The Cayman Islands (‘Cayman’) International Tax Co-operation (Economic Substance) Law, 2018 (‘Law’) and  International Tax Co-operation (Economic Substance) (Prescribed Dates) Regulations, 2018 (‘Regulations’) came into force on 1 January 2019. Official Guidance Notes are expected in early 2019 to set out how the new regime will work. Here we consider what steps Cayman entities should be taking to find out if the Law and Regulations apply to them and, if so, whether they carry out the core income generating activities defined in the Law for their business.

Step 1 Are you a Relevant Entity?
The first decision is whether your Cayman entity is considered to be a ‘relevant entity’ (‘Relevant Entity’).  The Schedule to the Law defines the relevant terms, and a Relevant Entity is defined as a

  • a)    Cayman incorporated company, which is not a domestic company; or a
  • b)    Cayman registered LLC, LLP or foreign incorporated company;
  • unless in each case the entity’s business is centrally managed and controlled in a jurisdiction outside Cayman and tax resident outside Cayman.

An investment fund is not a Relevant Entity. (s.1 Schedule Law.) A domestic company is one which is not part of a Multinational Enterprise Group that carries on business in Cayman under relevant legislation, or a subsidiary of such a company.

Step 2 Do you carry out a Relevant Activity?

A – What is a Relevant Activity
In the Law, relevant activity (‘Relevant Activity’) is defined as meaning: Banking business; distribution and service centre business; financing and leasing business; fund management business; headquarters business;holding company business;insurance business;shipping business; intellectual property business

B- What is not a Relevant Activity?
Investment fund business is not a Relevant Activity, and is defined as 'the business of operating as an investment fund'. An Investment fund is defined as:

an entity whose principal business is the issuing of investment interests (share, trust unit, partnership interest or other right that carries an entitlement to participate in the profits or gains of the entity) to raise funds or pool investor funds with the aim of enabling a holder of such an investment interest to benefit from the profits or gains from the entity's acquisition, holding, management or disposal of investments and includes any entity through which an investment fund directly or indirectly invests or operates.

Step 3 – Are you carrying out Core Activities in Cayman?
The Law sets out in a Schedule the core income generating activities (‘Core Activities’) which are of central importance to generating income for the types of business the Law defines as Relevant Activities. (These are set out at the end of this piece.) Relevant Entities which conduct Relevant Activity need to ensure that these Core Activities are being carried out in Cayman. See the Schedule at the end of this piece for the relevant Core Activities.
Step 4 – Are you ready to comply when necessary?
Relevant Entities which conduct Relevant Activity must be carrying out substantial business activity which is related to the line of business that the entity conducts in Cayman. New Relevant Entities need to comply from the date they start their Relevant Activity, whilst those Relevant Entities which existed before 1 January 2019 and which carry out a Relevant Activity need to comply from 1st July 2019.
Step 5 – Seek help
This Cayman legislation is part of a global effort to establish an international standard and it is important that all those in scope comply. Those managing Cayman entities need to assess whether their entities are in scope and, if they are, whether they comply or what they need to do to become compliant. At the end of the entity’s financial year they will also need to complete the necessary report to the Cayman Tax Information Authority (‘TIA’). The initial assessment can be done without advice, but Cayman Finance, the Cayman Financial Services Industry Body, has recommended its members take Cayman legal advice on how the Law will affect them and their clients. We would endorse Cayman Finance’s recommendation and encourage all Cayman entities to obtain the reassurance of independent local legal advice.
Solomon Harris
Solomon Harris has many years’ experience in the establishment and regulations affecting all types of Cayman entities and is able to can assess and advise on whether your entity is in scope and, if so, what it needs to do to comply and in the completion of the report to the TIA. For advice and any further information contact Solomon Harris Partner Richard Addlestone or Senior Associate Tom Wright.

Where can I find out more information?

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).
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.

                                                                                                            Core Activities

banking business: -
i) raising funds, managing risk including credit, currency and interest risk;
ii) taking hedging positions;
iii) providing loans, credit or other financial services to customers;
iv) managing capital and preparing reports or returns, or both, to investors or the Cayman Islands Monetary Authority (‘CIMA’), or both.

distribution and service centre business –
i) transporting and storing goods, components and materials;
ii) managing stocks;
iii) taking orders;  
iv) providing consulting or other administrative services.
financing and leasing business –
i) negotiating or agreeing funding terms;
ii) identifying and acquiring assets to be leased;
iii) setting the terms and duration of financing or leasing;
iv) monitoring and revising financing or leasing agreements and managing risks associated with such financing or leasing agreements.     fund management business
i) taking decisions on the holding and selling of investments;
ii) calculating risk and reserves;
iii) taking decisions on currency or interest fluctuations and hedging positions;
iv) preparing reports or returns, or both, to investors or CIMA, or both;

headquarters business –
i) taking relevant management decisions;
ii) incurring expenditures on behalf of Group entities;
iii) co-ordinating Group activities.

_____________________________________________________________________________

holding company business,

all activities related to that business

insurance business -
i) predicting or calculating risk or oversight of prediction or calculation of risk;
ii) insuring or re-insuring against risk;
iii) preparing reports or returns, or both, to investors or CIMA or both.    shipping business -
i) managing crew (including hiring, paying and overseeing crew members);
ii) overhauling and maintaining ships;
iii) overseeing and tracking deliveries;
iv) determining what goods to order and when to deliver them, organising and overseeing voyages.

fund management business -

i) taking decisions on the holding and selling of investments;

ii) calculating risk and reserves;

iii) taking decisions on currency or interest fluctuations and hedging positions;

iv) preparing reports or returns, or both, to investors or CIMA, or both;

intellectual property business -
i) a) where the intellectual property asset is a patent or an asset that is similar to a patent research and development; or
b) non-trade intangible (including a trademark), branding, marketing and distribution
ii) in exceptional cases, except if the relevant activity is a high-risk intellectual property business, other core income generating activities relevant to the business and the intellectual property assets. (See under high risk intellectual property).  

High-risk intellectual property
A. Taking strategic decisions and managing (as well as bearing) the principal risks related to development and subsequent exploitation of the intangible asset generating income;
B. Taking the strategic decisions and managing (as well as bearing) the principal risks relating to acquisition by third parties and subsequent exploitation and protection of the intangible asset;
C. Carrying on the underlying trading activities through which the intangible assets are exploited leading to the generation of income from third parties;

 

 

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