Cayman Islands Economic Substance Requirements


From 1 January 2019, new legislation will come into effect in the Cayman Islands, requiring in-scope entities that carry on particular activities to have demonstrable economic substance in Cayman.

The International Tax Co-operation (Economic Substance) Law, 2018 was passed on 17 December 2018, after an extensive process of consultation with the EU Code of Conduct Group, the OECD and Cayman stakeholders. Commencement of the Law is now subject only to the Governor’s assent.

Enactment of the substance requirements in the Law is the latest in a series of steps by Cayman to meet its 2017 commitment as an Inclusive Framework member under the OECD’s global Base Erosion and Profit Shifting (BEPS) initiative, and corresponding EU requirements encompassing no or nominal tax jurisdictions. It is expected that other international financial centres such as Jersey, Guernsey, the British Virgin Islands, the Isle of Man and Bermuda will implement similar legislation.

This briefing summarises the main elements of the Law. As the accompanying regulations and guidance are published and finalised we will provide further commentary for affected entities.


1.     The Law defines which Cayman entities are in-scope (Relevant Entities). Relevant Entities must make an annual report as to whether or not they are carrying on one or more of a defined list of activities (Relevant Activities). If they are, they must satisfy an economic substance test in Cayman in respect of such Relevant Activities. Cayman’s Tax Information Authority is responsible for determining if a Relevant Entity satisfies the economic substance test.

Relevant Entities

2.     Relevant Entities will include most Cayman exempted companies and Cayman LLCs except investment funds or entities through which investment funds directly or indirectly invest or operate.

3.     Relevant Entities will also include registered foreign companies unless those registered foreign companies are centrally managed and controlled outside Cayman and are tax resident outside the Islands.

Relevant Activities

4.     All Relevant Entities will have to make an annual declaration as to whether they have conducted any Relevant Activities in the preceding financial period. Relevant Activities are fund management, banking, insurance, finance and leasing, distribution and service centre business, headquarters business, intellectual property business, shipping, and holding company business.

Economic Substance Test

5.     Relevant Entities that carry on Relevant Activities must satisfy the economic substance test. To satisfy the economic substance test in relation to a Relevant Activity, a Relevant Entity must:

a)    conduct “Cayman Islands core income generating activities”;

b)     be “directed and managed” in an appropriate manner in Cayman; and

c)     having regard to the level of relevant income derived from the Relevant Activity carried out in Cayman:

  • have an adequate amount of operating expenditure incurred in Cayman;
  • have adequate physical presence (including maintaining a place of business or plant, property and equipment) in Cayman; and
  • have an adequate number of full-time employees or other personnel with appropriate qualifications in Cayman.

6.     A Relevant Entity satisfies the economic substance test in relation to a Relevant Activity if its Cayman Islands core income generating activities in relation to that Relevant Activity are conducted by any other person and the Relevant Entity is able to monitor and control the carrying out of the Cayman Islands core income generating activities by that other person.

7.     Customised provisions apply to holding companies who only hold equity participations in other entities and only earn dividends and capital gains; and to Relevant Entities carrying on the business of holding, exploiting or receiving income from intellectual property assets.

8.     Guidance will be issued on satisfying the economic substance test, including guidance as to the meaning of “adequate” and “appropriate”.

Core Income Generating Activities

9.      The Law defines “Cayman Islands core incoming generating activities” (CIGAs) as activities that are of central importance to a Relevant Entity in terms of generating income and that are being carried out in Cayman. For each Relevant Activity, the Law provides particular included activities. For example:

a)    For fund management business, CIGAs include:

  • taking decisions on the holding and selling of investments;
  • calculating risks and reserves;
  • taking decisions on currency or interest fluctuations and hedging positions; and
  • preparing reports or returns to investors and the Cayman Islands Monetary Authority.

b)    For financing and leasing business, CIGAs include:

  • negotiating or agreeing funding terms;
  • identifying and acquiring assets to be leased;
  • setting the terms and duration of financing or leasing;
  • monitoring and revising financing or leasing agreements and managing risks associated with such financing or leasing agreements.

Directed and Managed

10.     To be considered to be “directed and managed” in an appropriate manner in Cayman will require:

a)    that the Relevant Entity’s board of directors, as a whole, have the appropriate knowledge and expertise to discharge its duties as a board;

b)    that meetings of the board be held in Cayman at adequate frequencies given the level of decision making required, and that there be a quorum of the board of directors present in Cayman at such meetings;

c)    that minutes of such board meetings record the strategic decisions made at these meetings; and

d)    retention of all board minutes and appropriate records in Cayman.

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