2019 onwards will have to comply with the requirements from the date they commence the relevant activity.

Which entities need to demonstrate economic substance in the Cayman Islands?

The Laws impose certain economic substance requirements on Cayman Islands relevant entities  which carry on a relevant activity. Any Cayman Islands company, LLC or LLP and any foreign company which is registered in the Cayman Islands as a foreign company may be a relevant entity, in each case unless their business is centrally managed and controlled outside the Cayman Islands and the entity is tax resident outside of the Cayman Islands [4].

The relevant activities are:

  • Banking business
  • Distribution and service centre business
  • Financing and leasing business
  • Fund management business
  • Headquarters business
  • Holding company business
  • Insurance business
  • Intellectual property business
  • Shipping business

What will relevant entities that conduct relevant activities need to do?

Relevant entities that are conducting relevant activities will need to make an assessment regarding their activities and may be required to put in place measures to allow them to comply with the requirements of the Laws regarding economic substance in the Cayman Islands for each relevant activity they conduct. It is possible for relevant entities to outsource certain functions to other service providers in the Cayman Islands.

What are the reporting obligations and who will have access to information?

From 2020, all relevant entities must include a declaration in their annual return as to whether or not they are conducting a relevant activity and what their financial year is. Relevant entities that are conducting relevant activities and which must demonstrate economic substance will need to make annual filings with the TIA from 2020 on a portal which is currently being developed.

Information about entities in breach of the economic substance requirements will be disclosed by the TIA to tax authorities in the jurisdiction where the parent / beneficial owner resides and the tax authority of the country of incorporation of the relevant entity, if the relevant entity is incorporated outside the Cayman Islands.

Penalties will be imposed for non-compliant entities.

What happens next?

The guidance notes, when issued, will provide further detail and a clearer picture. We will be in touch with more information on the steps required to understand the impact (if any) of the economic substance requirements and the measures that entities need to take to ensure compliance. If you have any questions in the meantime, please contact your usual Harneys contact, or email our economic substance legal team at caymaneconomicsubstance@harneys.com.

[1] Limited liability company registered under the Limited Liability Companies Law

[2] Limited liability partnership registered under the Limited Liability Partnership Law

[3] The International Tax Co-operation (Economic Substance) Law, 2018, the International Tax Co-operation (Economic Substance) (Prescribed Dates) Regulations, 2018, the Companies (Amendment) (No.2) Law, 2018 and the Local Companies Control (Amendment) Law, 2018

[4] The economic substance requirements will not apply to domestic Cayman Island companies which are not part of an MNE Group which carry on business in the Cayman Islands under local licensing laws or companies limited by guarantee or not for profit associations