Q&A – SUBSTANCE IN THE CAYMAN ISLANDS WHAT FUND MANAGERS NEED TO KNOW (should take less than 2 minutes reading time) 


9 April 2019 



Why has the Cayman Islands introduced substance requirements? 



The OECD have established a global forum on harmful tax practices which sets global standards requires companies to have a substantial activityin the jurisdiction in which they operate. In essence this is to address what the OECD sees as base erosion and profit shifting (BEPS) referring to tax avoidance strategies that exploit gaps and mismatches tax rules to artificially shift profits to no or low tax jurisdictions. 


In November 2018 the OCED agreed with 125 countries including the Cayman Islands on how a substantial activities factor would be interpreted and implemented to ensure a level playing field as between low tax jurisdictions and jurisdictions offering preferential tax regimes.



What have the Cayman Islands introduced?



The Cayman Islands have introduced the International Tax Cooperation (Economic Substance) Law, 2018 (ES Law) which was brought into force on 1 January 2019. The implementation of the ES Law is set out in the detailed guidance that has been issued and updated.


What type of company / partnership is the scope and does this apply to CIMA registered mutual funds and or master funds?



The starting point is that the ES Law applies to all companies incorporated under the Cayman Islands Companies Law or partnerships under the Partnership Law, importantly the ES Law

does not include an investment fund or an entity that is tax resident outside the Cayman Islands as being a ‘relevant entity’.


Under the ES Law a mutual fund licensed or registered with the Cayman Islands Monetary Authority is considered to be an investment fund and thereby exempt from the ES Law. 


However it should be noted that the ES Law definition of an investment fund is wider than under the Mutual Funds Law



What if the entity is not an investment fund?   



If the entity is not an investment fund or is not tax resident outside the Cayman Islands then it will be subject to an economic substance test (ES Test)



What is the ES Test?   



When a relevant entity is subject to the ES test which includes among other considerations whether it is conducting Cayman Islands core income generating activities, and whether it is directed and managed in an appropriate manner in the Cayman Islands relevant to that activity.  The crucial elements consist of whether the entity has:


-        an adequate amount of operating expenditure in the Cayman Islands;

-       adequate physical presence; and 

-       an adequate number of full-time employees or other personnel with appropriate qualifications.  



When does this start and what actions are required?     



This starts in 2020, when relevant entities must notify the tax information authority whether they are:


-      Carrying on relevant activities

-      whether or not all or part of the relevant entity’s activities are subject to tax and the jurisdiction outside the Cayman Islands together with proof of  appropriate evidence to support that tax residence

-      the date of the end of its financial year


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