Economic substance latest developments for BVI and Cayman Islands

What is this all about?

The BVI and the Cayman Islands have made a commitment to address the concerns of the EU Code of Conduct Group around economic substance and to introduce appropriate legislation addressing this issue before the end of 2018.

What will the legislation look like?

While both jurisdictions have draft legislation in an advanced state to implement new economic substance requirements and reporting and have been in close discussions with the EU working group, it is not yet publicly available.  However, we understand that the legislation will follow closely the approach which has been taken jointly by the Crown Dependencies of Jersey, Guernsey and the Isle of Man (the CDs).

Who will be affected?

Based on what we have seen in the CDs’ draft legislation, we expect the BVI and the Cayman Islands legislation to impose a requirement of economic substance on tax resident companies (and possibly also limited partnerships) engaging in and having gross income from a relevant activity in the jurisdiction. The relevant activities were first identified in OECD guidance and have been expanded slightly to include the following: · Banking business · Insurance business · Shipping business · Fund management business · Financing and leasing business · Headquarters business · Holding business · Intellectual property holding business · Distribution and service centre business

What will affected entities need to do to comply?

Once the legislation is finalised, an analysis will firstly need to be carried out to assess which entities are in scope. Any affected entities will then need to consider their position and take action before the end of their financial period ending in 2019. We expect that entities which are subject to the new rules will need to demonstrate aspects like management, employment, a physical office and/or income production in the relevant jurisdiction, but we do also expect that certain aspects will be able to be outsourced to another entity in the jurisdiction under appropriate monitoring and control. Harneys Fiduciary will be able to provide various services to assist relevant entities with meeting their substance requirements.

When will we know more?

We expect that the draft legislation will be made public in the BVI and the Cayman Islands in the next week to 10 days, following which we will provide a further update to this note. However, if you wish to speak to someone in the meantime, please contact your usual Harneys contact or Ross Munro, Phil Graham, Rachel Graham, Matthew Taber, Amy Roost or Fiona Chandler.