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When incorporating in the Cayman Islands, entities engaged in relevant activities must comply with the Economic Substance (ES) Law, ensuring that they satisfy the Economic Substance Test (ES test). This guide provides an overview of the key requirements for the ES test and Reduced ES test, including filing obligations under the law.
What is the Cayman Economic Substance Test?
Under the Cayman Islands Economic Substance Law, every relevant entity involved in one or more relevant activities is required to meet the Economic Substance Test (ES test). Each activity must independently demonstrate compliance.
To pass the Cayman Islands ES test, entities must satisfy the following conditions:
Direction and Management
The entity must be appropriately directed and managed in the Cayman Islands, specifically regarding the relevant activity being conducted.
Adequacy Test
The entity must ensure it has adequate:
Operating expenses within the Cayman Islands.
Number of employees appropriate for the relevant activity.
Physical presence, including adequate premises and equipment on the Islands.
Core Income Generating Activities (CIGA) Test
The entity must conduct Core Income Generating Activities (CIGA) related to its relevant activity within the Cayman Islands. CIGAs refer to activities that play a key role in generating relevant income. These can be outsourced to a third party, but the entity must retain control of the CIGAs in the Cayman Islands.
Understanding the Reduced Economic Substance Test
The Reduced Economic Substance Test applies only to pure equity holding companies. For a pure equity holding company to pass this test, it must:
Comply with the filing requirements stated in the Companies Law (2020 Revision).
Have adequate premises and employees for holding and managing equity participation in other companies.
Economic Substance Filing Requirements
Entities subject to the Cayman Islands Economic Substance Law must meet annual reporting obligations by submitting the following:
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Economic Substance Notification (ESN)
What is an ESN?
An annual notification required for all registered entities, regardless of their economic activity. It is a prerequisite for submitting the annual Economic Substance Return (ESR).
How to file:
The two main platforms for filing ESNs are:
CAP system: The General Registry’s Corporate Administration Platform.
CBP system: The Cayman Business Portal (for specific cases).
What to include in the ESN:
Whether the entity conducts a relevant activity.
Whether the entity qualifies as a relevant entity.
Details of tax residency if the entity is not tax resident in the Cayman Islands.
Entity’s financial year-end date.
Filing Deadline:
The ESN must be submitted annually by 31st March, coinciding with the filing of the Annual Return.
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Economic Substance Return (ESR)
Relevant entities conducting one or more relevant activities must submit an ESR to the Cayman Islands Tax Information Authority (TIA) annually. The ESR demonstrates whether the entity meets the ES test.
How to file:
ESRs must be filed electronically via the DITC Portal. The Responsible Person, usually the entity’s director or registered office, will receive access to the portal to submit the ESR.
What to include in the ESR:
Details of the relevant activity conducted.
Relevant income and expenses for the activity.
Information about premises and equipment in the Cayman Islands.
Number of qualified employees and descriptions of CIGAs.
Additional details if applicable (e.g., MNE Group involvement or high-risk IP business).
Filing Deadline:
ESRs must be submitted within 12 months following the entity’s financial year-end.
Additional Considerations:
Entities that claim tax residency outside the Cayman Islands but engage in relevant activities must submit an ESR-TRO Form (Economic Substance Return – tax resident in another jurisdiction) within the same timeline.
For more information on Cayman Islands incorporation services, visit our Cayman Islands Incorporation page.
For in-depth guidance on economic substance rules, visit the Cayman Islands Government Official Economic Substance Guidance.
Stay compliant with the evolving international tax landscape by staying informed on global tax regulations at OECD Taxation.
