Q:
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What is Economic Substance Law (“ES Law”) and why does it exist in Cayman Islands?
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A:
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ES Law refers to new legislation introduced in the Cayman Islands which responding to the concerns and actions of worldwide unfair tax practices from EU. The new law requires certain entities that are incorporated or registered in the Cayman Islands, and which conduct one or more of a set list of nine relevant activities, to comply with local requirements and demonstrate adequate ‘economic substance’ either in or outside Cayman Islands.
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Q:
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Which Cayman Islands Company need to demonstrate adequate ‘economic substance’ in Cayman Islands. What is Cayman Islands economic substance test?
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A:
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Only for the entities which are carrying on business falls within the relevant activities categories are required to have the substance in the Cayman Islands or demonstrate its substance in the place of its operation or management.
A relevant entity must satisfy the Economic Substance Test (“ES Test”) having regard to the level of relevant income derived from any relevant activity carried out in the Cayman Islands.
1.
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has an adequate amount of operating expenditure incurred in the Islands;
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2.
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has an adequate physical presence (including maintaining a place of business or plant, property, and equipment) in the Islands; and
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3.
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an adequate number of full-time employees or other personnel with appropriate qualifications in the Islands.
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Q:
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What are relevant activities?
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A:
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A relevant entity that conducts anyone or more “relevant activity(ies)” that required to satisfy the ES Test in relation to each relevant activity. These relevant activities are:
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Banking business;
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2.
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Distribution and service center business;
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3.
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Finance and leasing business;
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4.
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Fund management business;
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5.
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Headquarters business;
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6.
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Holding business;
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7.
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Insurance business;
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8.
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Intellectual property business; and
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9.
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Shipping business.
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But does not include investment fund business.
The term of “relevant activity” does not require an entity to be actively engaged in the businesses listed above. Any passive collection of income from one of the foregoing businesses would be a relevant activity.
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Q:
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What information shall a Cayman company notify the Tax Information Authority (“TIA”) annually regarding Economic Substance?
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A:
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Cayman Company shall notify the TIA the following information annually:
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whether or not it is carrying on a relevant activity;
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2.
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if the company is carrying on a relevant activity, whether or not all or any part of the company’s gross income in relation to the relevant activity is subject to tax in a jurisdiction outside of the Islands and if so, shall provide appropriate evidence to support that tax residence as may be required by the Authority; and
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3.
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the date of the end of its financial year.
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Q:
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When should I make an annual declaration of Economic Substance for my Cayman Islands Company?
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A:
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A Cayman Islands Company is required to make an annual declaration of each calendar year. Relevant Entities carrying on Relevant Activity must submit to the Cayman Islands TIA a report setting forth prescribed details as to their compliance with the economic substance report within 12 months of the end of the financial year.
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Q:
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Is it need to satisfy ES Test during liquidation or otherwise ceasing to carry on relevant activities?
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A:
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A relevant entity need continue to have obligations which the ES Law imposes on it until it is officially be dissolved.
During the liquidation or winding up process, if relevant activities continue then the Company need to satisfy the ES Test for such period. However, Company is not required to satisfy the ES Test after the it is no longer carrying on relevant activities that generate relevant income.
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Q:
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What is the impact of failure to satisfy the ES Test requirement?
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A:
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The TIA shall impose a penalty of KYD10,000 on a relevant entity for failing to satisfy such ES Test or KYD100,000 if it is not satisfied in the subsequent financial year after the initial notice of failure. Following failure after two consecutive years, the Grand Court may make an order requiring the relevant entity to take specified actions to satisfy the ES Test or an order that the relevant entity is defunct or to be struck off.
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Q:
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What is the consequence of providing false or misleading information to the TIA regarding Economic Substance?
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A:
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It is an offence for a person to knowingly or willfully provide false or misleading information to the TIA under the ES Law. It is punishable on summary conviction by a fine of KYD 10,000 or with five years imprisonment, or both.
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