Cayman Entities and the Economic Substance Regime – Is Your Cayman Entity in Compliance?

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Nov 2024

As we gear up for the final quarter of 2024, this is an excellent time to review Cayman based entities with a financial year end of 31 December 2024 and consider the position of these entities with respect to the Cayman Economic Substance regime.

Economic Substance Regime

The International Tax Co-operation (Economic Substance) Act (as revised) and the Economic Substance for Geographically Mobile Activities Guidance (as revised) (together, the “Economic Substance Regime”) apply to Cayman-based entities which are considered a ‘Relevant Entity’ carrying on a ‘Relevant Activity’ in the relevant period. The list of ‘Relevant Activities’ pursuant to the Economic Substance Regime includes banking, insurance, fund management, financing and leasing, headquarters, shipping, intellectual property, distribution and service centres and holding companies.

Economic Substance Requirements

Generally speaking, the Economic Substance Regime requires a Relevant Entity that carries on a Relevant Activity to satisfy the economic substance test (“ES Test”). Bearing in mind that all “entities” including those that do not conduct Relevant Activities will be required to submit an economic substance notification (“ESN”) to the Cayman Tax Information Authority (“TIA”) to confirm, amongst other things, whether or not they conduct one or more Relevant Activities and, if so, whether or not they are a Relevant Entity.

A Relevant Entity includes a company incorporated under the Companies Act, a limited liability company registered under the Limited Liability Companies Act, a limited liability partnership registered in accordance with the Limited Liability Partnership Act, a company incorporated outside of the Cayman Islands and registered under the Companies Act, a partnership defined in section 3 of the Partnership Act, an exempted limited partnership as defined in section 2 of the Exempted Limited Partnership Act, and a foreign limited partnership registered under section 42 of the Exempted Limited Partnership Act but excludes:

a local partnership¹;
an entity that is an “investment fund²”;
an entity that is a “domestic company³”; and
an entity that is “tax resident” outside the Cayman Islands.

Trusts are not currently considered to be Relevant Entities.

Any Relevant Entity carrying on a Relevant Activity must ensure that they comply with the ES Test by ensuring the entity is conducting the following:

managed and directed in the Cayman Islands;
core income generating activities are undertaken in the Cayman Islands with respect to the Relevant Activity;
maintains adequate physical presence in the Cayman Islands;
there are adequate full time employees in the Cayman Islands with suitable qualifications; and
there is adequate operating expenditure incurred in the Cayman Islands in relation to each Relevant Activity.

Local entities and entities conducting holding company business which carry on a Relevant Activity only need to comply with minimum economic substance requirements.

Economic Substance Filings

Under the Economic Substance Regime, a Relevant Entity must file an annual ESN outlining whether the Relevant Entity is conducting a relevant activity for the purposes of the Economic Substance Regime. If the Relevant Entity declares in the ESN that it is conducting a Relevant Activity, the Relevant Entity will then have to file an economic substance return (“ESR”). In the ESR, entities will confirm details of the substance which is evidenced by the financial statements, and ultimately make a declaration as to whether they have complied with the Economic Substance Regime

If the Relevant Entity declares in the ESN that the entity is tax resident in another jurisdiction outside the Cayman Islands, the entity must file a tax resident outside the jurisdiction form (“TRO”) along with evidence or confirmation of such tax residence. The ESR and the TRO requires the entity to submit information to the TIA in relation to the previous financial year evidencing the entity’s compliance with the Economic Substance Regime.

On-going Monitoring and Enforcement

The TIA undertakes regular compliance checks in respect of entities which have not filed their ESR or TRO filings, and in recent instances has issued compliance notices and penalties to entities that are not in compliance with the Economic Substance Regime.

When reviewing an entity’s economic substance filings, the TIA can request information and supporting documents from entities in instances where the entity has declared information in their filings filed, and may conduct an audit of its records to assess compliance. It is important, therefore, that entities maintain adequate records in order to substantiate their economic substance filings (or their determination that they are not in scope). As the Economic Substance Regime continues to grow and mature this will bring with it the likelihood of further increased penalties from the TIA for failure to comply with the regime, especially in respect of entities which have repeatedly failed to comply.

Is Your Entity in Compliance?

The TIA has noted on numerous occasions that there continue to be a number of mis-filings which result in incorrect interpretation of or compliance with the Economic Substance Regime and that risk enforcement action being taken. Entities also preparing their Annual Return, which must be filed with the Cayman Registrar of Companies along with the payment of their Annual Government Fees by 31 January 2025, should be mindful of the information declared for the relevant financial year, as a cross–reference review may be undertaken with the Annual Return to the economic substance filing to monitor whether they align. As the end of the fiscal year approaches it is advisable for entities to carefully consider and assess their position under the Economic Substance Regime and whether any filings or remediations are required on the entity’s economic substance filings to align with the entity’s business activities.

We Can Help You With Your Compliance

In light of the on-going expansion of economic substance in the Cayman Islands, Conyers has been actively engaged in assisting clients with legal enquires and concerns regarding compliance. We have provided our clients with comprehensive reviews and assessments to ensure that their entities align with the Economic Substance Regime in the Cayman Islands. By doing so, we have acquired an unparalleled understanding of the economic substance requirements for various types of entities, across all relevant activities.

Please reach out to the Conyers economic substance team at [email protected] for help with:

determining the status of an entity for economic substance purposes
advising on the compliance of an entity with the economic substance requirements
clarifying the reporting obligations of an entity
completing and filing the economic substance filings; and
conducting compliance reviews

If you would like Conyers to assist with any of the above in connection with your economic substance filings or compliance reviews, please contact us as soon as possible.

Corporate Services

Entities required to meet the economic substance requirements may benefit from our fiduciary services, including local directorship services. Contact us to find out whether we can assist you in fulfilling your obligations under the Economic Substance Regime.