Cayman Islands: Cayman Islands Economic Substance Legislation

New legislation came into effect on 1 January 2019 in the Cayman Islands which requires certain Cayman Islands entities ("Relevant Entities") carrying on certain activities ("Relevant Activities") to demonstrate that they have sufficient "economic substance" in the Cayman Islands (the "Regime").

All Cayman Islands entities need to determine whether the Regime will apply to them and, if so, what measures are required to comply with the Regime.

Cayman Islands entities existing prior to 1 January 2019, which are subject to the Regime, will need to comply by 1 July 2019, and newly established entities will need to comply as soon as they commence any Relevant Activity.

We strongly suggest that you obtain advice to classify your entity under the Regime (even if you believe you are out of scope) and determine what, if any, additional substance you will need to put in place to meet the requirements of the Regime. As a matter of good governance you should document this determination in preparation for notification and reporting which will commence in 2020. Please get in touch with your usual Collas Crill contact or contact us at regulatory@collascrill.com for further advice in relation to classification and documentation.

The Cayman Islands Tax Information Authority (the "Authority") is responsible for monitoring compliance with the Regime.

Relevant Entity

Under the Regime, a Relevant Entity is:

  • a company, other than a domestic company, that is (i) incorporated under the Companies Law (2018 Revision); or (ii) 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;
  • a company that is incorporated outside of the Cayman Islands and registered under the Companies Law (2018 Revision);

but does not include:

  • an investment fund; or
  • an entity that is tax resident outside of the Cayman Islands.

Exclusions

Investment Funds

An investment fund is considered to be an entity whose principal business is the issuing of investment interests (meaning a share, unit trust, 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 (but not an entity that is itself the ultimate investment held).

The definition of investment funds will include mutual funds licensed or registered with the Cayman Islands Monetary Authority ("CIMA") pursuant to the Cayman Islands' Mutual Funds Law (2019 Revision) (the "Mutual Funds Law"), mutual funds exempted from registration under section 4(4) of the Mutual Funds Law and closed-ended investment funds.

Tax Residency

An entity which would otherwise be a Relevant Entity as set out above, will not be considered a Relevant Entity if it is tax resident outside of the Cayman Islands.

An entity may be regarded as tax resident outside the Cayman Islands if it is subject to tax in another jurisdiction by reason of its domicile, residence or any other criteria of a similar nature. An entity which is a "disregarded entity" for US income tax purposes and has a US corporation as its parent will be considered tax resident outside the Cayman Islands provided satisfactory evidence is provided.

Relevant Activity

Relevant Entities will be required to comply with the economic substance requirements under the Regime, if they carry on one or more Relevant Activities.

Relevant Activities are defined as activities in the following categories:

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

Investment fund business, defined as the business of operating as an investment fund, is specifically excluded from the definition of a Relevant Activity.

Economic Substance Test

A Relevant Entity conducting one or more Relevant Activities will be required to satisfy an economic substance test in relation to those Relevant Activities which it conducts (the "Test").

In order to satisfy the Test, a Relevant Entity must:

  • conduct Cayman Islands core income generating activities ("CIGA") in relation to the Relevant Activity;
  • be directed and managed in an appropriate manner in the Cayman Islands in relation to a Relevant Activity; and
  • having regard to the level of income derived from the Relevant Activity carried out in the Cayman Islands:
    1. have an adequate amount of operating expenditure incurred in the Cayman Islands;
    2. have adequate physical presence (including maintaining a place of business or plant, property and equipment) in the Cayman Islands; and
    3. have an adequate number of full-time employees or other personnel with appropriate qualifications in the Cayman Islands.

For the purpose of the Test, the terms "adequate" or "appropriate" as applicable to each Relevant Entity will be determined on a case-by-cases basis taking into account the particular facts of the Relevant Entity and its Relevant Activity. Collas Crill can advise further in respect of these requirements as they may apply to each Relevant Entity and its Relevant Activity. Please get in touch with your usual Collas Crill contact or contact us at regulatory@collascrill.com for specific advice on this.

A Relevant Entity that carries on a Relevant Activity but which has no relevant income is not obliged to meet the requirements of the Test. However, the Relevant Entity will still be required to satisfy its notification and reporting obligations under the Regime.

