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The new Economic Substance requirements for the Cayman Islands went into effect on January 1, 2019.
The International Tax Co-operation (Economic Substance) Law 45 of 2018 (the Law) falls under the OECD’s Base Erosion and Profit Shifting (BEPS) Inclusive Framework and requires entities formed on the first of January in 2019 or later, and pre-existing entities (in existence prior to January 1, 2019) that carry on particular activities, to have demonstrable economic substance in the Cayman Islands. That is to say, relevant entities must demonstrate they have sufficient economic activity in the country to justify the profits they’re making.
The Law arises after the Cayman Islands committed to reform their tax structures in order to comply with the European Union Code of Conduct Group of Business Taxation criteria.
The Law covers relevant entities engaged in any of the relevant activities (listed below). The relevant entities are the following:
There are nine types of relevant activities:
The Law does not classify investment fund business as a relevant activity.
Starting in 2020, relevant entities must notify the Tax Information Authority (the Authority) annually of the following:
However, relevant entities in existence prior to January 1, 2019, must first satisfy the Economic Substance Test (the Test) in relation to relevant activities performed from July 1, 2019. Relevant entities formed on or after January 1, 2019, must satisfy the economic substance test in relation to relevant activities performed from the date on which the relevant activity commenced.
The Test requires that a relevant entity
The relevant entities must submit a report to the Authority within 12 months of the end of their financial year offering the prescribed details about their compliance with the economic substance test.
The Authority will impose a penalty of $10,000 on relevant entities that fail to satisfy the Test and/or $100,000 if the Test is not satisfied in the following financial year (after receiving an initial notice of failure).
Relevant entities must carry out an internal review to define what measures, if any, are necessary to comply with the Law.
To help companies comply with the requirements, the Cayman Islands published the Economic Substance For Geographically Mobile Activities Guidance.
The Cayman Islands is the leading jurisdiction for international hedge funds, the second largest domicile in the world for captives, the number one domicile for healthcare captives and a leading jurisdiction for banking, trusts, capital markets and fiduciary services.
Our knowledge and expertise of Cayman’s rules and regulations, combined with a central point of contact, ensure on-going compliance. We can help you understand and navigate the local market. Contact us if you would like further guidance on how the economic substance requirements will impact your business.
To learn more about how CT can help you better manage your global compliance needs, contact a CT representative at (855) 444-5358 (toll-free U.S.) or visit https://ct.wolterskluwer.com/global-corporate-services.
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