The International Tax Co-operation (Economic Substance) Act (2021 Revision) (the "ES Act") came into force on 1 January 2019. The ES Act requires that all Cayman Islands entities notify the Cayman Islands Tax Information Authority (the "TIA") of, amongst other things, whether or not they are carrying on a "Relevant Activity" (as defined in the ES Act and as discussed further below) and, if so, whether or not they are a "Relevant Entity" (see further below). The notification to the TIA is by way of an annual Economic Substance Notification ("ESN") which must be filed prior to an entity filing its annual return with the General Registry's Corporate Administration Portal ("CAP").
Generally, Relevant Entities need to comply with the ES Act from the date on which they commence a "Relevant Activity". The economic substance test ("ES Test") can be satisfied in relation to a Relevant Entity carrying on a Relevant Activity if it (i) conducts core income generating activities ("CIGAs"); (ii) is directed and managed in an appropriate manner in the Cayman Islands in relation to that Relevant Activity; and (iii) has adequate operating expenditure, physical presence and personnel in the Cayman Islands. Relevant Entities must report their Relevant Activities on an annual basis and show "adequate substance" in the Cayman Islands.
The ES Act was most recently amended on 30 June 2021 and is supplemented by the Guidance on Economic Substance for Geographically Mobile Activities V 3.2 (July 2022) and Enforcement Guidelines (31 March 2022) (the "Guidance")
The International Tax Co-operation (Economic Substance) (Amendment of Schedule) Regulations, 2021, together with the International Tax Co-operation (Economic Substance) (Prescribed Dates) (Amendment) Regulations, 2021 (the "Amendment Regulations") serve to expand the range of entities subject to the ES Act to include partnerships, exempted limited partnerships and foreign limited partnerships from 1 January 2022 (for entities in existence as at 30 June 2021) or the date of commencement of a Relevant Activity (if not in existence as at 30 June 2021, the commencement date of the Amendment Regulations)
In 2017, following an assessment by the EU Code of Conduct Group (the "CoCG"), the Cayman Islands was included in a list of jurisdictions permitting corporate structures perceived to be lacking in economic substance. The ES Act aims to address the concerns raised by the CoCG. In a scoping paper issued in June 2018, the CoCG applied the methodology adopted by the OECD Forum on Harmful Tax Practices ("FHTP") in focusing on a sector-by-sector assessment of what economic substance means. The "Relevant Activities" subject to the ES Act have been derived from the categories of geographically mobile activities identified by the FHTP. Following further concerns raised by the European Commission, the Cayman Islands Ministry of Financial Services conducted an industry consultation in early 2021 resulting in the passing of the Amendment Regulations which expand the scope of the ES Act to partnerships.
3 WHO MUST COMPLY?
Generally speaking, a Relevant Entity that carries on a Relevant Activity is required to satisfy the ES Test. Where a Relevant Entity carries on more than one Relevant Activity the Relevant Entity will be required to satisfy the ES Test in respect of each Relevant Activity conducted. All "entities" (legal persons, partnerships, exempted limited partnerships and foreign limited partnerships that are registered with the Cayman Islands General Registry), including those that do not conduct Relevant Activities will be required to submit an ESN to the TIA to confirm, amongst other things, whether or not they conduct one or more Relevant Activities and, if so, whether or not they are a Relevant Entity.
3.1. Relevant Entity
The definition of Relevant Entity includes a company incorporated under the Companies Act (2023 Revision); a limited liability company registered under the Limited Liability Companies Act (2023 Revision); a limited liability partnership registered in accordance with the Limited Liability Partnership Act (2023 Revision), a company incorporated outside of the Islands and registered under the Companies Act (2023 Revision), a partnership defined in section 3 of the Partnership Act (2013 Revision), an exempted limited partnership as defined in section 2 of the Exempted Limited Partnership Act (2021 Revision) and a foreign limited partnership registered under section 42 of the Exempted Limited Partnership Act (2021 Revision) but excludes:
- a local partnership;1
- an entity that is an "investment fund";2
- an entity that is a "domestic company";3 and
- an entity that is "tax resident" outside the Cayman Islands.
Trusts are not currently considered to be Relevant Entities.
The Guidance provides that the TIA may regard a corporate entity as tax resident outside the Islands if the entity is subject to corporate income tax on all of its income from a Relevant Activity by virtue of its tax residence, domicile, or any other criteria of a similar nature in that other jurisdiction.4 For partnerships, the general partner is required to provide objective and sufficient evidence that the place of effective management is in another jurisdiction and the partnership is either taxed in that jurisdiction or required to satisfy similar economic substance requirements in that jurisdiction.
If an entity does not constitute a Relevant Entity it will not be required to satisfy the ES Test. However, an entity claiming to be tax resident outside the Cayman Islands will be required to produce satisfactory evidence to substantiate the same. An entity which is tax resident outside the Cayman Islands must disclose annually:
- proof that the entity is tax resident in another jurisdiction,
providing one or more of the following from the competent tax
authority as proo
- certificates / letters;
- tax assessments / demands or evidence of payment;
- tax returns; or
- proof that the entity is subject to the jurisdiction's
corporate income tax system including the following from the
- tax assessments, demands or evidence of payment;
- tax returns submitted
- confirmation that the entity is required to submit a corporate tax return.
If an entity is a Relevant Entity but it does not carry on a Relevant Activity, it will not be required to satisfy the ES Test but it will still be required to notify the TIA annually of:
- whether or not it is carrying on one or more Relevant Activities;
- if it is carrying on a Relevant Activity, whether or not all or any part of the Relevant Entity's gross income in relation to the Relevant Activity is subject to tax in a jurisdiction outside of Cayman and if so, provide appropriate evidence to support that tax residence as may be required by the TIA; and
- the date of the end of its financial year.
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1. "Local partnership" means a partnership that is not part of an MNE Group and that is only carrying on business in the Islands with persons resident in the Islands and that is licensed under the Trade and Business Licensing Act (2021 Revision); operating under a government franchise; or complies with section 3(a) of the Trade and Business Licensing Act (2021 Revision).
2. "Investment Fund" means an entity whose principal business is the issuing of investment interests 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 an entity through which an investment fund directly or indirectly invests or operates (but not an entity that is itself the ultimate investment held), but does not include a person licensed under the Banks and Trust Companies Act (2021 Revision) or the Insurance Act, 2010, or a person registered under the Building Societies Act (2020 Revision) or the Friendly Societies Act (1998 Revision). "Investment Interests" means a share, trust unit, partnership interest or other right that carries an entitlement to participate in the profits or gains of the entity.
3. A "domestic company" is one that is not part of an MNE Group and that is only carrying on business in the Islands and which complies with section 4(1) of the Local Companies (Control) Act (2019 Revision) or section 3(a) of the Trade and Business Licensing Act (2021 Revision); or a company referred to in section 80 (not-for-profit) of the Companies Act (2023 Revision).
4. A "domestic company" is one that is not part of an MNE Group and that is only carrying on business in the Islands and which complies with section 4(1) of the Local Companies (Control) Act (2019 Revision) or section 3(a) of the Trade and Business Licensing Act (2021 Revision); or a company referred to in section 80 (not-for-profit) of the Companies Act (2023 Revision)
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