CAYMAN ISLANDS - ECONOMIC SUBSTANCE CLASSIFICATION

CAYMAN ISLANDS - ECONOMIC SUBSTANCE CLASSIFICATION

Background

The International Tax Co-operation (Economic Substance) Law, 2018 (the “ES Law”) came into force on 1 January 2019 in the Cayman Islands (“Cayman”). The ES Law requires a “relevant entity” that is carrying on “relevant activities” to satisfy the economic substance test (“ES Test”) in relation to each relevant activity. Such a relevant entity will also have notification and reporting obligations under the ES Law.

All entities with separate legal personality will be required to provide notification in relation to economic substance through the Cayman Islands General Registry system. The notification of the type of relevant activity conducted (if any) will be a prerequisite to the filing of the relevant entity’s annual return with the Registrar of Companies in Cayman which must be filed in January of each year.

Requirements by the Tax Authority on Relevant Entity
 
At a date to be specified by the Tax Information Authority (the “Authority”), the relevant entity will need to complete the notification process via an Economic Substance Portal to be established by the Authority to facilitate the electronic submission of notification and reporting. Exempted entities will also need to provide information to the Authority to validate a claim of exemption.
 
A relevant entity which is required to satisfy the ES Test must also submit a report within twelve (12) months of the last day of its financial year. Information to be provided in the report includes the following confirmations in respect of the conduct of the relevant activity (the "Report Confirmations"):
 
(a)   the type of relevant activity conducted;
(b)   the amount and type of relevant income;
(c)   the amount and type of expenses and assets;
(d)   the location of the place of business or plant, property or equipment used in Cayman;
(e)   the number of full-time employees or other personnel with appropriate qualifications who are responsible for the execution of the Relevant Activity;
(f)    information showing the core income generating activities (“CIGA”); and
(g)   a declaration as to whether or not the ES Test is satisfied.
 
The Authority may also require a relevant entity to provide additional information (including copies of books, documents or other records, or of electronically stored information) and failure to provide requested information without lawful excuse or within the time specified by the Authority is an offence.

Sharing of information 
 
The Authority may share information provided to it under the ES Law with competent authorities in other jurisdictions in relation to:
 
(a)   the failure of a relevant entity to satisfy the ES Test;
(b)   high risk intellectual property business; and
(c)   an entity which claims to be tax resident in another jurisdiction.
 
The Authority may also share information with competent authorities in the jurisdiction of tax residence of the relevant entity's parent company, ultimate parent company and ultimate beneficial owner.

Important Note

While the Authority will specify the time, form and manner of the notification obligation as mentioned above, every entity is strongly encouraged to conduct assessment and classification as efficiently as possible. Since the timing of compliance with the ES test has already commenced, analysis shall be completed sooner rather than later.

If you are interested to know more or if you have any questions regarding the above, please feel free to contact us.