Cayman Islands Economic Substance

Under the Cayman Islands Economic Substance Act (“ESA”) legislation*, certain entities formed or registered in the Cayman Islands are required to have economic substance in the Cayman Islands.

All existing Cayman Islands entities, including partnerships, (a “Relevant Entity“) must annually notify the Registrar of Companies whether they are in scope or out of scope for ES Reporting, including the reasons that they are either in or out of scope, by 31 January each year (“ES Notification”). There is a grace period for filing the notification until 31 March, however, if the notification has not been filed a certificate of good standing will not be issued by the Registrar of Companies after 31 January. After 31 March, late payment penalties will be levied (as it is not possible to pay the annual government fees until the notification is made).

If the Relevant Entity is engaged in a Relevant Activity, an ES Return must be filed annually within one year of the Relevant Entity’s financial year end.

* The ES legislation can be found here.

  • More information

    Overview

    As a result of the OECD’S global Base Erosion and Profit Shifting (“BEPS”) initiative and the EU Code of Conduct Group substance requirements modelled on BEPS Action 5, the Cayman Islands has enacted comprises The International Tax Co-operation (Economic Substance) Act (2021 Revision) (“ESA”) and issued related Regulations and Guidance Notes (as revised from time to time). Under the ES Law, certain vehicles formed or registered in the Cayman Islands are required to have economic substance in the Cayman Islands.

    Notification

    All existing Cayman Islands entities1 must notify the Registrar of Companies whether they are in scope or out of scope for ES Reporting including the reasons that they are either in or out of scope by 31 January of each year. There is a grace period for filing the notification until 31 March of each year, however, if the notification has not been filed a certificate of good standing will not be issued by the Registrar of Companies after 31 January; and after 31 March late payment penalties will be levied (as it is not possible to pay the annual government fees until the notification is made).

    The notification must be submitted annually and it is a pre-requisite to filing the annual return.

    Which entities will be subject to substance requirements?

    Substance requirements apply to “relevant entities”. These are (subject to the following paragraph):

    • companies (both Cayman Islands incorporated and foreign companies registered in the Cayman Islands);
    • limited liability companies (“LLCs”) registered in the Cayman Islands;
    • limited liability partnerships (“LLPs”) registered in the Cayman Islands; and
    • partnerships.

    “Investment funds” and domestic companies (as defined in the ESA) and entities that are tax resident outside of the Cayman Islands are specifically excluded from the definition of “relevant entities” and, as such, they do not need to comply with the economic substance requirements. The definition of “investment fund” is broad and will include a wide range of investment funds, including those that are not licensed or registered with the Cayman Islands Monetary Authority.

    Investment funds, domestic companies and entities that are tax resident outside of the Cayman Islands will be subject to notification requirements, but not substance or reporting requirements.

    What activities are covered?

    The ES Law covers the following “relevant activities”:

    • banking business
    • fund management business (managing securities belonging to an investment fund on a discretionary basis)
    • insurance business
    • intellectual property business
    • shipping business
    • financing and leasing business
    • headquarters business
    • holding company business
    • distribution and service centre business.

    Economic substance requirements

    Relevant entities will be required to satisfy the economic substance test set out in the ES Law for each “relevant activity” carried on.

    1 ‘Entities’ for this purpose means Cayman Islands companies, limited liability companies, limited liability partnerships and foreign companies registered in the Cayman Islands.

  • Frequently asked questions

    1. What is the Economic Substance Act?

    The legislation comprises The International Tax Co-operation (Economic Substance) Act (2021 Revision) and accompanying regulations (including The International Tax Co-operation (Economic Substance) Regulations, 2020, The International Tax Co-operation (Economic Substance) (Amendment of Schedule) Regulations, 2021, The International Tax Co-operation (Economic Substance) (Prescribed Dates) Regulations, 2018 and The International Tax Co-operation (Prescribed Dates) (Amendment) Regulations, 2021) (together, the “Economic Substance Act” or “ESA“).

    The Economic Substance Act is supplemented by the issuance of related Guidance on Economic Substance for Geographically Mobile Activities (the “Guidance“), version 3.1 of which was issued on 30 June 2021.

    2. Why was it enacted?

    The ESA is part of the Organization for Economic Cooperation and Development (the “OECD“) Global Base Erosion and Profit Shifting (“BEPS“) initiative regarding geographically mobile activities. Requirements of this type are rapidly being implemented on a level playing field basis by all OECD-compliant ‘no or only nominal tax’ jurisdictions including the Channel Islands and the British Virgin Islands.

    Global standards in this field continue to develop. Accordingly, it is to be expected that the ESA itself and the body of related Guidance will continue to evolve.

    3. Who is impacted by the ESA in the Cayman Islands?

    All Cayman Islands entities (i.e. all companies and partnerships) must notify the Registrar of Companies whether they either:

    1. are a relevant entity conducting a relevant activity (or relevant activities) – in which case they are in scope; or
    2. are not a relevant entity conducting a relevant activity (or relevant activities) – in which case they are out of scope

    by 31 March at the latest, including the reasons that they are either in or out of scope (see FAQ 13 ‘What are the notification and reporting requirements?’).

    ‘In scope‘ relevant entities need to:

    • have sufficient economic substance in the Cayman Islands to satisfy the economic substance test in respect of their relevant activity(ies); and
    • report prescribed information relating to their economic substance annually.

    4. What is a relevant entity?

    A ‘relevant entity’ is:

    • a company, other than a domestic company1, that is incorporated:
      • under the Companies Act; or
      • under the Limited Liability Companies Act;
        • a partnership as defined under section 3 of the Partnership Act (2013 Revision), except where the partnership is a local partnership2 ;
        • an exempted limited partnership as defined under section 2 of the Exempted Limited Partnership Act (2021 Revision);
        • a foreign limited partnership registered under section 42 of the Exempted Limited Partnership Act (2021 Revision);
    • a limited liability partnership that is registered in accordance with the Limited Liability Partnership Act; or
    • a company that is incorporated outside of the Cayman Islands and registered as a foreign company under the Companies Act.

    5. What is a relevant activity?

    The ESA applies economic substance requirements to various categories of geographically mobile relevant activities identified by the OECD (and adopted by the EU) which comprise the following:

    A. Banking Business

    An entity engages in ‘banking business‘ where it is in the business of receiving (other than from a bank or trust company) and holding on current, savings, deposit or other similar account money, which is repayable by cheque or order and may be invested by way of advances to customers or otherwise.

    B. Distribution and Service Centre Business

    An entity engages in ‘distribution and service centre business‘ where it conducts the business of either or both of the following:

    • purchasing from an entity in the same corporate group:
      • component parts or materials for goods; or
      • goods ready for sale, and reselling such component parts, materials or goods outside the Cayman Islands;
    • providing services to an entity in the same corporate group in connection with the business outside the Cayman Islands,

    C. Financing and Leasing Business

    An entity engages in ‘financing and leasing business‘ where it is in the business of providing credit facilities for any kind of consideration to another person but does not include financial leasing of land or an interest in land, banking business, fund management business or insurance business.

    D. Fund Management Business

    A licensed or registered entity engages in ‘fund management business‘ where it manages securities belonging to an investment fund on a discretionary basis.

    For the avoidance of doubt, an entity which is carrying on ‘fund management business‘ for the purposes of the ES Act cannot be classified as an ‘investment fund’ for the purpose of the ES Act.

    E. Headquarters Business

    An entity engages in ‘headquarters business‘ where it is in the business of providing any of the following services to an entity in the same corporate group:

    • the provision of senior management;
    • the assumption or control of material risk for activities carried out by any of those entities in the same corporate group; or
    • the provision of substantive advice in connection with the assumption or control of risk referred to in paragraph (b),

    but does not include banking business, financing and leasing business, fund management business, intellectual property business, holding company business or insurance business.

    F. Holding Company Business

    An entity engages in ‘holding company business‘ when it is a pure equity holding company.

    A ‘pure equity holding company‘ means an entity that only holds equity participations in other entities (including incidental activities such as holding a bank account and engaging professional or other service providers) and only earns dividends and capital gains.

    G. Insurance Business

    An entity engages in ‘insurance business‘ where it is in the business of accepting risks by effecting or carrying out contracts of insurance, whether directly or indirectly, and includes running-off business including the settlement of claims.

    H. Intellectual Property Business

    An entity engages in ‘intellectual property business‘ where it conducts the business of holding, exploiting or receiving income from intellectual property assets.

    An ‘intellectual property asset‘ is an intellectual property right including a copyright, design right, patent and trademark.

    An entity engaging in ‘high risk intellectual property business‘ is automatically presumed not to meet the economic substance requirements.

    • ‘High risk intellectual property business‘ means intellectual property business carried on by an entity that
      • did not create the intellectual property in an intellectual property asset that it holds for the purposes of its business;
      • acquired the intellectual property asset:
        • from an entity in the same corporate group; or
        • in consideration for funding research and development by another person situated in a country or territory other than the Cayman Islands; and
      • licenses the intellectual property asset to one or more entities in the same corporate group or otherwise generates income from the asset in consequence of activities (such as facilitating sale agreements) performed by entities in the same corporate group.

    I. Shipping Business

    An entity engages in ‘shipping business‘ where it conducts any of the following activities involving the operation of a ship anywhere in the world other than in the territorial waters of the Cayman Islands or between the Cayman Islands:

    • the business of transporting by sea, passengers or animals, goods or mail for a charge;
    • the renting or chartering of ships for the purpose described in paragraph (a);
    • the sale of travel tickets and ancillary ticket related services connected with the operation of a ship;
    • the use, maintenance or rental of containers, including trailers and other vehicles or equipment for the transport of containers, used for the transport of anything by sea; and
    • the functioning as a private seafarer recruitment and placement service,

    but does not include a holding company business or the owning, operating or chartering of a pleasure yacht.

    6. Who is exempt from the requirement for economic substance and economic substance reporting?

    The requirements for economic substance and reporting do not apply to:

    a. Investment funds.

    An “investment fund” means:

    • an entity whose principal business is the issuing of investment interests to raise funds or pool investor funds with the aim of enabling a holder of such an investment interest to benefit from the profits or gains from the entity’s acquisition, holding, management or disposal of investments; and
    • any entity through which an investment fund directly or indirectly invests or operates (but not an entity that is itself the ultimate investment held) – such as a general partner or a subsidiary established to hold an investment,

    but does not include a person licensed under the Banks and Trust Companies Act or the Insurance Act or a person registered under the Building Societies Act or the Friendly Societies Act.

    The Tax Information Authority (the “Authority“) will regard private funds registered with the Cayman Islands Monetary Authority pursuant to the Private Funds Act, 2021 as investment funds for the purposes of the ES Act.

    b. Domestic companies (see the definition under FAQ 4 “What is a relevant entity“)

    However, economic substance notification requirements still apply if you are an investment fund or a domestic company.

    7. What about entities that are tax resident outside of the Cayman Islands?

    An entity is considered tax resident outside of the Company Islands if it is subject to tax in another jurisdiction by reason of its domicile, residence or any other criteria.

    Whilst such an entity is not subject to economic substance requirements, the Authority will require any entity that is carrying on a relevant activity and claiming to be tax resident outside the Islands to produce satisfactory evidence to substantiate the same through the notification and reporting requirements.

    The Authority shall also, in accordance with relevant international standards and scheduled agreements, provide the information provided to it under the ES Act to the competent authority in:

    • the jurisdiction in which that entity is tax resident;
    • the jurisdiction in which the immediate parent, ultimate parent and ultimate beneficial owner3 of
      the entity resides; and
    • if the relevant entity is incorporated outside the Islands, the competent authority of the relevant
      jurisdiction in which the entity is incorporated.

    The Authority will also regard any branch of a relevant entity as tax resident outside the Islands if the branch is subject to corporate income tax on all of that branch’s income in another jurisdiction by reason of its domicile, residence or any other criteria of a similar nature. The Authority will require any relevant entity which claims that its branch is tax resident outside the Islands to produce, with respect to its branch, satisfactory evidence. In this context, a ‘branch’ refers to a business unit or division of the relevant entity that is not a separate legal person from the relevant entity.

    8. I am caught by the economic substance requirements by virtue of being a relevant entity carrying on a relevant activity – what do I need to do?

    A ‘relevant entity’ that conducts one or more ‘relevant activity’, will need to satisfy the economic substance test in respect of each relevant activity conducted.

    The economic substance test requires that a relevant entity:

    (a) conducts ‘Core Income Generating Activities’ (“CIGA”) in relation to its relevant activity(ies);

    ‘Core Income Generating Activities’ means activities that are of central importance to the relevant entity in terms of generating relevant income and must be carried on in the Cayman Islands.

    A relevant entity will satisfy the economic substance test in relation to a relevant activity if its core income generating activities in relation to that relevant activity are conducted by any other person and the relevant entity is able to monitor and control the carrying out of the Cayman Islands core income generating activities by that other person.

    (b) is directed and managed in an appropriate manner in the Islands in relation to its relevant activity(ies); and

    The ESA provides that a relevant entity satisfies this limb of the economic substance test if in relation to the relevant activity:

    i. the relevant entity’s board of directors, as a whole, has the appropriate knowledge and expertise to discharge its duties as a board of directors in relation to the relevant activity;

    ii. meetings of the board of directors are held in the Islands at adequate frequencies given the level of decision making required in relation to the relevant activity;

    iii. during a meeting of the board of directors described in paragraph (ii), there is a quorum of directors present in the Islands;

    iv. the minutes of the meetings of the board of directors described in paragraph (ii) record the making of strategic decisions of the relevant entity at the meeting; and

    v. the minutes of all meetings of the board of directors and appropriate records of the relevant entity are kept in the Islands.

    (c) having regard to the level of relevant income derived from the relevant activity carried out in the Islands (i) has an adequate amount of operating expenditure incurred in the Islands; (ii) has an adequate physical presence (including maintaining a place of business or plant, property and equipment) in the Islands; and (iii) has an adequate number of full-time employees or other personnel with appropriate qualifications in the Islands.

    What is adequate or appropriate for each relevant entity will depend on the particular facts of the relevant entity and its business activity. A relevant entity will have to ensure that it maintains and retains appropriate records to demonstrate the adequacy and appropriateness of the resources utilized and expenditures incurred.

    Covid-19

    Per an advisory issued in May 2020, ‘’the DITC is aware that COVID-19 may impact travel in 2020, which may in turn affect the ability of some entities to hold their board of directors meetings in Cayman during the year. However, industry is reminded that the directed and managed requirement is only one element of the ES test; the entity is also required to conduct core income generating activities (“CIGA”) in relation to its relevant activity.

    Where the board of director meetings are required to be held virtually during this period of uncertainty, the DITC will take that into consideration on a case-by-case basis when determining whether an entity has passed or failed the ES test in its reporting, which is due in 2021.’’

    High risk intellectual property business

    Note: for high risk intellectual property business and the presumption that such a business will not meet the economic substance test, a relevant entity may rebut this presumption if it can produce materials which demonstrate that there is, and historically has been, a high degree of control over the development, exploitation, maintenance, protection and enhancement (also referred to as “DEMPE“) of the intangible asset, exercised by an adequate number of full-time employees with the necessary qualifications that permanently reside and perform their activities within the Cayman Islands. Such materials will include (a) detailed business plans demonstrating the commercial rationale for holding the IP assets in the Cayman Islands; (b) employee information, including level of experience, type of contracts, qualifications and duration of employment; and (c) evidence that decision making is taking place within the Cayman Islands.

    In the event that you are conducting intellectual property business please make contact with your Campbells attorney.

    9. What about pure equity holding companies?

    A pure equity holding company is subject to reduced economic substance requirements.

    This will be satisfied if the pure equity holding company confirms that it has complied with all applicable filing requirements under the Companies Act and that it has adequate human resources and adequate premises in the Islands for holding and managing equity participations in other entities.

    The Guidance Notes state that “a pure equity holding company maintaining a registered office in the Islands engaging its registered office service provider in accordance with the [Companies Act (2021 Revision)] may be able to satisfy the reduced ES Test, depending on the level and complexity of activity required to operate its business”.

    10. Outsourcing

    A relevant entity conducting a relevant activity may satisfy the economic substance test by outsourcing the conduct of its CIGA to another person in the Cayman Islands. A relevant entity that outsources its CIGA must be able to monitor and control the carrying out of the CIGA. The Authority has issued a “Form for Outsource Service Providers” which must be filed by the outsource service provider before an ES report is made by the relevant entity relying on such outsourcing.

    The Authority has the power to make a determination as to whether a relevant entity has satisfied the economic substance test for any financial year in respect of which a report is required under the Economic Substance Act. The relevant entity must be able to demonstrate that it has adequate supervision of the outsourced activities and, to satisfy the economic substance test, that both the supervision and those CIGA are undertaken in the Cayman Islands.

    Note that relevant entities conducting intellectual property business which is high-risk intellectual property business are not able to outsource their CIGA (per section 4(7) of the Economic Substance Act (see page 7 above)).

    11. I am a relevant entity carrying on a relevant activity but I have no relevant income?

    A relevant entity that carries on a relevant activity but which has no relevant income4 is not obliged to meet the requirements of the Economic Substance Test. The relevant entity will still, however, be required to satisfy its notification and reporting obligations under the ESA (e.g. the report filed will be akin to a ‘nil’ return) (see FAQ 13 ‘What are the notification and reporting requirements’?)

    12. From what date do I need to comply with the economic substance test?

    A relevant entity must comply with the economic substance test, and must conduct CIGA:

    1. If the relevant entity was in existence prior to 1 January 2019, from 1 July 2019;
    2. In all other cases (save for fund management business), from the date on which the relevant entity commences the relevant activity; and
    3. If the relevant entity is either licensed or registered to conduct fund management business pursuant to the Securities Investment Business Act (as Revised) (“SIBL”), from 15 January 2020. Note that formerly ‘’Excluded Persons’’ under SIBL which re-registered as ‘’Registered Persons’’ under SIBL, came into scope of the ESA with effect from 15 January 2020.

    13. What are the notification and reporting requirements under ESA?

    Notification

    All entities (including investment funds but excluding trusts) are required to submit an annual economic substance notification by no later than 31 March in each year (although if the ESN is not filed by 31 January it will not be possible to receive a certificate of good standing from the Registrar of Companies).

    The submission of the economic substance notification identifies if the entity is a relevant entity carrying out a relevant activity and is a prerequisite to filing an annual return.

    If the ESN is not filed by 31 March, late payment penalties will be levied (as it is not possible to pay the annual government fees until the notification is made).

    The ESN is based on the financial year of the entity and therefore, for those entities which are required to provide details on the ESN in advance of their year end, the ESN for a given year will remain open for amendment until the end of the following calendar year. For example the ESN for 2020 will remain open for amendment until 31 December 2021. If an entity changes from carrying on one relevant activity to another relevant activity during a year, both should be disclosed on the ESN

    Please see our flow chart to determine whether the entity is in or out of scope and complete the appropriate form based on this. Campbells will assist in making the requisite notification on behalf of the entity.

    Reporting

    Entities that are in-scope under the ESA (i.e. ‘relevant entities’ conducting ‘relevant activities’) will be required to report certain information on their relevant activities in the Cayman Islands, in particular the extent to which core income generating activities are being conducted in the Cayman Islands, on an annual basis to the Authority.

    For all entities that are in scope under the ESA, an ES Return must be filed no later than 12 months following the entity’s financial year end.

    Please note that if a relevant entity which was required to file a return was terminated, migrated to another jurisdiction, deregistered (as a foreign company) or merged or consolidated with one or more other entities, is it still required to submit its ES reporting, i.e. such entity will, so long as it exists, continue to have any obligations which the ESA imposes upon it.

    More information about ESA reporting is available here.

    14. What is the current position in respect of partnerships? (at 26 November 21)

    In line with ongoing commitments given by the Cayman Islands, on 30 June 2021, the categories of entities that are in scope for the purposes of economic substance was expanded to include all types of partnerships (including general partnerships, exempted limited partnerships and foreign limited partnerships).

    Accordingly partnerships will now constitute a ‘relevant entity’ and, therefore, all partnerships (regardless of whether or not they are carrying on a ‘relevant activity’) will be required to submit an annual economic substance notification indicating whether or not they are carrying on a ‘relevant activity’.

    Partnerships carrying on a ‘relevant activity’ are required to meet the economic substance test under the Economic Substance regime.

    We anticipate that most partnerships will be operating as investment funds and, therefore will be exempt from the requirements to meet the economic substance test. However, they will be required to notify the Authority that they are investment funds. In addition, local partnerships (being partnerships that are not part of a multinational enterprise group and are only carrying on business in the Cayman Islands) will not be considered ‘relevant entities’ and will not be required to satisfy the economic substance test.

    In accordance with the new regulations, partnerships which carry on a relevant activity will be required to meet the economic substance test:

    • in respect of partnerships formed after 30 June 2021, from the date on which they begin carrying on a relevant activity; and
    • in respect of partnerships in existence prior to 30 June 2021, from 1 January 2022.

    ESN requirements for partnerships will be as follows:

    • For partnerships that existed prior to 30 June 2021 the first ESN that will require to be submitted by them will be for ESN Year 2022. ESNs for ESN Year 2022 will be due by 31 March 2023.
    • For partnerships that came/come into existence on or after 30 June 2021 the first ESN that will require to be submitted by them will be determined by the date on which their first financial year commences. For example, if an exempted limited partnership was formed on 1 July 2021 and its first financial year covers the period commencing on 1 July 2021 and ending on 30 June 2022 then its first ESN Year will be ESN Year 2021 (and its ESN for that ESN Year will be due by 31 March 2022).

    15. What happens if I don’t do anything and what are the various penalties under the ESA?

    Economic Substance Notification

    If an entity does not make the ESN it will not be able to file its annual return. The consequences of this are that:

    1. The entity will be subject to penalties for not filing the annual return; and
    2. Ultimately, it will be struck off the Register of Companies (dissolved) for failure to file its annual return

    Economic Substance Return

    Where a relevant entity that is required to satisfy the economic substance test fails to prepare and submit to the Authority the required ES return within the specified time, the Authority shall by notice in writing impose a penalty of CI$5,000 and an additional penalty of CI$500 for each day during which the failure to comply continues. The penalty must be paid within 30 days, subject to the permitted appeal process.

    Economic Substance Test

    The ES Act provides for civil penalties up to CI$100,000 to be applied in relation to non-compliance with the applicable ES Test.
    If, after failing the ES Test for two consecutive years, a Relevant Entity continues its failure to comply, the Authority will report such non-compliance to the Cayman Islands Registrar of Companies who shall apply to the Grand Court which may make an order including:

    • an order requiring the Relevant Entity to take a specified action, including for the purpose of satisfying such ES Test; or
    • in the case of a Relevant Entity that is –
      • a company that is registered or incorporated under the Companies Act (2021 Revision), an order that it is a defunct company to which Part VI of that Act applies;
      • a limited liability company that is registered under the Limited Liability Companies Act (2021 Revision), an order that it is a defunct company to which section 40 of that act applies; or
      • a limited liability partnership that is registered under the Limited Liability Partnership Act (2021 Revision), an order that the limited liability partnership be struck off in accordance with section 31 of that act as if it is a limited liability partnership that the Registrar has reasonable cause to believe is not carrying on business or is not in operation.

    It is an offence for a person to knowingly or wilfully supply false or misleading information to the Authority under the ES Act. Such an offence is punishable on summary conviction by a fine of CI$10,000 or with imprisonment for a term of five years, or both.

    Campbells are able to provide further guidance and advice. Please contact your usual Campbells attorney or write to Regulation@campbellslegal.com if you need advice or assistance.

    16. Links to useful additional reading:

    https://www.ditc.ky/es/es-legislation-resources/

     

    _______

    1 A “domestic company” is a company that is not part of an MNE Group and that is (a) only carrying on business in the Cayman Islands and which complies with section 4(1) of the Local Companies (Control) Act or section 3(a) of the Trade and Business Licensing Act; or (b) a company referred to in section 80 of the Companies Act (i.e. an association not for profit).

    MNE Group means any Group that includes two or more enterprises for which the tax residence is in different jurisdictions or includes an enterprise that is resident for tax purposes in one jurisdiction and is subject to tax with respect to the business carried out through a permanent establishment in another jurisdiction.

    Group means a collection of enterprises related through ownership or control such that it is either required to prepare Consolidated Financial Statements for financial reporting purposes under applicable accounting principles or would be so required if equity interests in any of the enterprises were traded on a public securities exchange.

    ² A “local partnership” means a partnership as defined under section 3 of the Partnership Act (2013 Revision) that is not part of an MNE Group and (a) that is only carrying on business in the Islands and is empowered by its partnership agreement to carry on business in the Islands; and (b) that (i) is licensed under the Trade and Business Licensing Act (2021 Revision) and, at the relevant time, is carrying on such business in accordance with the terms and conditions imposed in such licence and not otherwise; (ii) is operating under a franchise granted by the government; or (iii) complies with section 3(a) of the Trade and Business Licensing Act (2021 Revision).

    ³ Please see the website and click on ‘Tax Resident outside the Islands’ in the Decision Tree for definitions of immediate parent, ultimate parent and ultimate beneficial owner.

    ⁴ For the purposes of the Economic Substance Act, ‘’relevant income’’, in relation to an entity, means all of that entity’s gross income from its relevant activities and recorded in its books and records under applicable accounting standards.

3 Steps to ES Law Notification

  1. Review the decision tree below to identify the form to complete for ES Notification and to determine if the Relevant Entity is in scope (red) or out of scope (green) for ES Reporting.
  2. Complete the required Notification Form. Click above for additional information or refer to the FAQs. Alternatively, you may contact your usual Campbells attorney for legal assistance on our normal terms of engagement.
  3. Submit the completed form to regulation@campbellslegal.com

  • Download Notification Forms

  • Further information

    Investment fund

    Investment fund means

    • an entity whose principal business is the issuing of investment interests to raise funds or pool investor funds with the aim of enabling a holder of such an investment interest to benefit from the profits or gains from the entity’s acquisition, holding, management or disposal of investments; and
    • any entity through which an investment fund directly or indirectly invests or operates* (but not an entity that is itself the ultimate investment held)

    but does not include a person licensed under the Banks and Trust Companies Act (2018 Revision) or the Insurance Act, 2010, or a person registered under the Building Societies Act (2014 Revision) or the Friendly Societies Act (1998 Revision)

    * such as a general partner or a subsidiary established to hold an investment.

    Distribution and service centre business

    What is a “distribution and service centre business”?

    “distribution and service centre business” means the business of either or both of the following –

    • purchasing from an entity in the Group –
      • component parts or materials for goods; or
      • goods ready for sale, and reselling such component parts, materials or goods outside the Islands;
    • providing services to an entity in the same Group in connection with the business outside the Islands, but does not include any activity included in any other relevant activity except holding company business.

    For the avoidance of doubt, (b) above only falls within the definition in the specific circumstances where the relevant entity is operating a service centre for entities in the same Group.

    “Group” means a collection of enterprises related through ownership or control such that it is either required to prepare Consolidated Financial Statements for financial reporting purposes under applicable accounting principles or would be so required if equity interests in any of the enterprises were traded on a public securities exchange.

    Source: Cayman Islands Economic Substance Guidance 3.1, page 18

    Financing and leasing business

    What is a “financing and leasing business”?

    “financing and leasing business” means the business of providing credit facilities for any kind of consideration to another person but does not include financial leasing of land or an interest in land, banking business, fund management business or insurance business.

    Source: Cayman Islands Economic Substance Guidance 3.1, page 19

    Headquarters business

    What is a “headquarters business”?

    “headquarters business” means the business of providing any of the following services to an entity in the same Group –

    the provision of senior management;
    the assumption of control or material risk for activities carried out by any of those entities in the same Group; or
    the provision of substantive advice in connection with the assumption or control of risk referred to in paragraph (b), but does not include banking business, financing and leasing business, fund management business, intellectual property business, holding company business or insurance business.

    “Group” means a collection of enterprises related through ownership or control such that it is either required to prepare Consolidated Financial Statements for financial reporting purposes under applicable accounting principles or would be so required if equity interests in any of the enterprises were traded on a public securities exchange.

    Source: Cayman Islands Economic Substance Guidance 3.1, page 20

    Pure equity holding company

    What is a “holding company business”?

    “holding company business” means the business of a pure equity holding company.

    “pure equity holding company” means an entity that only holds equity participations in other entities and only earns dividends and capital gains.

    For the avoidance of doubt, an investment fund is not regarded as a pure equity holding company.

    Source: Cayman Islands Economic Substance Guidance 3.1, page 20

    Intellectual property business

    What is a “intellectual property business”?

    “intellectual property business” means the business of holding, exploiting or receiving income from intellectual property assets.

    “intellectual property asset” means an intellectual property right including a copyright, design right, patent and trademark.

    Source: Cayman Islands Economic Substance Guidance 3.1, pages 21 and 22

    Shipping business

    What is a “shipping business”?

    “shipping business” means any of the following activities involving the operation of a ship anywhere in the world other than in the territorial waters of the Islands or between the Islands –

    • the business of transporting, by sea, passengers or animals, goods or mail for a charge;
    • the renting or chartering of ships for the purpose described in paragraph (a);
    • the sale of travel tickets and ancillary ticket related services connected with the operation of a ship;
    • the use, maintenance or rental of containers, including trailers and other vehicles or equipment for the transport of containers, used for the transport of anything by sea; or
    • the functioning as a private seafarer recruitment and placement service, but does not include a holding company business or the owning, operating or chartering of a pleasure yacht*

    * pleasure yacht has the meaning given to that expression by section 11(6) of the Merchant Shipping Act, namely a pleasure vessel and any vessel to which regulations made in respect of vessels in commercial use for sport or pleasure are stated to apply.

    Source: Cayman Islands Economic Substance Guidance 3.1, page 23

    Banking business

    What is a “banking business”?

    “banking business” has the meaning given to that expression by section 2 of the Banks and Trust Companies Act (2021 Revision).

    Where “banking business” means the business of receiving (other than from a bank or trust company) and holding on current, savings, deposit or other similar account money which is repayable by cheque or order and may be invested by way of advances to customers or otherwise.

    Source: Cayman Islands Economic Substance Guidance 3.1, page 18

    Fund management business

    What is a “fund management business”?

    “fund management business” means the business of managing securities as set out in paragraph 3 of Schedule 2 to the Securities Investment Business Act (2020 Revision) (“SIBA”) carried on by a relevant entity licensed or otherwise authorised to conduct business under that Act for an investment fund.

    “managing securities as set out in paragraph 3 of Schedule 2 to the Securities Investment Business Act (2020 Revision)” means managing securities belonging to another person in circumstances involving the exercise of discretion.

    For the avoidance of doubt, an entity which is carrying on “fund management business” for the purposes of the ES Act cannot be classified as an “investment fund” for the purpose of the ES Act.

    Breaking the definition down:

    “managing securities belonging to another person in circumstances involving the exercise of discretion” does not extend to other activities such as arranging deals in securities or providing non-binding discretionary advice.

    The word “licensed” covers only the small minority of entities that are fully licensed under SIBA and does not extend to entities registered as registered persons under SIBA.

    The words “authorised to conduct business” applies to entities that are registered persons under SIBA.

    Source: Cayman Islands Economic Substance Guidance 3.1, page 19

    Insurance business

    What is an “insurance business”?

    “insurance business” has the meaning given to that expression by section 2 of the Insurance Act, 2010.

    “insurance business” means the business of accepting risks by effecting or carrying out contracts of insurance, whether directly or indirectly, and includes running-off business including the settlement of claims.

    Source: Cayman Islands Economic Substance Guidance 3.1, page 21

    Domestic company

    What is a “domestic company”?

    A “domestic company” means a company that is not part of an MNE Group and that is –

    • only carrying on business in the Islands and which complies with section 4(1) of the Local Companies (Control) Act (2019 Revision) or section 3(a) of the Trade and Business Licensing Act (2019 Revision); or
    • a company referred to in section 80 of the Companies Act (2021 Revision).’’

    ‘’Associations not for profit registered under section 80 of the Companies Act are not relevant entities for the purposes of the ES Act. Pages 8 and 9 of the Guidance Notes provide further detail on associations not for profit.’’

    “MNE Group” means any Group that includes two or more enterprises for which the tax residence is in different jurisdictions or includes an enterprise that is resident for tax purposes in one jurisdiction and is subject to tax with respect to the business carried out through a permanent establishment in another jurisdiction.

    “Group” means a collection of enterprises related through ownership or control such that it is either required to prepare Consolidated Financial Statements for financial reporting purposes under applicable accounting principles or would be so required if equity interests in any of the enterprises were traded on a public securities exchange.

    Tax resident outside the Cayman Islands

    What is “Tax Resident outside the Cayman Islands”?

    An “entity” is not regarded as a relevant entity for the purposes of the ES Act if it is tax resident outside the Islands.

    The Authority will regard an entity as tax resident in a jurisdiction other than the Islands if the entity is subject to corporate income tax on all of its income from a relevant activity by virtue of its tax residence, domicile or any other criteria of a similar nature in that other jurisdiction. Additionally, in the event that the entity is a “disregarded entity” for U.S. income tax purposes, and has a U.S. corporation or U.S. individual as its parent, the Authority will consider the entity as tax resident outside of the Islands if satisfactory evidence is provided.

    The Authority will require any entity claiming to be tax resident outside the Islands to produce satisfactory evidence to substantiate the same. For example, the evidence may include a Tax Identification Number, tax residence certificate and assessment or payment of a corporate income tax liability on all of that entity’s income in the Islands from a relevant activity, or, in the case of a disregarded entity for U.S. income tax purposes, a signed statement under penalty of perjury from an external tax advisor or ‘C’ level officer stating that all of that entity’s income has been included on the corporate tax return of the U.S. parent company.

    In the absence of such evidence the entity will be regarded as a relevant entity that is subject to the ES Act. The ES Test must be satisfied with respect to any part of relevant income that is not subject to corporate income tax imposed by a jurisdiction other than the Islands.

    In the case of an entity that is tax resident in a jurisdiction outside of the Islands, the Authority shall, in accordance with relevant international standards and scheduled agreements, provide the information provided to it under the ES Act to the competent authority in — (a) the jurisdiction in which that entity is tax resident; (b) the jurisdiction in which the immediate parent, ultimate parent and ultimate beneficial owner of the entity resides; and (c) if the relevant entity is incorporated outside the Islands, the competent authority of the relevant jurisdiction in which the entity is incorporated.

    Whilst such an entity is not subject to economic substance requirements, the Authority will require any entity that is carrying on a relevant activity and claiming to be tax resident outside the Islands to produce satisfactory evidence to substantiate the same through the notification and reporting requirements.

    The Authority shall also, in accordance with relevant international standards and scheduled agreements, provide the information provided to it under the ES Act to the competent authority in:

    • the jurisdiction in which that entity is tax resident;
    • the jurisdiction in which the immediate parent, ultimate parent and ultimate beneficial owner of the entity resides; and
    • if the relevant entity is incorporated outside the Islands, the competent authority of the relevant jurisdiction in which the entity is incorporated.

