INTERSHORES I Cayman Islands - Economic Substance Requirements

The Cayman Islands International Tax Co-operation (Economic Substance) Law, 2018 (the “Economic Substance Law”) came into effect on 1 January 2019.


To whom does the Economic Substance Law apply?

All companies incorporated under the Companies Law (2018 Revision) (the “Companies Law”), limited liability companies registered under the Limited Liability Companies Law (2018 Revision) (the “LLC Law”), limited liability partnerships registered in accordance with the Limited Liability Partnership Law (2018 Revision) (the “LLP Law”), or companies incorporated outside of the Cayman Islands and registered under the Companies Law, which are registered as exempted will fall under the scope of the new Economic Substance Law (collectively as  “Relevant Entities”).


Relevant Entities which carry out “Relevant Activities” are required to satisfy an economic substance test for each Relevant Activity and have reporting obligation.  The Relevant Activities are (i) banking (ii) distribution and service centre, (iii) financing and leasing, (iv) fund management, (v) headquarters business, (vi) holding company, (vi) insurance, (vii) intellectual property (IP), and (viii) shipping.


Main requirements and obligations of the Economic Substance Law

Relevant Entities are required to satisfy an economic substance test with respect to each Relevant Activity.  Section 4 of the Economic Substance Law sets out the specific requirements in order to satisfy the economic substance test, as follows:


The Relevant Entity is required to conduct Cayman Islands core income generating activities (“CIGAs”) in relation to that Relevant Activity. CIGAs are defined as being activities which are of central importance in terms of generating income and which are being carried out in the Cayman Islands.


Specific examples of such activities are included for each Relevant Activity.  For example,

For intellectual property business, such activities may include research and development and/or branding, marketing and distribution, and in certain cases making strategic decisions and managing (as well as bearing) the principal risks related to development and subsequent exploitation of the IP, to acquisition by third parties and subsequent exploitation and protection of the IP, and/or carrying on the underlying trading activities through which IP rights are exploited.


For fund management business, activities may include making investment decisions (i.e. regarding holding or selling investments), calculating risk and reserves, making decisions on currency or interest fluctuations and hedging positions, preparing reports or returns, or both, to investors or to the Cayman Islands Monetary Authority (“CIMA”), or both.


For headquarters business, such activities include making relevant management decisions, incurring expenditures on behalf of group entities,


The Relevant Entity is required to be directed and managed in an appropriate manner in the Cayman Islands in relation to that Relevant Activity.   The following have to be considered for management:


1.   the Relevant Entity should have an adequate physical presence (including maintaining a place of business or plant, property and equipment) in the Cayman Islands. 

2.  the Relevant Entity should have an adequate number of full-time employees or other personnel with appropriate qualifications in the Cayman Islands.

3.  the board of directors, as a whole, should have the appropriate knowledge and expertise to discharge its duties as a board of directors. 

4.  meetings of the board of directors should be held in the Cayman Islands at adequate frequencies given the level of decision making required. 

5.  during a meeting of the board of directors a quorum of directors should be present in the Cayman Islands for such meetings. 

6.  the minutes of the meetings of the board of directors should record the decision making at the meeting. 

7.  the minutes of all meetings of the board of directors and appropriate records should be kept in the Cayman Islands.

8.  relevant income derived from the Relevant Activity carried out in the Cayman Islands. 

9.  books of the Relevant Entity should record an adequate amount of operating expenditure incurred in the Cayman Islands. 


Service Provider Arrangements - The Relevant Entity can satisfy the economic substance test if its CIGAs are conducted by another person in the Cayman Islands, provided that the Relevant Entity is able to monitor and control the carrying out of the CIGAs by such other person. Service provider arrangements may therefore be used for purposes of maintaining a sufficient physical presence in the Cayman Islands.


Relevant Entities are required to report to Tax Information Authority (TIA) on an annual basis


Relevant Entities are required to notify the TIA annually as :


1.   to whether or not they are carrying on one or more Relevant Activities

2.   if any portion of the gross related income is taxed in any jurisdiction outside of the Cayman Islands

3.   the date of the end of their financial year


Relevant Entities are required, within twelve (12) months after the end of each financial year commencing on or after 1 January 2019, to make a detailed annual report to the TIA regarding any Relevant Activities carried out during the year, which includes information in relation to income, assets, expenses, location of the business in the Cayman Islands, employees, CIGAs, information with respect to the group (if applicable), any other information if  for intellectual property business.


The TIA has authority to request further information and the Relevant Entities have an obligation to provide such further information, and also retain all records related to the economic substance test for a period of six (6) years.


Relevant Entities failing to report information or are deemed by TIA not to satisfy the economic substance test will be sanctioned


If a Relevant Entity fails to satisfy the economic substance test for a financial year, TIA will issue a notice to that effect, advise the Relevant Entity of the action to be required. 


It could mean to impose a penalty of CI$10,000 (approximately USD$12,200), to be paid within twenty-eight (28) days after the date of issue of the notice.


If the TIA determines that such Relevant Entity has failed the economic substance test for the following year as well, a further notice with an increased penalty of CI$100,000 (approximately USD$122,000) will issued and a report will be filed by the TIA with the Registrar of Companies (which will apply to the Grand Court to issue an order against the Relevant Entity or have it declared defunct).


Directors, managers or managing members of Relevant Entities may also be liable for offenses, including in case of neglecting their duties.  Persons failing to provide information upon a request by the TIA or which knowingly or wilfully alter, destroy or remove information commit an offence and are liable on summary conviction to a fine of CI$10,000 (approximately USD$12,200) or to imprisonment for a term of two (2) years, or to both.


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Whilst reasonable care has been taken in provision of information above, it does not constitute legal or other professional advice. INTERSHORES does not accept any responsibility, legal or otherwise, for any error omission and accepts no responsibility for any financial or other loss or damage that may result from its use.  In particular, readers are advised to take appropriate professional advice before committing themselves to any involvement in jurisdictions, vehicles or practice.










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