Economic Substance in the Cayman Islands

We previously wrote of the new Economic Substance (ES) requirements for the BVI here –

https://www.mooresrowland.tax/2019/09/economic-substance-requirements-in.html

I previously mentioned that onshore is the new offshore. But are we seeing the creation of 3 groupings?

1. The USA including the USVI

2. Post-Brexit London plus the Channel Islands and Switzerland

3. Singapore standing alone in Asia

Returning to the Caymans, legislation in the Cayman Islands provides economic substance requirements for
certain Cayman-based entities (including certain foreign companies registered
under the Cayman Companies Law (2018)) that are engaged in certain “relevant
activities.”

The economic substance requirements apply if the subject entity:

·       
Conducts Cayman
Islands core-income generating activities

·       
Is directed and
managed in an appropriate manner from the Cayman Islands, and

·       
Conducts certain operating
functions in Cayman adequately (expenditure, physical presence, full-time
employees or other personnel in the Cayman Islands)

Cayman-based “relevant
entities” include Cayman companies, limited liability companies (LLCs), and
limited liability partnerships (LLPs) and certain foreign companies registered
under the Cayman Companies Law (2018). Limited partnerships and investment
funds and Cayman entities that are not centrally managed and controlled from
Cayman and that are tax resident outside of Cayman are not considered to be
relevant entities and are not included in the scope of the legislation.
Entities with tax residency outside of the Cayman territory must provide
certain supporting documentation (e.g., a tax residency certificate or letter
from foreign tax authority) as evidence.

“Relevant activities”
of subject entities include: 

·       
Banking business

·       
Financing and leasing
business

·       
Fund management
business

·       
Holding company
business

·       
Insurance
business    

·       
Intellectual property
business

·       
Headquarters business

·       
Distribution and
service centre business

·       
Shipping business

Again, the definition
of relevant activities does not include an investment fund business.

A failure to comply
with the economic substance requirements can be subject to penalties ($10,000
in year one, and $100,000 in year two) and to a possible “strike off” of the
Cayman entity for continued failures.