The current status of economic substance in the Cayman Islands

New version of the Guidance Notes

A new version of the Guidance Notes for Economic Substance for Geographically Mobile Activities (Guidance Notes) was recently published by the Cayman Islands Tax Information Authority (TIA).

The revised Guidance Notes can be found on the TIA website.

The key change to the Guidance Notes was the inclusion of detailed sector specific guidance for each of the relevant activities. Amendments have also been made to the Guidance Notes to reflect the various legislative changes over the past twelve months.

Sector specific guidance

The sector specific guidance sets out the scope of each relevant activity, the types of activities that are likely to be considered a relevant activity and the core income generating activities that are required to be performed for that relevant activity. The Guidance Notes also include several worked examples of typical scenarios for each relevant activity, serving as a helpful reference.

Reminder – recent amendments

We issued a client alert summarising the changes proposed at the time, most of which have now been introduced and are reflected in the updated Guidance Notes, as follows below.

As most Cayman Islands entities will now be aware, all must file a notification with the Registrar of Companies prior to filing their annual return, even if the entity is not a relevant entity.

Where an entity claims tax residence outside of the Cayman Islands information on the immediate parent, ultimate parent and ultimate beneficial owner of the entity must be provided to the TIA. The TIA is then required to exchange that information with the relevant competent authorities.

The TIA now has appropriate functions and powers for it to monitor and verify outsourcing of core income generating activities.

Finally, the TIA now has the ability to impose a fine where a relevant entity that is required to satisfy the economic substance test fails to prepare and submit to the TIA its annual Economic Substance Report within the specified time. The penalty is CI$5,000 with an additional penalty of CI$500 for each day the breach continues.

Economic substance reporting

For some entities Economic Substance Reports will soon be due to be filed with the TIA. The TIA has advised that it expects to launch a portal in this quarter of 2020, called the Cayman Islands DITC Portal, to facilitate this, and other, electronic reporting. It also advised that it intends to utilize the portal to share information with other competent authorities, such as the tax residency information.

The TIA has stated that it will publish a DITC Portal User Guide with a module for economic substance specifying the rules and procedures for use of the portal by relevant entities and their representatives.

Impact of current travel restrictions

The Cayman Islands government advised in April that they are aware that some entities may not be able to hold their board of directors meetings in Cayman during the year due to the many travel restrictions in place.

The TIA will take this into consideration on a case-by-case basis when determining whether an entity has passed or failed the “directed and managed” component of the economic substance test in its reporting, which is due in 2021.

Current travel restrictions do not affect the reporting requirements which are due this year, 2020, in respect of 2019 year-end.

Harneys Regulatory

Harneys Regulatory is well versed in all aspects of the economic substance requirements in the Cayman Islands, so please contact your usual Harneys representative if you would like to discuss the economic substance regime in the Cayman Islands.