As a prerequisite to filing the annual return with the Registrar of Companies in Cayman, we are required to make an additional filing for all Cayman entities in relation to their status under the Economic Substance (‘ES’) legislation.
At its most basic level, all relevant Cayman entities conducting relevant activities, must be able to demonstrate that they:
- conduct core incoming generating activities on island;
- are directed and managed from Cayman;
- have adequate physical presence in Cayman;
- have an adequate number of full-time employees or other personnel with appropriate qualifications in Cayman; and
- have an adequate amount of operating expenditure incurred in Cayman.
Relevant entities include all Cayman entities and Cayman registered foreign companies except:
- investment funds or entities through which investment funds directly or indirectly invest or operate;
- entities which are tax resident outside the Cayman Islands;
- entities which are authorised to carry on business locally in the Cayman Islands as a domestic company.
Relevant activities are the businesses of:
- fund management,
- banking, insurance,
- finance and leasing,
- distribution and service centre business,
- headquarters business,
- intellectual property business,
- shipping, and
- holding company business.
A further explanation of these businesses is included at Appendix 1, below.
(Pure Equity) Holding company business, refers to a company that only holds equity participations in other entities and only earns dividends and capital gains. These entities are subject to a reduced ES test.
We have developed a portal to collect the various pieces of information required for the filing. As you answer the questions it will highlight the remaining questions required to be completed. Please complete all the required question and submit the form to us.
Please let us know should you have any questions, and we are already assisting clients with additional services to help them demonstrate substance in Cayman.
Lastly, be aware that Cayman Island Tax Information Authority will impose penalties where inaccurate information is provided.
Appendix 1 – Relevant Activities
Banking Business
An entity engages in banking business if it conducts the business of receiving (other than from a bank or trust company) and holding on current, savings, deposit or other similar account money which is repayable by cheque or order and may be invested by way of advances to customers or otherwise.
The core income generating activities of an entity that engages in banking include raising funds, managing risk including credit, currency and interest risk; taking hedging positions; providing loans, credit or other financial services to customers; managing capital and preparing reports or returns, or both, to investors or the Cayman Islands Monetary Authority, or both.
Insurance Business
An entity engages in insurance business if it conducts the business of accepting risks by effecting or carrying out contracts of insurance, whether directly or indirectly, and includes running-off business including the settlement of claims.
The core income generating activities of an entity that engages in insurance include predicting or calculating risk or oversight of prediction or calculation of risk; insuring or re-insuring against risk; preparing reports or returns, or both, to investors or the Cayman Islands Monetary Authority, or both.
Fund Management Business
An entity engages in fund management business if it conducts the business of managing securities as set out in paragraph 3 of Schedule 2 to the Cayman Islands Securities Investment Business Act (Revised) carried on by a relevant entity licensed or otherwise authorised to conduct business under that Act for an investment fund (ie a Registered Person).
“Managing Securities” means managing securities belonging to another person in circumstances involving the exercise of discretion.
The core income generating activities of an entity that engages in fund management include taking decisions on the holding and selling of investments; calculating risks and reserves; taking decisions on currency or interest fluctuations and hedging positions; preparing reports or returns, or both, to investors or the Cayman Islands Monetary Authority, or both.
Financing and Leasing Business
An entity engages in financing and leasing if it conducts 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.
The core income generating activities of an entity that engages in financing or leasing 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.
Headquarters Business
An entity engages in headquarters business if it conducts the business of providing any of the following services to an entity in the same Group: (a) the provision of senior management; (b) the assumption or control of material risk for activities carried out by any of those entities in the same Group; or (c) the provision of substantive advice in connection with the assumption or control of risk referred to in paragraph (b), but does not include banking business, financing and leasing business, fund management business, intellectual property business, holding company business or insurance business.
The core income generating activities of an entity that engages in business as a headquarters include taking relevant management decisions; incurring expenditures on behalf of other entities in the Group; and coordinating activities of the Group.
Shipping Business
An entity engages in shipping if it engages any of the following activities involving the operation of a ship anywhere in the world other than in the territorial waters of the Cayman Islands or between the Cayman Islands: (a) the business of transporting, by sea, passengers or animals, goods or mail for a charge; (b) the renting or chartering of ships for the purpose described in paragraph (a); (c) the sale of travel tickets and ancillary ticket related services connected with the operation of a ship; (d) 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 (e) the functioning as a private seafarer recruitment and placement service, but does not include a holding company business or the owning, operating or chartering of a pleasure yacht.
The core income generating activities of an entity that engages in shipping include managing the crew (including hiring, paying and overseeing crew members); overhauling and maintaining ships; overseeing and tracking deliveries; determining what goods to order and when to deliver them, organising and overseeing voyages.
Distribution and Service Centres Business
An entity engages in business as a distribution centre if it engages in the business of (a) purchasing from an entity in the same Group: (i) component parts or materials for goods; or (ii) goods ready for sale, and reselling such component parts, materials or goods outside the Cayman Islands; (b) providing services to an entity in the same Group in connection with the business outside the Cayman Islands, but does not include any activity included in any other relevant activity except holding company business.
The core income generating activities of an entity that engages in business as a distribution and service centre include transporting and storing of goods components and materials; managing stocks; taking orders; providing consulting or other administrative services.
Holding Company Business / Pure Equity Holding Company Business
The definition of a holding company for economic substance purposes is limited to that of a pure equity holding company, which is a company that only holds equity participations in other entities and only earns dividends and capital gains.
The core income generating activities of an entity that engages in business as a holding company include ensuring that all applicable corporate law and tax filing requirements under the Companies Act (as revised) are met and ensuring the company has adequate human resources and adequate premises in the Cayman Islands for holding and managing equity participations in other entities.
A pure equity holding company may engage its registered office service provider to conduct the core income generating activities. Where holding companies also conduct other “relevant activities” they will additionally be subject to the requirements associated with that other activity. A pure equity holding company is not required to be directed and managed in the Cayman Islands.
If an entity holds any other asset (e.g. land) or conducts any other income generating activities in addition to income earned from equity participations in other entities (e.g. interest income received as a lender), the entity will not be considered a pure equity holding company. Please note that having a bank account does not count as holding another asset.
Intellectual Property (IP) Business
An entity engages in IP business if it engages in the business of holding, exploiting or receiving income from intellectual property assets.
“Intellectual property asset” means an intellectual property right including a copyright, design right, patent and trademark.
The core income generating activities for entities that engage in IP activities include conducting research and development in relation to IP assets (such as patents); marketing, branding and distribution of non-trade intangible assets (such as trademarks); taking the strategic decisions and managing and bearing the principal risks related to the development and subsequent exploitation of an IP asset; taking the strategic decisions and managing and bearing the principal risks related to any third party acquisition and subsequent exploitation of an IP asset; and carrying on the underlying trading activities through which IP assets are exploited and which lead to the generation of income from third parties.
An entity engages in high risk IP activities where the entity: did not create the IP in an IP asset that it holds for the purpose of its business, acquired the IP asset from an entity in the same Group; or in consideration for funding research and development by another person situated in a country or territory other than the Cayman Islands, and licenses the IP to one or more entities in the same Group or otherwise generates income from the asset in consequence of activities (such as facilitating sale agreements) performed by entities in the same Group.