The New ES Guidance Notes reflect several significant developments, with two being of particular importance:

  • the introduction of a circumvention prohibition; and
  • the inclusion of detailed sector-specific guidance in relation to each “relevant activity”.

In summary, the ES Law imposed an obligation to examine whether an entity is carrying on a relevant activity and, if it is, whether that entity is a “relevant entity”.  Where an entity ticks both boxes, the entity will be required to meet an economic substance test (ES Test) under the ES Law.  For more on the Cayman Islands economic substance regulatory framework, click here.


Section 6 of the New ES Guidance Notes addresses circumvention.  The section reads: “The Authority will monitor arrangements which appear to be circumvention mechanisms and will investigate cases where a person has entered into any arrangement the main purpose or one of the main purposes of which is to circumvent any obligation under the ES Law.  An example could include an entity which seeks to manipulate or artificially suppress its income to circumvent substance requirements”.

Sector-specific guidance

Whereas version 2.0 of the guidance provided sector-specific guidance only in relation to holding company business, intellectual property business and shipping business, the New ES Guidance Notes also provide sector-specific guidance on the remaining relevant activities, i.e. banking business, distribution and service centre business, financing and leasing business, fund management business, headquarters business and insurance business.

Banking business, fund management business and insurance business are regulated sectors.  Regulatory licensees are generally required to have a place of business within the Cayman Islands.  Accordingly, it is expected that most of such entities are well placed to meet the ES Test.  In the case of Class A banking and insurance licensees, most are likely to qualify as “domestic entities” and would therefore be relieved of the obligation to report under the ES Law.

Those entities carrying on fund management business, not as licensees but rather as registered persons under the Securities Investment Business Law (2020 Revision), without any physical presence in the Cayman Islands, should consult with their advisors to ensure they are well positioned to satisfy any ES Test that applies to them.

Cayman entities carrying on business activities for and on behalf of a multi-jurisdictional group should seek advice as to whether any of the business activities conducted by them constitute distribution and service centre business and/or headquarters business under the New ES Guidance Notes.  Similarly, entities granting shareholder loans and/or intercompany loans to affiliated entities are cautioned that such activities may constitute “financing and leasing business” for purposes of the ES Law.  We strongly recommend that any entities engaged in these activities consult promptly with their advisors to ensure they have a clear understanding of their classification and related obligations under the ES Law.

The sector-specific guidance provided in the New ES Guidance Notes in relation to holding company business, intellectual property business and shipping business remains largely similar to that provided in version 2.0.  The New ES Guidance Notes do, however, include sample fact patterns for all relevant activities.  The Authority makes clear that these examples “are intended to provide high-level guidance to industry and will not bind the Authority in any way”.

Domestic companies

A domestic company is not a relevant entity for purposes of the ES Law, as generally such entities are only carrying on business in the Cayman Islands.  The New ES Guidance Notes clarify that a “domestic company” means a company that is not part of an “MNE Group”, the latter being a group of companies operating and tax resident in multiple jurisdictions with total consolidated revenue of at least US$850 million. Further, companies limited by guarantee are no longer considered domestic companies, unless they otherwise satisfy the criteria in the definition of that term under the ES Law.

The Cayman Islands DITC Portal

A relevant entity carrying on a relevant activity that is required to satisfy an ES Test is required to prepare and submit to the Authority annually an economic substance return (ES Return).  The ES Return must be made within 12 months after the end of each financial year of the relevant entity commencing on or after 1 January 2019.  ES Returns will be filed on a newly developed electronic portal of the Cayman Islands Department of International Tax Cooperation for registration, notification and reporting purposes (DITC Portal) that is expected to launch in Q4 2020.  The DITC Portal is intended to encompass all legislative frameworks (economic substance, FATCA, CRS, country-by-country reporting) and is expected to facilitate the sharing of information with other countries’ tax authorities.


Where a relevant entity is required to file an ES Return, the failure to do so by the relevant time will attract a penalty of CI$5,000 (US$6,098) and an additional penalty of CI$500 (US$609.75) for each additional day during which the failure to comply continues.

For more information on the New ES Guidance Notes and their potential impact on your Cayman entity, please contact a member of the Appleby Cayman Regulatory Group or your usual Appleby contact.

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