As expected, the Cayman Islands (‘Cayman’) International Tax Co-operation (Economic Substance) Law, 2018 (‘Law’) came into force on 1 January 2019. The Law was published in the Cayman Gazette on 27 December 2018 at the same time as the International Tax Co-operation (Economic Substance) (Prescribed Dates) Regulations, 2018 (‘Regulations’) which set the dates from which a relevant entity must satisfy the economic substance requirement in relation to a relevant activity. Guidelines are expected to be published early in 2019.

NOTE - Definitions used in this piece have been updated. For more information please refer to links in our piece Cayman issues Industry Advisory on Economic Substance Regulations and Guidance v2.0.

What is economic substance?
To meet the ‘Economic substance’ requirement, a Cayman company or other entity must be carrying out substantial business activity which is related to the line of business that the entity conducts in Cayman. For more information on the international standard to which this new legislation relates, please see our earlier pieces Cayman economic substance legislation expected to be in force by 1 January 2019 and Cayman Government Advisory on OECD Substantial activity requirements.
When do entities have to satisfy the economic substance requirement?
Under the Regulations, the date from which a relevant entity shall satisfy the economic substance test in relation to a relevant activity shall be either:

-    1st July 2019 for relevant entities in existence before 1 January 2019; or
-    Commencement of relevant activity for relevant entities which came into existence after 1 January 2019.

How is the requirement enforced?
Under the Regulations, a relevant entity that is carrying on a relevant activity and is required to satisfy the economic substance test shall prepare and submit a report (‘Report’) to the Tax Information Authority (‘TIA’) (or a person the TIA designates to act on its behalf). This report will enable the TIA to determine whether the entity satisfies the economic substance test. The report must be submitted no later than twelve months after the last day of the end of each financial year of the relevant entity commencing on or after 1 January, 2019.
What goes into the Report?
The Report must be in the form approved by the Authority and the requirements of what it needs to include are set out in the Law. Among other things, the Report must include information such as the type of relevant activity conducted by the relevant entity with details of matters such as the number of employees and their qualifications, the income and expenses of the relevant entity and a declaration that it satisfies the economic substance requirement under the Law. 
What should Cayman entities do now?
Whilst the legislation was still in the form of a Bill, the Cayman Financial services industry body, Cayman Finance, encouraged its members to familiarise themselves with the new rules and once it was passed into law recommended that they take Cayman legal advice on how the Law will affect them and their clients. 
Are these new rules?
The legislation relates to a global standard which also affects all of Cayman’s main competitor jurisdictions. The legislation allows Cayman to meet its obligations as a member of the Organisation for Economic Co-operation and Development (‘OECD’) Base Erosion and Profit Shifting (‘BEPS’) Inclusive Framework (‘Framework’) – the body which sets the global tax standard regarding structures that aim to attract profits in jurisdictions in which they do not conduct real economic activity. It also helps Cayman with respect to the EU List of Non-Cooperative Jurisdictions for Tax Purposes by enabling it to fulfil its commitment to the EU to have legislation in place by 31 December 2018.
Solomon Harris
Solomon Harris has many years’ experience in the preparation of all types of Cayman investment and advising on new investment vehicles. We are able to assess and advise on regulatory or legal issues which may affect those vehicles contact Solomon Harris Partner Richard Addlestone or Senior Associate Tom Wright.
Disclaimer
The information contained in this article is necessarily brief and general in nature and does not constitute legal advice. Appropriate legal or other professional advice should be sought for any specific matter.

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