Cayman Islands Core Income Generating Activities

A Relevant Entity must ensure that it conducts its Cayman Islands CIGA in respect of the Relevant Activities in accordance with the Guidance. CIGA are those activities which are of essential importance to a Relevant Entity in terms of income generation. The Guidance sets out a non-exhaustive list of what the CIGAs are considered to be for each category of Relevant Activity.

"Directed and Managed"

The reference within the Test to a Relevant Entity being "directed and managed in an appropriate manner in the Cayman Islands in relation to a Relevant Activity" relates primarily to the requirement for decision-making at a board level to be conducted in the Cayman Islands at an adequate frequency given the level of decision-making required. It is expected that the majority of board meetings will be held in the Cayman Islands and that, even for Relevant Entities with a minimal level of Relevant Activity, there will be at least one meeting of its board of directors in the Cayman Islands per annum.

Outsourcing

Outsourcing of Cayman Islands CIGA within the Cayman Islands is permitted and may contribute to the satisfaction of the Test in relation to a Relevant Activity, provided the Relevant Entity is able to adequately monitor and control the carrying out of the Cayman Islands CIGA by that other person. Outsourcing includes outsourcing, contracting or delegating to third parties or entities in the same group and the resources of the outsourced service provider will be taken into consideration when determining whether the people and premises element of the Test is met.

Collas Crill Corporate Services Limited is able to offer certain outsourced services to assist with compliance with the Test. Please get in touch with your usual Collas Crill contact or at regulatory@collascrill.com for further information.

Variations to Test Requirements

Pure Equity Holding Companies

At present, pure equity holding companies (i.e. entities which only hold "equity participations" in other entities) will be subject to a reduced Test which is satisfied if the company confirms that it has complied with all applicable filing requirements under the Companies Law (2018 Revision) and that it has adequate human resources and adequate premises in the Cayman Islands for "holding and managing" such equity participations. A pure equity holding company may be able to satisfy these reduced substance requirements where it engages and maintains a registered office service provider in the Cayman Islands. A pure equity holding company is not required to be "directed and managed" in the Cayman Islands.

High Risk Intellectual Property Business

A high risk intellectual property business (as defined under the Regime) is subject to a more stringent Test than other intellectual property businesses.

A Relevant Entity that is carrying on a high risk intellectual property business is presumed not to have met the Test for a financial year, even if there are Cayman Islands CIGA relevant to the business and the "intellectual property assets" (as defined) being carried out in the Cayman Islands.

A Relevant Entity may rebut this presumption if it can produce materials to the Authority which demonstrate that there is, and historically has been, a high degree of control over the development, exploitation, maintenance and, protection and enhancement of the intangible "intellectual property asset", exercised by an adequate number of full time employees with the necessary qualifications that permanently reside and perform their activities within the Cayman Islands.

Notification and Reporting

Notification

Beginning in 2020, a Relevant Entity will be required to notify the Authority annually of whether or not it is carrying on a Relevant Activity and if so, whether or not all or any part of its gross income in relation to the activity is subject to tax in a jurisdiction outside of the Cayman Islands. A Relevant Entity will also be required to notify the Authority of the date of the end of its financial year.

Reporting

Within 12 months of the end of its financial year, a Relevant Entity performing a Relevant Activity must prepare and submit a report to the Authority which will allow the Authority to determine whether the Test has been fulfilled by such entity.

The report will include the information relating to the type of Relevant Activities conducted; the amount and type of relevant income, expenses and assets; the location of place of business, plant, property or equipment; and the number of full-time employees or other personnel with appropriate qualifications responsible for carrying on Relevant Activity. The Authority has indicated that it will take a "principles-based" approach to determining whether or not a Relevant Entity has satisfied the Test.

A Relevant Entity which is required to satisfy the Test must retain records in respect of this for a period of 6 years after the end of a financial year.

The Authority may, on notice, require a Relevant Entity to provide certain information or access for inspection various information by the Authority to determine compliance with the Regime.

Penalties

Relevant Entities conducting Relevant Activities which do not meet the Test may be given direction by the Authority on how shortcomings may be resolved and may face a fine of up to CI$10,000 (US$12,200 equivalent). Ongoing failure by a Relevant Entity to meet the requirements of the Test in the following year may result in additional fines of up to CI$100,000 (US$122,000 equivalent) and further failures could lead to a Relevant Entity being struck off the register after two consecutive years of failure.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions