The ES Law requires certain entities incorporated or registered in the Cayman Islands and carrying on specified activities to have ‘adequate substance’ in the Cayman Islands.


The Cayman Islands is an early adopter of the Common Reporting Standard, is compliant with FATCA, and is recognised as a jurisdiction committed to tax transparency. Our anti-money laundering and anti-terrorist financing legislative regime meets and in some cases exceeds international standards and our commitment to compliance is unwavering. The Cayman Islands government and financial services industry together have a long history of working closely and cooperatively with key intergovernmental organisations to ensure that our regulatory framework remains sound.

One of these intergovernmental groups, the EU Code of Conduct Group (the Code Group), assessed the tax policies of a range of countries, including the Cayman Islands, in 2017. Following assessment by the Code Group, Cayman was included in a list of jurisdictions which are required to address the Code Group’s concerns about ‘economic substance’. Like its counterparts in BVI, Bermuda, Guernsey, Jersey and Isle of Man, the government of the Cayman Islands has been working closely with the Code Group to ensure that those concerns are adequately addressed. As a result of this engagement, the ES Law was enacted.


The ES Law applies only to “relevant entities.” A relevant entity is any of the following (except for investment funds and entities that are tax resident outside of the Cayman Islands, which are specifically carved out):

(a) a company, other than a domestic company, that is: (i) incorporated under the Companies Law; or (ii) a limited liability company registered under the Limited Liability Companies Law;

(b) a limited liability partnership that is registered under the Limited Liability Partnership Law;

(c) a company that is incorporated outside of the Cayman Islands and registered under the Companies Law.

A relevant entity is only in scope of the economic substance requirements if it conducts any “relevant activity”. Relevant activities are:

Banking business

Distribution and service centre business

Financing and leasing business

Fund management business

Headquarters business

Holding company business

Insurance business

Intellectual property business

Shipping business.

Each of the above relevant activities is defined in the ES Law.

The Economic Substance Test

A relevant entity conducting any relevant activity is required to satisfy a 3-branch economic substance test in relation to that relevant activity. It must:

1. conduct Cayman Islands core income generating activity in relation to that relevant activity (a core income generating activity is any activity that is of central importance to a relevant entity in terms of generating income and that is being carried out in or from within the Cayman Islands);

2. be directed and managed in an appropriate manner in the Cayman Islands in relation to that activity;

3. having regard to the level of relevant income derived from the relevant activity carried out in the Cayman Islands –

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

(ii) have 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.

Whether or not a relevant entity meets the applicable economic substance requirements will be a question of fact. There will not be a one-size-fits-all approach and much will depend on the size and scope of the business (both in the Cayman Islands and in other locations) and its expected gross income in the Cayman Islands.


A relevant entity is required to satisfy the economic substance requirements:

by 1 July 2019, if it was in existence before 1 January 2019; or

on the date on which it commences the relevant activity, if it was not in existence prior to 1 January 2019.


Starting in 2020 (exact date to be announced), relevant entities will be required to file a notice with the Cayman Islands Tax Information Authority (TIA) stating whether or not they are carrying out relevant activities. Twelve months after the last day of the end of each financial year commencing on or after 1 January 2019, a relevant entity carrying out any relevant activity will be required to file a basic return setting out particulars as to income, expenses, assets, management, employees, physical presence and other matters. These filings will be examined by the TIA to ensure that the relevant entity has adequate economic substance in the Cayman Islands. If it lacks adequate substance, the TIA will give the entity direction on how to meet the test and may impose a fine of up to USD 10,000. Continued failure to meet the test in the following year may result in a higher fine of USD 100,000 and could lead to the entity being struck off the applicable register.

Next Steps

All relevant entities will need to undertake an internal review to determine what measures, if any, they might need to take in order to achieve compliance. In most cases, we believe that compliance will be a straightforward matter. If you would like further guidance on how these requirements will impact your business, please reach out to your usual Appleby contact.

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