Substance legislation passed by lawmakers in December 2018 has laid down the parameters for the way Cayman is responding to pressure by the European Union to reform its tax regime, but many questions remain about the economic impact of the new framework.
In response to the threat of an EU blacklisting, the new law requires companies and limited liability partnerships that are registered and managed locally and generate income in one of nine defined activities to demonstrate that they have enough economic activity on island to justify the profits they make.
In drawing up gray- and blacklists of countries and their cooperation in tax matters, the EU has taken aim at tax structures used by multinational companies to divert profits to jurisdictions with little or no corporate income tax, if the companies have no management, employees or offices there.
To ensure that profits are taxed where they are generated and economic activity is taking place, the new legislation imposes a substance test on banking, insurance, fund management and shipping companies, as well as entities functioning as headquarters or distribution and service centers, and businesses engaged in financing and leasing or holding intellectual property.
Resident companies that generate core income in these fields must pass the economic substance test from July 1.