    A relevant entity should take care that it does not falsely claim to be tax resident or subject to corporate income tax in another jurisdiction on all of that entity’s income in the Islands from a relevant activity such that the result would be a circumvention of the ES Test.

    The Authority will also regard any branch of a relevant entity as tax resident outside the Islands if the branch is subject to corporate income tax on all of that branch’s income in another jurisdiction by reason of its domicile, residence or any other criteria of a similar nature. The Authority will require any relevant entity which claims that its branch is tax resident outside the Islands to produce, with respect to its branch, satisfactory evidence of the type described in the previous paragraph.

    In this context, a “branch” refers to a business unit or division of the relevant entity that is not a separate legal person from the relevant entity.

    Definitions

    “Consolidated Financial Statements” means the financial statements of a Group in which the assets, liabilities, income, expenses and cash flows of the ultimate parent and the Constituent Entities are presented as those of a single economic entity;

    “Constituent Entity” means –

    • any separate business unit of a Group that is included in the Consolidated Financial Statements of the Group for financial reporting purposes, or would be so included if equity interests in such business unit of a Group were traded on a public securities exchange;
    • any such business unit that is excluded from the Group’s Consolidated Financial Statements solely on size or materiality grounds; and
    • any permanent establishment of any separate business unit of the Group included in (a) or (b) provided the business unit prepares a separate financial statement for such permanent establishment for financial reporting, regulatory, tax reporting, or internal management control purposes;

    “Entity” means

    • a company that is —
      • incorporated under the Companies Act (2021 Revision); or
      • a limited liability company registered under the Limited Liability Companies Act (2021 Revision);
        • a partnership as defined under section 3 of the Partnership Act (2013 Revision);
        • an exempted limited partnership as defined under section 2 of the Exempted Limited Partnership Act (2021 Revision);
        • a foreign limited partnership registered under section 42 of the Exempted Limited Partnership Act (2021 Revision);
    • a limited liability partnership that is registered in accordance with the Limited Liability Partnership Act, 2017; or
    • a company that is incorporated outside of the Islands and registered under the Companies Act (2021 Revision);

    “Group” means a collection of enterprises related through ownership or control such that it is either required to prepare Consolidated Financial Statements for financial reporting purposes under applicable accounting principles or would be so required if equity interests in any of the enterprises were traded on a public securities exchange;

    “Immediate Parent” in relation to an entity, means a person that owns directly twenty-five percent or more of the ownership interests or voting rights in the entity;

    “Ultimate Beneficial Owner” means an individual who, directly or indirectly, meets one of the following specified conditions:

    1. He or she holds 25% or more of the Relevant Entity’s shares, partnership interests or equivalent; or
    2. He or she holds 25% or more of the Relevant Entity’s voting rights; or
    3. He or she has the right to appoint or remove a majority of the Relevant Entity’s board of directors, partners or equivalent; or
    4. If no individual meets the above conditions, he or she has the absolute unconditional right to exercise, or actually does exercise, significant influence or control over the Relevant Entity (other than solely as a director, professional advisor or professional manager); or
    5. If no individual meetings the above conditions and the Relevant Entity’s shares, partnership interests or equivalent are held by a trust or partnership that satisfies one of the above conditions, he or she has the absolute and unconditional right to, or actually does, exercise significant influence or control over the trust or partnership (other than solely as a director, professional advisor or professional manager);

    “Ultimate Parent” means a Constituent Entity of a Group that meets the following criteria –

    • it owns directly or indirectly a sufficient interest in one or more other Constituent Entities of the Group such that it is required to prepare Consolidated Financial Statements under accounting principles generally applied in its jurisdiction of tax residence, or would be so required if its equity interests were traded on public securities exchange in its jurisdiction of tax residence; and
    • only carrying on business in the Islands and which complies with section 4(1) of the Local Companies (Control) Act (2019 Revision) or section 3(a) of the Trade and Business Licensing Act (2019 Revision); or
    • a company referred to in section 80 of the Companies Act (2021 Revision).’’there is no other Constituent Entity of the Group that owns directly or indirectly an interest described in paragraph (a) in the first mentioned Constituent Entity.

     

    Domestic company

    What is a “domestic company”?

    A “domestic company” means a company that is not part of an MNE Group and that is –

    • only carrying on business in the Islands and which complies with section 4(1) of the Local Companies (Control) Act (2019 Revision) or section 3(a) of the Trade and Business Licensing Act (2019 Revision); or
    • a company referred to in section 80 of the Companies Act (2021 Revision).’’

    ‘’Associations not for profit registered under section 80 of the Companies Act are not relevant entities for the purposes of the ES Act. Pages 8 and 9 of the Guidance Notes provide further detail on associations not for profit.’’

    “MNE Group” means any Group that includes two or more enterprises for which the tax residence is in different jurisdictions or includes an enterprise that is resident for tax purposes in one jurisdiction and is subject to tax with respect to the business carried out through a permanent establishment in another jurisdiction.

    “Group” means a collection of enterprises related through ownership or control such that it is either required to prepare Consolidated Financial Statements for financial reporting purposes under applicable accounting principles or would be so required if equity interests in any of the enterprises were traded on a public securities exchange.

    Tax resident outside the Cayman Islands

    What is “Tax Resident outside the Cayman Islands”?

    An “entity” is not regarded as a relevant entity for the purposes of the ES Act if it is tax resident outside the Islands.

    The Authority will regard an entity as tax resident in a jurisdiction other than the Islands if the entity is subject to corporate income tax on all of its income from a relevant activity by virtue of its tax residence, domicile or any other criteria of a similar nature in that other jurisdiction. Additionally, in the event that the entity is a “disregarded entity” for U.S. income tax purposes, and has a U.S. corporation or U.S. individual as its parent, the Authority will consider the entity as tax resident outside of the Islands if satisfactory evidence is provided.

