Cayman’s Department for International Tax Cooperation has released responses to frequently asked questions about how companies will have to comply with new economic substance requirements, specifically in relation to reporting and filing information.
Cayman introduced economic substance legislation in response to pressure from the European Union to curb tax avoidance by companies who operate in tax havens without having staff, offices or other operations there.
Companies that are engaged in relevant activities in low or no-tax jurisdictions must demonstrate they have a minimum of economic activity locally to be treated as resident for tax purposes.
These relevant activities include banking, insurance, fund management, financing and leasing, shipping, intellectual property, collective investment vehicles and holding companies.
In these highly mobile business sectors, companies must show that their core income-generating activities are managed locally and conducted with qualified employees and sufficient infrastructure and expenditure in Cayman.
The latest guidance explains that an annual economic substance notification, a prerequisite for the filing of an annual return, will have to be filed via the General Registry system for each separate legal person. The notification form will be online in the fourth quarter of 2019 and the notification process will be explained in more detail in a user guider to be published by 9 Sept.
The economic substance reporting will have to be submitted within 12 months after the end of each financial year through a new portal that is currently under development. The portal is expected to open for reporting by July or August 2020.
The FAQ clarifies that neither Cayman entities who are subject to withholding tax nor Cayman entities whose parent companies fall under controlled foreign company or similar rules with respect to Cayman subsidiaries qualify as “tax resident outside the islands” for the purposes of the Economic Substance law.
If a Cayman entity is engaged in more than one relevant activity, it will have to pass an economic substance test for each activity separately, but only one economic substance notification is required.
Following recent changes to the excluded persons regime under the Securities Investment Business Law, the guidance explains that a securities business that becomes a ‘registered person’ with the Cayman Islands Monetary Authority will be in scope for economic substance and must register by 15 Jan. 2020.
In the first year, the Department for International Tax Cooperation will consider these entities in scope from that date onwards, with the first return for the year 2020 due by the end of 2021.
For new businesses, the Economic Substance Law will apply from the date the entity becomes a ‘registered person’ with CIMA, with the economic substance return due 12 months after the year end.
The department is currently drafting a new version of Economic Substance Guidance with the intention of releasing sector specific guidance for each relevant activity as well as guidance for investment funds. In July, the OECD released a peer review by its Forum on Harmful Tax Practices that found Cayman’s legislative framework for economic substance “not harmful”.
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