As a result of the OECD\u2019S global Base Erosion and Profit Shifting (\u201cBEPS<\/strong>\u201d) initiative and the EU Code of Conduct Group substance requirements modelled on BEPS Action 5, the Cayman Islands has enacted The<\/em> International Tax Co-operation (Economic Substance) Law, 2018 <\/em>(the \u201cES Law<\/strong>\u201d) and issued related Regulations and Guidance Notes. \u00a0Similar legislation has been introduced in numerous jurisdictions, including the Channel Islands and the British Virgin Islands.<\/p>\n Under the ES Law, certain vehicles formed or registered in the Cayman Islands are required to have economic substance in the Cayman Islands. The requirement to show economic substance is primarily aimed at preventing what is called \u201cbase erosion and profit shifting\u201d.\u00a0 This constitutes, in the OECD\u2019s view, the artificial shifting of profits to places where there is little or no economic activity or taxation. The ES Law seeks to remedy the OECD\u2019s concerns by requiring relevant entities to have sufficient substance in the Cayman Islands.<\/p>\n The ES law applies to the following \u201crelevant entities\u201d:<\/p>\n Investment funds are specifically excluded from the definition of relevant entity and, as such, they are not within the scope of the ES Law.\u00a0 The definition of \u201cinvestment fund\u201d is broad and will include a wide range of investment funds, including those that are not licensed or registered with the Cayman Islands Monetary Authority.<\/p>\n The ES Law does not apply to \u201cdomestic companies\u201d (as defined in the ES Law). \u00a0In addition, entities that are tax resident outside of the Cayman Islands do not need to comply with the economic substance requirements but will need to provide satisfactory evidence of their tax residency.<\/p>\n Relevant entities that are subject to the ES Law will be required to satisfy the economic substance test if they are carrying on any \u201crelevant activities\u201d. Relevant activities include the following types of business: banking<\/strong>, fund management<\/strong>, insurance<\/strong>, intellectual property<\/strong>, shipping (excluding pleasure yachts), <\/strong>\u00a0financing and leasing<\/strong>, headquarters<\/strong>, holding company<\/strong> and distribution and service centre<\/strong>.<\/p>\n A relevant entity subject to the ES Law must satisfy the economic substance test (\u201cES Test<\/strong>\u201d) as follows:<\/p>\n Entities will be required to register with the Tax Information Authority (\u201cTIA<\/strong>\u201d) by September 2020 and then file a report containing prescribed information on income and expenditure within 12 months after the end of their financial year commencing in 2019.\u00a0 In practice, this means that entities with a financial year commencing on 1 January 2019 will need to file the report by 31 December 2020.<\/p>\n The ES Test may be met by a relevant entity in relation to any relevant activity by:<\/p>\n Alternatively, it is possible to outsource some or all of the CIGA provided the relevant entity is able to demonstrate that it is able to monitor and control the outsourced activities and that those activities are undertaken in the Cayman Islands.<\/p>\n Certain relevant activities, such as the business of pure equity holding companies and high risk intellectual property business, have specific rules and guidance applicable to them under the ES Law.<\/p>\n The ES Law contains penalties for failure to satisfy the ES Test including:<\/p>\n Campbells is closely monitoring the implementation of the ES Law and its application to the industry.\u00a0 It is expected that the Guidance Notes will be developed in due course. Although substantive steps may not need to be taken now, preliminary work to identify affected entities should be undertaken in preparation for when the rules become fully effective later this year.<\/p>\n Clients are advised to consider whether a company, LLC or LLP which may be affected is carrying on a ‘relevant activity’. All relevant entities carrying on relevant activities will need to undertake an internal review to determine what measures, if any, they might need to take in order to achieve compliance. In most cases, we believe that compliance will be a straightforward matter.\u00a0Campbells will be able to recommend solutions on these options available over the next few months as more guidance becomes available.<\/p>\nWhich entities will be affected?<\/h2>\n
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What activities are covered?<\/h2>\n
Timing<\/h2>\n
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Economic substance test<\/h2>\n
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Enforcement and penalties<\/h2>\n
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What to do now?<\/h2>\n
Further information<\/h2>\n