Cayman Islands economic substance regime – extension to partnerships

As mentioned in our earlier briefing[1], the economic substance regime was extended on 30 June 2021[2] by broadening the definition of a “relevant entity” under the International Tax Cooperation (Economic Substance) Act 2021 (as revised, ES Act) to include:

  • Cayman Islands based partnerships, with the exception of a local partnership[3] (Partnerships);
  • Cayman Islands exempted limited partnerships (ELPs); and
  • Foreign limited partnerships registered in the Cayman Islands (Foreign LPs).

The following entities are not relevant entities and remain out of scope of the economic substance regime:

  • investment funds[4]
  • entities that are tax resident outside the Cayman Islands
  • domestic companies[5]
  • associations not for profit[6]

Relevant activity

A relevant activity under the ES Act includes each of the following[7]:

  • banking business;
  • distribution and service centre business;
  • financing and leasing business; fund management business;
  • headquarters business;
  • holding company business;
  • insurance business;
  • intellectual property business; and
  • shipping business.

Economic substance test (ES Test)

The ES Test requires that a relevant entity conducting a relevant activity (In-scope Partnerships):

(a)      conduct core income generating activities in relation to that relevant activity;

(b)      be directed and managed in an appropriate manner in the Cayman Islands in relation to that relevant activity; and

(c)      having regard to the level of relevant income derived from the relevant activity carried out in the Cayman Islands

(i)       have an adequate amount of operating expenditure incurred in the Cayman Islands;

(ii)      have an adequate physical presence (including maintaining a place of business or plant, property and equipment) in the Cayman Islands; and

(iii)     have an adequate number of full-time employees or other personnel with appropriate qualifications in the Cayman Islands.

According to economic substance guidance published by the Tax Information Authority (TIA),

“adequate” means “as much or as good as necessary for the relevant requirement or purpose”;


“appropriate” means “suitable or fitting for a particular purpose, person, occasion”.

What is adequate or appropriate for each relevant entity is therefore a question of fact dependent on the business activities of the relevant entity.


In-scope Partnerships must satisfy the ES Test in relation to a relevant activity from:

  • 1 January 2022 for In-scope Partnerships in existence prior to 1 July 2021; or
  • the date the In-scope Partnership commences a relevant activity if formed after 1 July 2021.

ES Notification

All partnerships (Partnerships (including local partnerships), ELPs and Foreign LPs) must file an economic substance notification (ES Notification) annually via the general registry’s corporate administration platform as a prerequisite to filing their annual return.  The ES Notification must state whether the partnership is a relevant entity under the ES Act, and, if applicable, the exemption the partnership is relying upon (e.g., investment fund).

The DITC are proposing to amend the existing ES Notification template so that it can be submitted by the partnership’s registered office.

Transition Period for Pre-Existing Partnerships

There is a one-year transition period in place for partnerships in existence prior to 30 June 2021.  For such pre-existing partnerships, the first ES Notification will be due with their 2023 annual return in January 2023 in respect of the partnerships’ 2022 financial year.

New Partnerships

For partnerships formed or registered on or after 30 June 2021, the deadline to submit the first ES Notification will be determined by the date on which the partnerships’ first financial year commences.  For example, if a partnership was formed or registered on 1 July 2021 and its first financial year covers the period from 1 July 2021 to 30 June 2022, the first notification year will be the 2021 notification year and the first ES Notification will be due with their 2022 annual return in January 2022.

ES Return

In-scope Partnerships will be required to file an economic substance return (ES Return) on the DITC’s online portal. The DITC has stated that they will amend the template ES Return to enable a general partner to file the ES Return on behalf of its In-scope Partnership.

In-scope Partnerships must submit an ES Return no later than 12 months after the last day of their financial year end commencing on or after 1 July 2021.

Entities falling outside the economic substance regime

Partnerships (including local partnerships), ELPs and Foreign LPs that are not relevant entities and Partnerships, ELPs and Foreign LPs that are relevant entities but are not conducting any relevant activity are each required to file an ES Notification but they are not required to file an ES Return or to satisfy the ES Test.

Next steps

The deadline for an In-scope Partnership in existence prior to 1 July 2021 satisfying the ES Test is 1 January 2022.

In-scope Partnerships formed since 1 July 2021 should already been putting in place measures to ensure they satisfy the ES Test with respect to their relevant activity(ies).

All In-scope Partnerships should familiarise themselves with the economic substance regulatory framework and related economic substance guidance published by the TIA.

Penalties for non-compliance with the economic regime can be severe. For example, there is a late filing penalty of CI$5,000 and an additional penalty of CI$500 for each day an ES Return remains outstanding.

Non-compliance with the ES Act generally may result in additional monetary penalties being imposed by the TIA and prescribed remediation action. Additionally, in the case of a relevant entity failing to satisfy the ES Test for in excess of two years, and where that relevant entity is a limited partnership, an order can be made that the relevant entity be struck off the registrar of partnerships.

Appleby Cayman has significant experience in successfully guiding clients through the economic classification process and in helping clients satisfy their notification and reporting obligations under the ES Act.  Please get in touch with Miriam Smyth ([email protected]) or your usual Appleby contact should you require our assistance.


The content of this article is for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be sought in respect of your specific circumstances.


[1] Available here

[2] The changes were brought into force by the following regulations: (i) the International Tax Co-operation (Economic Substance) (Amendment of Schedule) Regulations 2021 (available here); and (ii) the International Tax Co-operation (Economic Substance) (Prescribed Dates) (Amendment) Regulations 2021 (available here).

[3] A partnership as defined under section 3 of the Partnership Act 2013 (as revised).

[4] The definition of an “investment fund” is broad and includes CIMA registered mutual funds and private funds and Cayman Islands entities through which an investment fund directly or indirectly invests or operates.

[5] A company carrying on business in the Cayman Islands in accordance with section 4(1) of the Local Companies (Control) Act 2019 (as revised) or section 3(a) of the Trade and Business Licensing Act 2019 (as revised)

[6] Registered under section 80 of the Companies Act 2020 (as revised).

[7] If you are a relevant entity but you are not sure if you are conducting one of the nine activities, please contact Appleby to carry out an economic substance classification exercise and to provide further advice.

Key contacts

Jacob MacAdam

Partner: Cayman Islands

T +1 345 814 2016
E Email Jacob

Miriam Smyth

Counsel: Cayman Islands

T +1 345 814 2975
E Email Miriam

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