Economic Substance in the Cayman Islands
We previously wrote of the new Economic Substance (ES) requirements for the BVI here –
ES requirements apply to many other jurisdictions including the Cayman Islands.
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.