The International Tax Co-operation (Economic Substance) Bill, 2018

The Cayman Islands Government has now passed The International Tax Co-operation (Economic Substance) Bill, 2018 (the “Bill”). The Bill has been issued in response to the Cayman Islands’ commitment to the global initiative to combat base erosion and profit shifting.

If a Cayman Islands entity is conducting one of the following relevant business activities (and that entity is not tax resident in another jurisdiction), the Bill would require the entity to have “economic substance” in the Cayman Islands:

What are the ‘relevant business activities’?

1. “banking business” which has the meaning given to that expression by section 2 of the Banks and Trust Companies Law (2018 Revision);
2. “distribution and service centre business” which means the business of either or both of the following –
   1. purchasing from an entity in the same group of entities -
      1. component parts or materials for goods; or
      2. goods ready for sale, and
         reselling such component parts, materials or goods outside the Islands;
   2. providing services to an entity in the same group of entities in connection with the business outside the Islands,
      but does not include any activity included in any other relevant activity except holding company business;
3. “financing and leasing business” which means the business of providing credit facilities for any kind of consideration to another person but does not include financial leasing of land or an interest in land, banking business, fund management business or insurance business;
4. “fund management business” which means the business of managing securities as set out in paragraph 3 of Schedule 2 to the Securities Investment Business Law (2015 Revision) carried on by a relevant entity licensed under that Law for an investment fund (this definition does not currently cover those companies who have registered as Excluded Persons under this Law);
5. “holding company business” which means the business of a pure equity holding company, and “pure equity holding company” means a company that only holds equity participations in other entities and only earns dividends and capital gains;
6. “headquarters business” means the business of providing any of the following services to an entity in the same group of entities –
   1. the provision of senior management;
   2. the assumption or control of material risk for activities carried out by any of those entities in the same group of entities; or
   3. the provision of substantive advice in connection with the assumption or control of risk referred to in paragraph (2),
      but does not include banking business, financing and leasing business, fund management business, intellectual property business, holding company business or insurance business;
7. “insurance business” which has the meaning given to that expression by section 2 of the Insurance Law, 2010;
8. “intellectual property business” which means the business of holding, exploiting or receiving income from intellectual property assets;
9. “shipping business” which means any of the following activities involving the operation of a ship anywhere in the world other than in the territorial waters of the Islands or between the Islands –
   1. the business of transporting, by sea, passengers or animals, goods or mail for a charge;
   2. the renting or chartering of ships for the purpose described in paragraph (1);
   3. the sale of travel tickets and ancillary services connected with the operation of a ship;
   4. the use, maintenance or rental of containers, including trailers and other vehicles or equipment for the transport of containers, used for the transport of anything by sea; or
   5. the management of the crew of a ship.

If my entity conducts a relevant business activity, what ‘economic substance’ will it be required to have?

Under the Bill, the economic substance test varies depending on the relevant business activity being conducted. Generally speaking, if an entity: (i) conducts core income-generating activities in the Cayman Islands; (ii) incurs an adequate amount of operating expenditure in the Cayman Islands; (iii) has an adequate physical presence in the Cayman Islands and (iv) the entity is directed or managed in an appropriate manner in relation to the relevant activity; then the entity will pass the economic substance test. 

Entities which perform holding company business are subject to a “reduced” economic substance test under the proposed legislation. They would satisfy the substance test if they have complied with all applicable filing requirements under the Companies Law and if they have adequate human resources and adequate premises in the Cayman Islands for holding and managing equity participations in other entities. In addition, the company must be directed and managed from Cayman with regular board meetings held and minutes of strategic decisions kept on island.

The Bill contains more rigorous requirements for so-called “high risk intellectual property” businesses. These include entities that hold intellectual property they did not create and acquired either from an entity in the same group or another entity outside of the Cayman Islands, and then license the intellectual property to related entities.

We expect that certain aspects of the substance requirements will be able to be outsourced to another entity in the Cayman Islands under appropriate monitoring and control. Stuarts Corporate Services Ltd. will be able to provide various services to assist relevant entities with meeting their substance requirements.

What is required in terms of reporting?

Entities which are carrying out relevant business activities must, no later than 12 months after the last day of each financial year, prepare and submit a report to the Tax Information Authority in the Cayman Islands.  Stuarts can assist with such reporting.

When is the Bill expected to take effect?

The Bill has now passed and is expected to take effect by 1 January 2019.

What should we be doing now?

At this time we recommend that our clients notify us if their Cayman Islands entity is carrying out any relevant business activities and to seek our advice on the possible implications. If you wish to speak to someone in the meantime, please contact Chris Humphries.

Download the PDF -  The International Tax Co-operation (Economic Substance) Bill, 2018

If you would like further information please contact:

Jon Mclean
Partner
Tel:(+1 345) 814 7930
jon.mclean@stuartslaw.com

Megan Wright
Associate
Tel:(+1 345) 814 7904
megan.wright@stuartslaw.com