The Cayman Government has set out how companies should comply with new economic substance requirements, which must be met for certain companies to access the territory's tax regime.
The economic substance requirements
Under new requirements dictated in large part by the EU, companies that are tax resident in a low or no tax jurisdiction, and are engaged in key activities identified by the EU, must demonstrate that they meet minimum substance requirements as part of their annual tax return to access the territories' tax regimes.
The standard requires that for certain highly mobile sectors of business activity, the core income generating activities must be conducted with qualified employees and operating expenditure in the jurisdiction.
The key activities identified by the European Commission Code of Conduct Group are: banking, insurance, fund management, financing and leasing, shipping, intellectual property, collective investment vehicles, and holding companies that generate income from any of these key activities.
The substance requirements vary for each key activity to reflect the different needs of the companies involved and are designed to be fair and proportionate while ensuring that there are sufficient activities undertaken in the relevant jurisdiction to reflect the amount of profits accounted there.
The substance requirements will include being able to demonstrate that the company is directed and managed from the relevant territory, that the company has adequate levels of employees as well as annual expenditure, and physical offices.
New guidance
The new FAQs explain that a new Economic Substance notification will be required for all entities with separate legal personality and will be done via the General Registry system (CAP and CBP). The Government anticipates that the notification form will be online in Q4 2019.
The process for notification on the General Registry system will be explained in further detail in a user guide which is expected to be published on the Department of International Tax Cooperation website by September 2019.
Under Cayman legislation, if a Cayman entity is conducting relevant business activities and is not tax resident in another jurisdiction, it must have "economic substance" in the islands in order to access the tax regime. "Economic substance" means that the Cayman entity must undertake substantial business activity, appropriate to the line of business that they are conducting, in the islands.
Reporting will be carried out via a new portal that is currently under development. Guidance will be issued during the first half of 2020. The initial step for filing the ES return will be to confirm, via the portal, the information that has been prepopulated on the notification lodged through the General Registry system. The portal is expected to be open for reporting in July or August 2020.
Entities must file their reports within 12 months of the last day of the end of each financial year.
Where an entity is engaged in more than one relevant activity during a relevant financial period, it will need to pass the economic substance test for each activity. However, it will only be required to submit one notification.
The deadline for entities to register is January 15, 2020. For year one, the Department for International Tax Cooperation (DITC) will regard entities as in scope for economic substance from January 15, 2020, regardless of whether the entity registers in advance. For a new business, the ES law will apply from the date the entity becomes a "registered person" with the Cayman Islands Monetary Authority. In both cases, the economic substance return will be due 12 months after the year end.
by Mike Godfrey, Lowtax.net, Washington 22 August, 2019