What are the Economic Substance requirements for a fund management company in the Cayman Islands?

A Cayman Islands fund management company that earns income from managing investments must satisfy the Economic Substance (ES) test under the International Tax Co-operation (Economic Substance) Act, 2018 (as revised). The test has three requirements: the company must conduct its core income generating activities (CIGAs) in the Cayman Islands, be directed and managed there, and maintain adequate operating expenditure, physical presence and qualified personnel locally.

What counts as fund management business?

Fund management business is a ‘relevant activity’ under the ES Act. It covers the business of managing the investments of one or more investment funds as agent. A Cayman entity that acts as a general partner or investment manager to a fund and receives management fees or carried interest will ordinarily be conducting fund management business and is therefore a ‘relevant entity’ subject to the ES regime, unless it is itself an investment fund, or is tax resident in another jurisdiction.

The four prescribed CIGAs for fund management

The ES Act sets out four activities that are examples of CIGAs for fund management:

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

These examples are neither exhaustive nor mandatory. The TIA considers which elements of CIGA the entity actually conducts in the Cayman Islands as part of its overall assessment. The critical requirement is that whatever CIGAs the entity does conduct must be conducted in the Cayman Islands.

Directed and managed in the Cayman Islands

A fund management company is directed and managed in an appropriate manner in the Cayman Islands if:

1. its board has appropriate knowledge and expertise;
2. board meetings are held in the Cayman Islands with a quorum physically present, at adequate frequency given the level of decision-making required;
3. minutes record the making of strategic decisions at those meetings; and
4. minutes and records are kept in the Cayman Islands.

Where a quorum is required to be physically present in the Cayman Islands, participation solely by telephone or video conference from outside Cayman will not satisfy that aspect of the directed-and-managed test.

Adequate expenditure, physical presence and personnel

What is ‘adequate’ is assessed by reference to the level of relevant income the entity earns and the nature of its activities. The ES Guidance does not prescribe minimum headcounts or expenditure thresholds because these would be arbitrary across different fund structures. A fund management company must, however, be able to demonstrate that the resources it deploys in the Cayman Islands are proportionate to the income it receives and the decisions it takes. Full-time employees or personnel with appropriate qualifications must be present in the Cayman Islands.

Licensed fund managers – additional considerations

Entities holding a fund manager licence from CIMA are still subject to the ES regime. However, CIMA’s licensing requirements, which already impose standards around staffing, governance and local infrastructure, create significant overlap with the ES test. A CIMA-licensed manager operating in compliance with its licence conditions will often already satisfy much of what the ES test requires, though it must still meet all notification and reporting obligations under the ES Act.

Notification and reporting

All Cayman entities must file an annual Economic Substance Notification with the Tax Information Authority (TIA). A fund management company that conducts a relevant activity and receives relevant income must also file an annual ES Report within twelve months of its financial year end. Failure to file currently carries an initial penalty of CI$5,000, with CI$500 accruing for each day of continued non-compliance.

For fund management companies, the practical challenge is ensuring that genuine decision-making occurs on-island and is properly documented, not simply that meetings are held there in name.

Related questions: What is a Core Income Generating Activity (CIGA) for Economic Substance purposes? | Can a Cayman Islands entity outsource its Core Income Generating Activities and still satisfy Economic Substance? | What are the Economic Substance requirements for a Cayman Islands intellectual property holding company?

wb.group specialises in Economic Substance compliance for Cayman Islands fund management entities. Contact us to discuss your structure.