While the draft guidance itself is restricted to local industry consultation only, the enhancements made reflect an intelligent and business minded response to industry input so far, and a meaningful commitment to absorbing the new global regime, applicable to all reputable and familiar financial centres, in a sensible and practical way. The guidance provides support for understanding the scope of the economic substance law (ESL), and how to comply with it.
One of the principal revisions to note is the application of the ESL to all “entities” as opposed to “relevant entities” alone, as prescribed in the International Tax Co-operation (Economic Substance) (Amendment) Bill, 2019. In summary, entities are all legal personalities that are registered with the Cayman Islands’ General Registry. A relevant entity is an entity that is not a domestic company, an investment fund or an entity that is tax resident outside of the Cayman Islands. A relevant entity – carrying on a relevant activity – is required to satisfy an economic substance test and is also required to prepare and submit to the Cayman Tax Information Authority a report for the purpose of the Authority’s determination whether the economic substance test has been satisfied. This is an important change and, in anticipation of implementation, many Cayman domiciled entities are currently receiving questionnaires from their Cayman registered office service providers to complete in this respect. All entities are required to notify the Authority annually of, among other things, whether or not they are carrying on a relevant activity and, if so, whether or not they are a relevant entity. The deadline for notification is provisionally slated for March 2020 via an online portal.
To recap, “relevant activity” falls under nine sector headings:
- Banking business;
- Distribution and service centre business;
- Financing and leasing business;
- Fund management business;
- Headquarters business;
- Holding company business;
- Insurance business;
- Intellectual property business; or
- Shipping business;
Investment fund business is not included. Notably, the term investment fund includes the investment fund itself but also any entity through which an investment fund directly or indirectly invests or operates (excepting the entity that is itself the ultimate investment held).
The economic substance test requires that a relevant entity conducting a relevant activity:
- Conducts Cayman Islands core income generating activities (CIGA) in relation to that relevant activity varying on a sector basis;
- Is directed and managed in an appropriate manner in the Cayman 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 Cayman Islands, has in the Cayman Islands:
- An adequate amount of operating expenditure incurred;
- An adequate physical presence (including maintaining a place of business or plant, property and equipment); and
- An adequate number of full-time employees or other personnel with appropriate qualifications.
The terms relevance, in the contexts of activity, entity and the gross income derived from that activity, appropriateness and adequacy each requires a detailed case-by-case legal analysis of the precise fact pattern within which a Cayman domiciled legal personality operates. If not already in process, Cayman legal advice should be taken without delay to determine whether clients with Cayman touch points are subject to the jurisdictional substance requirements.
While remaining a work in progress, the revised guidance provides detailed and helpful sector specific commentary including illustrative examples with respect to typical scenarios. It is clear that these have been informed by ongoing industry consultation and, while not intended to be binding or definitive, at least provide a general frame of reference within which a considered analysis may be undertaken. This is encouraging insofar as it is a clear indication of the Cayman Islands Government’s, and consequently the Authority’s, commitment to address and implement the ESL collaboratively with industry participants.
Local and verifiable outsourcing is permitted in certain circumstances and a growing number of Cayman service providers are positioning themselves to meet demand. Some relevant entities will already meet ESL requirements with little effort while others will need to undertake a more detailed and substantive review. In short, while common fact patterns will emerge, there will not be a “one-size-fits-all” solution to compliance in any given sector, as will be the case across all offshore financial centres.
Notwithstanding the challenges, for some, that the ESL will present, it remains the case that Cayman, as a tax neutral, internationally recognised and economically stable jurisdiction will maintain its position as an attractive option for international financial planning. This remains particularly the case as US economic growth continues and financial markets remain reasonably priced. With its continued focus on quality, innovation and expertise, it seems reasonable to expect that the “new normal” brought about by economic substance will be absorbed by the market and in no way hinder the Cayman Islands’ continued success.