Amendments to Economic Substance Law released

Government has released a bill to amend the International Tax Co-operation (Economic Substance) Law to make changes to the economic substance notification requirements and the sharing of information on entities that are tax resident outside of Cayman.

Under the law certain “relevant entities” that conduct defined “relevant activities” must file notifications and, unless they are exempt, report on and maintain economic substance in the form of office, staff, expenditures and management functions locally.

The proposed changes will allow the Tax Information Authority to issue guidance without prior approval by Cabinet. The authority will also have the power to impose a penalty on entities that have to pass an economic substance test, if they fail to comply with the requirement to provide an annual report.

The amendments provide that entities that are tax resident outside of Cayman must provide the name and address of its immediate parent, ultimate parent and ultimate beneficial owner of the entity. The jurisdiction in which the entity is claiming to be tax resident and any supporting information is also required.

A new subsection imposes an obligation on the authority to share information on entities that are tax resident outside of Cayman with competent authorities in the home jurisdiction and the jurisdiction in which the immediate parent, ultimate parent and ultimate beneficial owner of the entity resides.

If the relevant entity is incorporated outside the Islands, information is also provided to the competent authority of the relevant jurisdiction in which the entity is incorporated.

The bill changes the notification requirements so that “an entity”, not just a relevant entity, must inform the Tax Information Authority each year whether it is carrying on relevant activity and whether it is a relevant entity under the law.

The bill also demands the verification of any outsourcing of core income generating activities and inserts anti-avoidance provisions into the Law. These prescribe that if an arrangement is set up to avoid an obligation under the Economic Substance Law, the arrangement is deemed not to have been entered into and the Law will take effect as if the arrangement had never existed.