The International Tax Co-operation (Economic Substance) Law, 2018 (as amended) (the ES Law) was introduced by the Cayman government before the end of 2018 as part of the Cayman Islands' commitment to the EU - to alleviate the EU's concerns about a supposed 'lack of economic substance.
What entities are within the scope of the law?
This law applies to entities that carry out one or more relevant core income-generating activities unless it is tax resident in a jurisdiction outside the Cayman Islands (except jurisdictions included in the EU list of non-cooperative jurisdictions).
Companies that are tax residents outside the Cayman Islands, where they are subject to tax, and also companies that do not conduct relevant activities are outside the scope of the law, and substance will not be required.
What are the Core Income Generating Activities?
The relevant core income-generating activities are the following:
Banking
Insurance
Shipping
Fund Management
Financing & Leasing
Headquarters
Distribution and Service Centers
Holding Company
Intellectual Property
A relevant entity is subject to the Economic Substance Test from the date on which it starts the relevant activity unless the entity was in existence prior to 1 January 2019. In that case, it must comply with the law by July 1, 2019.
What does the Economic Substance Test entail?
The Economic Substance Test requires that entities conducting relevant activities comply with the following:
conduct Cayman Islands core income-generating activities ("Cayman Islands CIGA") in relation to that relevant activity;
are directed and managed in an appropriate manner in the Islands in relation to that relevant activity; and
having regard to the level of relevant income derived from the relevant activity carried out in the Islands
-have an adequate amount of operating expenditure incurred in the islands;
-have an adequate physical presence in the Islands; and
-have an adequate number of full-time employees or qualified staff in the Island
What information must be provided annually?
From 2020, entities must notify the Authority annually:
whether or not they are carrying on a relevant activity,
if the relevant entity is carrying on a relevant activity, whether or not all or any part of the relevant entity's gross income in relation to the relevant activity is subject to tax in a jurisdiction outside of the Islands and, if so, shall provide appropriate evidence to support that tax residence as may be required by the Authority, and
the date of the end of its financial year.
What are the penalties for non-compliance?
If the Authority determines that a relevant entity has not satisfied an economic substance test for a financial year, the Authority will issue a notice to the entity, giving the reasons, detailing if a penalty applies, and informing of any action necessary to satisfy the economies substance test, and the company's right to appeal.
Penalties of US$10,000 apply to a relevant entity that has failed to satisfy an Economic substance test, and US$100,000 if the subsequent financial year it is not satisfied after the initial notice of failure.
Kindly note that as directors, owners, or managers of a Cayman Islands company, you must ensure that you understand the new legislation and its impact, so that you make the best decisions for your entity. We can help you classify your entity to confirm whether it is within the scope of the law, and we can also assist you with the necessary wording for resolutions to demonstrate that you or your management team have made an informed determination.
Furthermore, we can assess your company's current compliance obligations and assist with possible future strategies.
Please contact us at contact@viss.com.hk for assistance.
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