Cayman Islands Economic Substance Legislation And Requirements

Cayman Islands Economic Substance Legislation and Requirements
Mar 19, 2019

On January 1, 2019, the Cayman Islands formally introduced into law, The International Tax Co-operation (Economic Substance) Law, 2018 together with the accompanying International Tax Co-operation (Economic Substance) (Prescribed Dates) Regulations, 2018 (collectively, the “Law”). This was done in accordance with The International Tax Co-operation mandate adopted by most if not all Offshore Financial Centers at the same time. This is in accordance with the stipulated standards set by the OECD and the European Union and designed to curtail “Base Erosion and Profit Shifting” (BEPS).

Based on the Law, the Guidance Notes issued by the Cayman Islands Tax Information Authority, support the legislation and adoption by those effected. From the Law and the Guidance Notes, these are the key concepts and provisions of the Law:

Relevant Entities – relevant entities are those entities that are within the scope of the Law and include the following categories:

  • Most Cayman Islands exempted companies
  • Limited partnerships
  • Cayman limited liability companies (LLCs)
  • Registered foreign companies, unless those entities are tax resident outside the Cayman Islands

Excluded entities under the Law

  • Investment funds are not included under the Law, to include entities through which investment funds directly or indirectly invest or operate through, and
  • Any of the entities listed above in ‘Relevant Entities” section as long as such entity is tax resident outside the Cayman Islands

Relevant Activities – are activates classified as “Cayman Islands Core Income Generating Activities (Cayman Islands CIGA)”. Relevant activities as outlined under the Law, includes each of the following:

  1. Banking business
  2. Distribution and service center business
  3. Financial and leasing business
  4. Fund management business
  5. Headquarters business
  6. Holding company business
  7. Insurance business
  8. Intellectual property business
  9. Shipping business

The Authority - the Cayman Islands Tax Information Authority is the “Authority” for the purpose of enforcing the Law. The Authority’s function under the Law includes administering the Law, determining whether an entity satisfies the aforementioned tests laid out above surrounding relevant entities and relevant activities, monitoring compliance with the Law, and sharing information with other competent authorities. The Authority is the sole dedicated channel in the Cayman Islands for international cooperation on matters involving the provision of tax related information.

Economic Substance Test - relevant entities that conduct CIGA, which includes activities that are of central importance to a relevant entity in terms of generating income which is carried out in or form within the Cayman Islands, must satisfy the economic substance test. Given the income derived from the relevant activities, the relevant entities must be able to demonstrate in the following areas:

  1. It has adequate amount of operating expenditure incurred in Cayman;
  2. It has adequate physical presence (including maintaining a place of business or plant, property and equipment) in the Cayman Islands; and
  3. It has an adequate number of full-time employees or other personnel with appropriate qualifications in Cayman.

There are a few exceptions to these requirements in the following areas:

  • Holding companies are required to meet a reduced test for economic substance, whilst any high-risk intellectual property holding structures will face more onerous requirements; and
  • Outsourcing of “Core Income Generating Activities” within the jurisdiction is permitted based on specific circumstances but must be done in such a manner that it can monitored by the entity.

Filings - All relevant entities are required to file a notice with the Authority to confirm whether or not they are conducting relevant activities. Each entity within the scope of the Law and conducting relevant activities is required to file a report with the Authority to include the following: income, expenses, assets, management, employees, physical presence and other relevant data pertaining to its operations. The Authority will examine the report to determine if the relevant entity has complied with the Law.

Noncompliance – failing to comply with the Law can result in a penalty of $10,000 in the first year and $100,000 thereafter. Continued failure to meet the substance requirements may result in possible court-ordered dissolution of the subject entities.

Support ServiceAdvanced Fund Administration and WB Financial & Consulting, have been monitoring the progress of this legislation, and the needs of the relevant entities impacted. We have positioned ourselves to provide the required services and provide implementation guidance to clients. For further information and support services, please contact any of the following individuals:

CONTACT DETAILS
Email: info@afaservices.com
Phone: (345) 943-4232

 

Peter M.O. Young, CPA, CEMBA, Acc. Dir., MAFM

Peter M.O. Young is the President, Chief Operating Officer and Founder of Advanced Fund Administration (Cayman) Ltd. (“AFA”). Prior to establishing AFA, he was the Executive Vice President and Principal Operating Officer for Citi Hedge Fund Services (Cayman) Ltd., (formerly, BISYS Hedge Fund Services (Cayman) Limited) with responsibility for its Cayman Islands operation. Prior to joining BISYS, Mr. Young was the managing partner and CEO of Rothstein Kass & Company's Cayman Islands office, which included Rothstein, Kass & Company (Cayman) Certified Public Accountants and RK Consulting (Cayman) Ltd. Mutual Fund Administrators respectively. During his tenure as managing partner of Rothstein Kass & Company's Cayman Islands office, Mr. Young oversaw the audit and administration of over 450 hedge funds with over $45 billion in assets under management. He has extensive experience serving as a director for some of the largest hedge fund complexes and other investment companies in the industry. Mr. Young’s professional memberships include the American Institute of Certified Public Accountants, the American Accounting Association, and the Cayman Islands Society of Professional Accountants. He holds a B.Sc. degree in Accounting, a B.B.A. degree in Business Administration, a Certificate in Executive MBA, and an MAFM (Master of Accounting & Financial Management) degree from DeVry University, Keller Graduate School of Management and is an Accredited Director, certified under the Canadian Institute of Secretaries, as well as being a Certified Public Accountant.

Paul Muspratt CA

Paul is a member of WBF in Cayman. Paul jointly manages the firm’s Financial Advisory business in the Cayman Islands, and has over twenty years of professional accounting and management experience with a focus on financial services and hospitality. Before joining WBF, Paul had a variety of experiences from large, multinational fund administrators, to establishing and managing bank and trust businesses. Paul’s responsibilities have similarly extended from financial accounting, directing operations, through to compliance and risk management. Before Cayman, Paul worked for Ernst & Young in their UK financial services practice and before that with Arthur Andersen; he trained as a Chartered Accountant with PwC in Scotland. Professional qualifications and education: Paul has a BA (hons) from Exeter University, is a Chartered Accountant, and member of the Institute of Chartered Accountants Scotland and the Cayman Islands Institute of Professional Accountants.

Steven Sokohl CPA

Steven is a member of WBF in Cayman. Steven jointly manages the firm’s Financial Advisory business in the Cayman Islands, and has over twenty-five years of professional accounting and management experience with a focus on financial services. Before joining WBF, Steven had a variety of experiences from large multi-national banks to privately held family office structures. Steven’s main responsibilities have focused on the financial and management accounting and regulatory aspects of these businesses. Before Cayman, Steven worked for Arthur Andersen and Ernst & Young in their US audit and tax practices with an emphasis on financial service clients. Subsequently, Steven worked primarily within the financial services sector in major money centre jurisdictions (New York, Paris, Hong Kong and the Cayman Islands). Professional qualifications and education: Steven has a BS (hons) from American University, is a Certified Public Accountant, and a member of the Cayman Islands Institute of Professional Accountants.

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