The International Tax Co-operation (Economic Substance) Law, 2018 (ES Law) came into effect in the Cayman Islands on 1 January 2019, requiring in-scope entities that carry on particular activities to have demonstrable economic substance in Cayman. You can find Ogier's overview of this legislation here.

This briefing summarises the main elements of the ES Law as it relates to investment funds and associated vehicles, and fund managers and other entities registered as excluded persons under the Securities Investment Business Law (2019 Revision) (SIB Law). This note does not address entities holding a full licence to carry on discretionary fund management under the SIB Law. Such entities should seek specific advice from Cayman counsel.


1.     The ES Law defines which Cayman entities are in-scope (Relevant Entities). Relevant Entities must make an annual report as to whether or not they are carrying on one or more of a defined list of activities (Relevant Activities). If they are, they must satisfy an economic substance test in Cayman in respect of such Relevant Activities.

Relevant Entities

2.     The first step is to ascertain if an entity is a Relevant Entity, as entities that are not Relevant Entities fall outside the scope of the ES Law altogether.

3.   The following are not Relevant Entities:

  • exempted limited partnerships;
  • "investment funds" (as defined – see below);
  • entities that are authorised to carry on business locally in Cayman as domestic companies; and
  • entities that are tax resident outside Cayman.

Any entity claiming to be tax resident outside Cayman will be required to produce satisfactory evidence to substantiate the same, such as a Tax Identification Number, tax residence certificate together with an income tax return, assessment or payment of a corporate income tax liability on its gross income arising in Cayman from a Relevant Activity (if any).

Investment Funds

4.  The ES Law currently excludes investment funds altogether. The ES Law defines an "investment fund" as "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 any entity through which an investment fund directly or indirectly invests or operates, but does not include a person licensed under the Banks and Trust Companies Law (2018 Revision) or the Insurance Law, 2010, or a person registered under the Building Societies Law (2014 Revision) or the Friendly Societies Law (1998 Revision)".

5.  Guidance issued by the Cayman Tax Information Authority (Guidance) confirms that mutual funds licensed or registered with the Cayman Islands Monetary Authority are considered investment funds for the purpose of the ES Law.

6.  For entities not registered or licensed as mutual funds it will be necessary to assess the individual circumstances of each entity to determine if it is out of scope as an investment fund. In the absence of additional guidance, and subject to such a fact-specific analysis, it is our view that:

  • It is immaterial as to whether the investment interests are redeemable or not, so both open-ended and closed-ended vehicles may be investment funds;
  • A master fund, intermediary fund or trading subsidiary of an investment fund would generally be treated as an investment fund by virtue of being "an entity through which an investment fund directly or indirectly invests"; and
  • An underlying portfolio company owned directly or indirectly by an investment fund would not itself be an investment fund for these purposes.

7.  As no single characteristic may be determinative, it will be important to consider all the circumstances, particularly where an entity has only one investment; has only one investor; has no third party investors; or does not engage a professional fund manager to manage the entity's assets.

Fund Managers

8. For entities that carry on any form of fund management, the first step is again to assess if the entity is a Relevant Entity. Of the entities that are most commonly used for fund management activities, most exempted companies, Cayman LLCs and foreign entities (eg. Delaware LLCs) registered in Cayman as foreign companies will be Relevant Entities, unless in each case they are tax resident outside Cayman.

Relevant Activities

9.     Entities that are Relevant Entities will then need to determine if their activities are Relevant Activities. A Relevant Entity carrying on more than one Relevant Activity is required to satisfy the economic substance test in relation to each Relevant Activity.

10. In the funds context, it is likely that the Relevant Activities of greatest relevance will be "fund management business" (though as described below the ES Law currently limits this to full licensees under the SIB Law) and "holding company business". Again, a fact-specific analysis will be required and each of the Relevant Activities must be considered. Particular care will need to be taken if a Relevant Entity holds, exploits or receives income from intellectual property assets.

