In response to the O.E.C.D.'s B.E.P.S. recommendations and the conclusions and concerns identified by the E.U. Code of Conduct Group of Business Taxation, the Cayman Islands enacted the International Tax Cooperation (Economic Substance) Law, 2018 ("E.S. Law") on December 27, 2018. The law was supplemented by the Economic Substance for Geographically Mobile Activities Guidance (the "Guidance") released on February 22, 2019.1

The Cayman Islands, being one of the O.E.C.D.-compliant "no or only nominal tax" jurisdictions, committed to take active steps to change its tax regime in order to stay out of the E.U.'s list of non-cooperative jurisdictions for tax purposes.

The E.S. Law was designed to address offshores structures attracting profits to the Islands and mandate economic substance there. The E.S. Law identifies "Relevant Entities" who conduct "Relevant Activities" and applies the law only to these entities. Notification and reporting obligations also apply.

To satisfy the economic substance test contained in the law, these entities must show that they undertake sufficient income generating activities and have sufficient operating expenditures, physical presence, and full-time employees to substantiate an economic nexus in the Cayman Islands.


Generally, the E.S. Law provides that certain entities (i.e., Relevant Entities) that carry out identified business activities (i.e., Relevant Activities) in the Cayman Islands must comply with the following:

  • Each Relevant Activity must have adequate economic substance (explained below).
  • The core income generating activities ("C.I.G. Activities") in relation to the Relevant Activities must be carried out in the Islands.
  • Each Relevant Entity must comply with reporting requirements to demonstrate adherence to the E.S. Law.

Relevant Entities carrying on more than one Relevant Activity must satisfy the requirements separately in relation to each Relevant Activity


A Relevant Entity is any of the following entities:

  • A company that is incorporated under the Companies Law (2018 Revision) or a limited liability company ("L.L.C.") registered under the Limited Liability Companies Law (2018 Revision)
  • A limited liability partnership ("L.L.P.") registered in accordance with the Limited Liability Partnership Law, 2017
  • A company incorporated outside the Cayman Islands and registered under the Companies Law (2018 Revision)


The E.S. Law does not apply to domestic Cayman Islands corporations, investment funds, or entities that are tax resident outside the Cayman Islands.2

A domestic company is a company that is engaged in a business in the Cayman Islands and complies with the local laws.3 However, a company that meets the above requirement but is a part of a multinational enterprise ("M.N.E.") Group (i.e., a group with annual revenues of at least $850 million) is not a domestic company. Also, a company not carrying on any business is not a domestic company even if it complies with the local laws.

An investment fund means an entity in the business of operating as an investment fund. The principal business of an investment fund is the issuing of investment interests (i.e., shares, trust units, partnership interests, or other rights carrying an entitlement to participate in the profits or gains of the entity) to raise funds with the aim of enabling the holder of the interest to benefit from the profits or gains from the entity's acquisition, holding, management, or disposal of investments. Mutual funds licensed or registered with the Cayman Islands Monetary Authority are also treated as investment funds.

A company, L.L.C. or L.L.P. that is incorporated or established in the Cayman Islands and is a tax resident in another jurisdiction is not subject to the E.S. Law if it produces satisfactory evidence to substantiate the claim (e.g., the tax identification number, tax residence certificate, and evidence of assessment or payment of a tax liability as well as details of the details of its parent company, ultimate parent company, and ultimate beneficial owners, including their respective jurisdictions of tax residence).

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1 Reference to the E.S. Law throughout this article includes the Guidance.

2 Section II.A.2 of the Guidance.

3 Section 4(1) of the Local Companies (Control) Law (2015 Revision) or Section 3(a) of the Trade and Business Licensing Law (2018 Revision).

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.