“Relevant activities” under the Cayman Islands International Tax Co-operation (Economic Substance) Act are nine specific business types: banking business, distribution and service centre business, financing and leasing business, fund management business, headquarters business, holding company business, insurance business, intellectual property business and shipping business. Investment fund business is expressly excluded. A relevant entity carrying on any of the nine must satisfy the economic substance test in respect of that activity, including conducting the core income generating activities (CIGA) in the Islands.
The nine relevant activities
The list sits in the Schedule to the Act and in section III of the DITC’s Economic Substance Guidance v3.2. Each activity has its own statutory definition and CIGA. Fund management business, for example, is defined as “the business of managing securities as set out in paragraph 3 of Schedule 2 to the Securities Investment Business Act”, carried on by a relevant entity licensed or registered under that Act for an investment fund. Banking, insurance and financing and leasing business each map to the underlying Cayman regulatory regime.
Investment fund business is excluded
Operating as an investment fund is not a relevant activity — the Act expressly excludes it. The fund itself is therefore outside the substance test (although it still files an ESN). The entity that manages the fund — if it is a Cayman entity licensed or registered under the Securities Investment Business Act — is the one that may be carrying on fund management business.
Reduced test for pure equity holding companies
Where the relevant activity is pure equity holding — a company “that only holds equity participations in other entities and only earns dividends and capital gains” — the substance test is reduced. The entity satisfies the test by complying with applicable Cayman filing requirements and having adequate human resources and premises in the Islands for holding and managing those participations.
Increased test for high-risk IP business
The Act creates a rebuttable presumption that a relevant entity carrying on “high-risk intellectual property business” — broadly, an entity that did not create the IP it now exploits and earns income from group licensing — has not met the substance test. The presumption can only be rebutted with evidence of a high degree of control by an adequate number of suitably qualified, full-time employees performing the CIGA permanently in the Islands.
Passive income does not prevent classification
The DITC Guidance is explicit that “passive collection of income” from one of the listed businesses — for example, holding-company dividends or royalty receipts — does not prevent the activity from being treated as a relevant activity.
Determining which (if any) of the nine activities applies is the gateway question for any Cayman compliance review.
Related questions: What are the Economic Substance requirements in the Cayman Islands, and which entities do they apply to? | What is the Economic Substance Notification? | What is the Economic Substance Return, and how is it different from the Notification?
WB Group helps Cayman entities scope their relevant activities and design substance plans that withstand TIA scrutiny. Contact us to discuss your structure or visit our Economic Substance Page.
FAQs
Yes. A relevant entity must satisfy the ES test in respect of each relevant activity it carries on, and report accordingly on its ES Return. The DITC Guidance addresses each activity separately in its Sector Specific Guidance schedule.
It depends on what asset and what income. A pure equity SPV earning only dividends and capital gains is subject only to the reduced test for pure equity holding companies. An SPV holding intellectual property may be carrying on intellectual property business — potentially high-risk IP business — and must satisfy the full test.
In the Schedule to the International Tax Co-operation (Economic Substance) Act and in section III of the DITC’s Economic Substance Guidance v3.2, available on the DITC website.