Fund Management Business

11. The ES Law currently defines fund management business as "the business of managing securities as set out in paragraph 3 of Schedule 2 to the SIB Law carried on by a relevant entity licensed under that Law for an investment fund". Two elements of this definition should be noted:

  • Paragraph 3 of Schedule 2 to the SIB Law covers "managing securities belonging to another person in circumstances involving the exercise of discretion". It does not extend to other activities such as arranging deals in securities or providing non-binding discretionary advice.
  • The word "licensed" means that only those entities that are fully licensed under the SIB Law can be carrying on fund management business as a Relevant Activity. However, the majority of Cayman entities providing some form of fund management do so on the basis of registration as "excluded persons" under the SIB Law, rather than obtaining a full licence.

12. Under the ES Law then, as drafted, neither SIB Law excluded persons nor entities whose activities are limited to providing non-binding investment advice are conducting the Relevant Activity of fund management business.

13. The Cayman government has confirmed that it will be implementing changes to the SIB Law that will require SIB Law excluded persons to maintain certain resources in Cayman. While the scope and timing of this requirement has not been settled, it should be expected that these changes will affect all SIB Law excluded persons.

14. In addition, it is expected that the definition of "fund management business" under the ES Law will be expanded to include certain SIB Law excluded persons managing securities belonging to another person in circumstances involving the exercise of discretion.

Holding Company Business

15. Holding company business is the business of a company that only holds equity participations in other entities and only earns dividends and capital gains. Companies holding interests in other entities and also performing other services should seek advice as to whether or not they can be considered to be carrying on holding company business.


16. Relevant Entities will be required to make an annual declaration to the Cayman Registrar of Companies as to whether they have conducted any Relevant Activities in the preceding financial period and, where applicable, an annual report to the Cayman Tax Information Authority of certain prescribed details relating to such Relevant Activities. The form, manner and timing of this reporting will be prescribed.

Key Dates

17.   The ES Law and accompanying Regulations provide a timetable for compliance, notification and reporting:

  • Compliance:
    • Relevant Entities in existence prior to 1 January 2019 must satisfy the economic substance test in relation to a Relevant Activity from 1 July 2019.
    • Relevant Entities formed on or after 1 January 2019 must satisfy the economic substance test in relation to a Relevant Activity from the date on which the Relevant Entity commences the Relevant Activity.
  •  Notification: starting in 2020, all Relevant Entities must notify the Tax Information Authority whether or not they are conducting a Relevant Activity and provide certain additional details including as to the date of their financial year.
  • Reporting: within 12 months of the end of their financial year, Relevant Entities carrying on a Relevant Activity must submit to the Tax Information Authority a report setting forth prescribed details as to their compliance with the economic substance test.

Next steps

18. Although some issues remain to be further refined in the Guidance, the deadlines for compliance with the ES Law require that clients with Cayman Islands entities (or non-Cayman entities registered in Cayman as foreign companies) address the new requirements now. All Cayman entities should complete a classification of their status under the ES law, as this will be necessary to meet notification and, if applicable, substance and reporting obligations. Clients should therefore consult Ogier or other Cayman counsel to determine:

  • are their entities "investment funds" If so, they should confirm this classification and document this determination in board resolutions;
  • if they are not investment funds, are they Relevant Entities?
  • if they are Relevant Entities, are they carrying on Relevant Activities?
  • if they are Relevant Entities carrying on Relevant Activities:
    • when were they incorporated or registered in Cayman?
    • do those Relevant Activities include holding, exploiting or receiving income from intellectual property assets?
    • does the Relevant Entity only hold equity participations in other entities and only earn dividends and capital gains?
    • is the entity registered under the SIB Law as an excluded person?

19. Ogier has developed a range of potential solutions and analyses to assist clients to comply with the ES Law and anticipated revisions to the SIB Law.  Please get in touch with your usual Ogier contact or any of our partners listed here.

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.