Five steps to compliance with the Cayman Economic Substance test
15 January 2019
The Cayman Islands (‘Cayman’) International Tax Co-operation (Economic Substance) Law, 2018 (‘Law’) and International Tax Co-operation (Economic Substance) (Prescribed Dates) Regulations, 2018 (‘Regulations’) came into force on 1 January 2019. Official Guidance Notes are expected in early 2019 to set out how the new regime will work. Here we consider what steps Cayman entities should be taking to find out if the Law and Regulations apply to them and, if so, whether they carry out the core income generating activities defined in the Law for their business.
Step 1 - Are you a Relevant Entity?
The first decision is whether your Cayman entity is considered to be a ‘relevant entity’ (‘Relevant Entity’). The Schedule to the Law defines the relevant terms, and a Relevant Entity is defined as a:
- Cayman incorporated company, which is not a domestic company; or a
- Cayman registered LLC, LLP or foreign incorporated company;
unless in each case the entity’s business is centrally managed and controlled in a jurisdiction outside Cayman and tax resident outside Cayman.
An investment fund is not a Relevant Entity. (s.1 Schedule Law.) A domestic company is one which is not part of a Multinational Enterprise Group that carries on business in Cayman under relevant legislation, or a subsidiary of such a company.
Step 2 - Do you carry out a Relevant Activity?
What is a Relevant Activity
In the Law, relevant activity (‘Relevant Activity’) is defined as meaning: Banking business; distribution and service centre business; financing and leasing business; fund management business; headquarters business;holding company business;insurance business; shipping business; intellectual property business
What is not a Relevant Activity?
Investment fund business is not a Relevant Activity, and is defined as 'the business of operating as an investment fund'. An Investment fund is defined as:
an entity whose principal business is the issuing of investment interests (share, trust unit, partnership interest or other right that carries an entitlement to participate in the profits or gains of the entity) to raise funds or pool investor funds with the aim of enabling a holder of such an investment interest to benefit from the profits or gains from the entity's acquisition, holding, management or disposal of investments and includes any entity through which an investment fund directly or indirectly invests or operates.
Step 3 - Are you carrying out Core Activities in Cayman?
The Law sets out in a Schedule the core income generating activities (‘Core Activities’) which are of central importance to generating income for the types of business the Law defines as Relevant Activities. (These are set out at the end of this piece.) Relevant Entities which conduct Relevant Activity need to ensure that these Core Activities are being carried out in Cayman. See the Schedule at the end of this piece for the relevant Core Activities.
Step 4 - Are you ready to comply when necessary?
Relevant Entities which conduct Relevant Activity must be carrying out substantial business activity which is related to the line of business that the entity conducts in Cayman. New Relevant Entities need to comply from the date they start their Relevant Activity, whilst those Relevant Entities which existed before 1 January 2019 and which carry out a Relevant Activity need to comply from 1st July 2019.
Step 5 - Seek help
This Cayman legislation is part of a global effort to establish an international standard and it is important that all those in scope comply. Those managing Cayman entities need to assess whether their entities are in scope and, if they are, whether they comply or what they need to do to become compliant. At the end of the entity’s financial year they will also need to complete the necessary report to the Cayman Tax Information Authority (‘TIA’). The initial assessment can be done without advice, but Cayman Finance, the Cayman Financial Services Industry Body, has recommended its members take Cayman legal advice on how the Law will affect them and their clients. We would endorse Cayman Finance’s recommendation and encourage all Cayman entities to obtain the reassurance of independent local legal advice.