Introduction to Cayman Economic Substance Rules

The Cayman Islands has made significant updates to comply with the fair taxation standards introduced by the OECD and EU. These changes emphasize the importance of Economic Substance (ES) for entities operating within the jurisdiction, ensuring transparency and promoting fair taxation practices, you can also visit here to find KYC Documents for Cayman Islands Incorporation. This fosters a competitive and compliant global financial ecosystem.

In this article, Fionza provides a comprehensive guide on the Cayman Islands Economic Substance (ES) Requirements, covering in-scope entities, compliance procedures, and other key considerations.

Overview of Cayman Economic Substance Rules

The focus on Economic Substance came into the spotlight with the implementation of the OECD’s Forum on Harmful Tax Practices (FHTP), which established global standards for substantial activity requirements in low or no-tax jurisdictions in November 2018. As a member of the OECD’s BEPS Inclusive Framework, the Cayman Islands were one of the first jurisdictions to introduce local laws in alignment with these standards.

The International Tax Co-operation (Economic Substance) Law (2020 Revision), also known as the Cayman “ES Act”, took effect on January 1, 2019, and has undergone multiple amendments to enhance the requirements for ES notification, information sharing, and compliance obligations. The latest version, Cayman ES (Amendment) Law, 2020, was published on February 12, 2020, along with supplementary regulations and guidance, such as the Guidance on ES for Geographically Mobile Activities (July 13, 2020) and Cayman ES Regulations, 2020 (August 11, 2020).

ES Compliance: Who Needs to Comply?

Under the Cayman Islands’ ES Act, certain entities are required to demonstrate compliance with ES annually, particularly those engaged in “relevant activities” that are geographically mobile. These entities must pass an ES test, which includes the CIGAs test (Core Income Generating Activities), direction and management test, and adequacy test.

In-Scope Entities:

• Companies incorporated under the Companies Law (2020 Revision)
• Cayman limited liability companies (LLCs) registered under the Limited Liability Companies Law (2020 Revision)
• Limited liability partnerships (LLPs) registered under the Limited Liability Partnership Law, 2017
• Companies incorporated outside of the Cayman Islands but registered under the Companies Law (2020 Revision)

Entities Excluded from ES Law:

• Domestic companies
• Investment funds
• Companies that are tax residents in an overseas jurisdiction

For entities claiming tax residency in another jurisdiction, they must provide sufficient evidence to the Authority to demonstrate that they are subject to corporate tax on all income in that foreign jurisdiction.

Relevant Activities under the Cayman ES Act

Entities engaged in relevant activities as outlined by the Cayman ES Act are required to file notifications and returns. These activities are aligned with OECD and EU standards and include:

• Banking business
• Distribution and service center business
• Financing and leasing business
• Fund management business
• Headquarters business
• Holding company business
• Insurance business
• Intellectual property business
• Shipping business

It’s important to note that “passive relevant income,” such as dividends, interest, royalties, and rental property income, can qualify an entity as conducting a relevant activity, even without direct participation in business operations.

Filing Obligations

Entities that fall under the scope of the ES Act are required to submit two key filings annually:

1. ES Notification: To inform the Cayman Islands Tax Information Authority (TIA) of their relevant activities.
2. ES Return: Providing detailed information on the relevant entity’s compliance with ES requirements.

The Tax Information Authority (TIA) is responsible for overseeing the implementation of the ES Act and ensuring that entities in the Cayman Islands comply with the law.

For more details on how Fionza can assist with your compliance needs related to Cayman Islands incorporation and Economic Substance, contact us or visit our Cayman Islands incorporation services page.

For further reading, explore the official Cayman Islands Government Economic Substance Guidance here.

Also, click here to visit Frequently Asked Questions About Cayman Islands Incorporation