The Cayman Islands has comprehensive legislation and regulations requiring legal entities domiciled or registered in the jurisdiction and carrying on certain activities, to have demonstrable substance in Cayman.
The International Tax Co-operation (Economic Substance) Law, 2018, and the regulations which fall under that law, are in place to safeguard the reputation of the Cayman Islands and uphold good business practices.
The legislation is to ensure that certain income streams are based on local activity in the jurisdiction, substantiating an overseas company having a presence in the Cayman Islands.
The economic substance act relates to any company with a presence in the Cayman Islands which is not carrying out ‘domestic’ business solely within the jurisdiction. This includes companies incorporated or registered as an overseas company in Cayman, as well as limited liability partnerships registered in Cayman.
The legislation applies to the following businesses:
- Distribution and service centres
- Intellectual property holding companies
- Fund management
- Finance and leasing
- Holding companies
Each Relevant Entity conducting a Relevant Activity (and any entity claiming tax residency outside Cayman) must submit a report to the TIA within 12 months of the end of their financial year regarding their compliance with the ES Test during that financial year. This report includes various financial, ownership and other data and Relevant Entities conducting a Relevant Activity must also provide their books of account or financial statements for the relevant financial year.
The penalty for failure to satisfy the ES Test for a Relevant Activity in a given financial year is US$12,200. The penalty for failure to satisfy the ES Test for a Relevant Activity in a subsequent financial year can rise to up to US$122,000 and, in addition, the Registrar must make an application to the Grand Court for an order for the Relevant Entity either to take such actions as may be specified or to be struck off.
Our Atlas team can prepare the book of accounts needed for the economic substance return, ensuring full compliance.
Further information on the legal requirements can be found at ogier.com/publications/cayman-islands-economic-substance-requirements.