The Cayman Islands government has released adjusted guidance on the economic substance requirements which will apply to all entities with establishments in the jurisdiction.
A key aspect to the direction is that the economic substance legislation is now applicable to all entities listed with the general registry. The original version made reference only to relevant entities, defined in the International Tax Co-operation (Economic Substance) (Amendment) Bill, 2019 as an entity conducting a relevant activity, which does not fall under the requirements of a domestic company, an investment fund or an entity that is tax-resident outside of the Cayman Islands.
Many Cayman Islands-domiciled entities are now being asked by their Cayman Islands registered office service providers to complete the appropriate forms as a result of the broadening of scope. The forms require stating which business activities are being conducted which are relevant, and if so, if they are a relevant entity. The notification deadline is conditionally set for next year in March 2020.
Cayman Investment Funds
Investment fund businesses are not included in the scope of the legislation, and neither any entity through which an investment fund directly or indirectly manages or does business with.
While the draft guidance itself is restricted to local industry consultation only, the enhancements made reflect an intelligent and business minded response to industry input so far; however, are they really a meaningful commitment to absorbing the new global regime? Economists have commented that the improvements appear to have made the legislation more watertight, and applicable to all reputable financial centres, in a practical and workable way.
The Cayman government have also published a proposal to supplement the economic substance law, reflecting feedback received from the European Commission and OECD Forum on Harmful Tax Practices.
Penalty for Non-Compliance
It will allow the Cayman Islands Tax Information Authority to impose fines on a day-by-day basis if an entity that is required to satisfy the economic substance test fails to prepare and submit its annual report on time.