    The Authority will require any entity claiming to be tax resident outside the Islands to produce satisfactory evidence to substantiate the same. For example, the evidence may include a Tax Identification Number, tax residence certificate and assessment or payment of a corporate income tax liability on all of that entity’s income in the Islands from a relevant activity, or, in the case of a disregarded entity for U.S. income tax purposes, a signed statement under penalty of perjury from an external tax advisor or ‘C’ level officer stating that all of that entity’s income has been included on the corporate tax return of the U.S. parent company.

    In the absence of such evidence the entity will be regarded as a relevant entity that is subject to the ES Act. The ES Test must be satisfied with respect to any part of relevant income that is not subject to corporate income tax imposed by a jurisdiction other than the Islands.

    In the case of an entity that is tax resident in a jurisdiction outside of the Islands, the Authority shall, in accordance with relevant international standards and scheduled agreements, provide the information provided to it under the ES Act to the competent authority in — (a) the jurisdiction in which that entity is tax resident; (b) the jurisdiction in which the immediate parent, ultimate parent and ultimate beneficial owner of the entity resides; and (c) if the relevant entity is incorporated outside the Islands, the competent authority of the relevant jurisdiction in which the entity is incorporated.

    Whilst such an entity is not subject to economic substance requirements, the Authority will require any entity that is carrying on a relevant activity and claiming to be tax resident outside the Islands to produce satisfactory evidence to substantiate the same through the notification and reporting requirements.

    The Authority shall also, in accordance with relevant international standards and scheduled agreements, provide the information provided to it under the ES Act to the competent authority in:

    • the jurisdiction in which that entity is tax resident;
    • the jurisdiction in which the immediate parent, ultimate parent and ultimate beneficial owner of the entity resides; and
    • if the relevant entity is incorporated outside the Islands, the competent authority of the relevant jurisdiction in which the entity is incorporated.

    A relevant entity should take care that it does not falsely claim to be tax resident or subject to corporate income tax in another jurisdiction on all of that entity’s income in the Islands from a relevant activity such that the result would be a circumvention of the ES Test.

    The Authority will also regard any branch of a relevant entity as tax resident outside the Islands if the branch is subject to corporate income tax on all of that branch’s income in another jurisdiction by reason of its domicile, residence or any other criteria of a similar nature. The Authority will require any relevant entity which claims that its branch is tax resident outside the Islands to produce, with respect to its branch, satisfactory evidence of the type described in the previous paragraph.

    In this context, a “branch” refers to a business unit or division of the relevant entity that is not a separate legal person from the relevant entity.

    Definitions

    “Consolidated Financial Statements” means the financial statements of a Group in which the assets, liabilities, income, expenses and cash flows of the ultimate parent and the Constituent Entities are presented as those of a single economic entity;

    “Constituent Entity” means –

    • any separate business unit of a Group that is included in the Consolidated Financial Statements of the Group for financial reporting purposes, or would be so included if equity interests in such business unit of a Group were traded on a public securities exchange;
    • any such business unit that is excluded from the Group’s Consolidated Financial Statements solely on size or materiality grounds; and
    • any permanent establishment of any separate business unit of the Group included in (a) or (b) provided the business unit prepares a separate financial statement for such permanent establishment for financial reporting, regulatory, tax reporting, or internal management control purposes;

    “Entity” means

    • a company that is —
      • incorporated under the Companies Act (2021 Revision); or
      • a limited liability company registered under the Limited Liability Companies Act (2021 Revision);
        • a partnership as defined under section 3 of the Partnership Act (2013 Revision);
        • an exempted limited partnership as defined under section 2 of the Exempted Limited Partnership Act (2021 Revision);
        • a foreign limited partnership registered under section 42 of the Exempted Limited Partnership Act (2021 Revision);
    • a limited liability partnership that is registered in accordance with the Limited Liability Partnership Act, 2017; or
    • a company that is incorporated outside of the Islands and registered under the Companies Act (2021 Revision);

    “Group” means a collection of enterprises related through ownership or control such that it is either required to prepare Consolidated Financial Statements for financial reporting purposes under applicable accounting principles or would be so required if equity interests in any of the enterprises were traded on a public securities exchange;

    “Immediate Parent” in relation to an entity, means a person that owns directly twenty-five percent or more of the ownership interests or voting rights in the entity;

    “Ultimate Beneficial Owner” means an individual who, directly or indirectly, meets one of the following specified conditions:

    1. He or she holds 25% or more of the Relevant Entity’s shares, partnership interests or equivalent; or
    2. He or she holds 25% or more of the Relevant Entity’s voting rights; or
    3. He or she has the right to appoint or remove a majority of the Relevant Entity’s board of directors, partners or equivalent; or
    4. If no individual meets the above conditions, he or she has the absolute unconditional right to exercise, or actually does exercise, significant influence or control over the Relevant Entity (other than solely as a director, professional advisor or professional manager); or
    5. If no individual meetings the above conditions and the Relevant Entity’s shares, partnership interests or equivalent are held by a trust or partnership that satisfies one of the above conditions, he or she has the absolute and unconditional right to, or actually does, exercise significant influence or control over the trust or partnership (other than solely as a director, professional advisor or professional manager);

    “Ultimate Parent” means a Constituent Entity of a Group that meets the following criteria –

    • it owns directly or indirectly a sufficient interest in one or more other Constituent Entities of the Group such that it is required to prepare Consolidated Financial Statements under accounting principles generally applied in its jurisdiction of tax residence, or would be so required if its equity interests were traded on public securities exchange in its jurisdiction of tax residence; and
    • there is no other Constituent Entity of the Group that owns directly or indirectly an interest described in paragraph (a) in the first mentioned Constituent Entity.

  • Download Relevant Activity descriptions

  • Further information

    “MNE Group” means any Group that includes two or more enterprises for which the tax residence is in different jurisdictions or includes an enterprise that is resident for tax purposes in one jurisdiction and is subject to tax with respect to the business carried out through a permanent establishment in another jurisdiction.

    “Group” means a collection of enterprises related through ownership or control such that it is either required to prepare Consolidated Financial Statements for financial reporting purposes under applicable accounting principles or would be so required if equity interests in any of the enterprises were traded on a public securities exchange.