How to Prepare for Cayman Islands Economic Substance Returns

Cayman Islands Economic Substance regulations are in place to promote fair taxation and reporting of revenue. Familiarisation with requirements and deadlines can help to streamline year-end preparation and planning for a seamless process.

Major offshore financial jurisdictions have economic substance regulations in place primarily to assess whether an entity conducts core income-generating activities (“CIGA”) of sufficient substance in relation to the level of income derived from the entity’s relevant activities in their tax jurisdiction to ensure fair taxation at a global level.

What are the rules to determine economic substance in the Cayman Islands?

The International Tax Cooperation (Economic Substance) Act (as revised) (“the Act”) outlines reporting requirements for certain entities established in the Cayman Islands—namely “relevant entities” conducting “relevant activities”.

Relevant entities engaged in any of the following relevant activities are required to satisfy the Act’s economic substance test (“ES Test”) in respect of that relevant activity to the extent that is not subject to tax in a jurisdiction outside of the Cayman Islands:

• Banking;
• Corporate headquarters;
• Distribution and service centres;
• Finance and leasing;
• Fund management;
• Holding company;
• Insurance;
• Intellectual property; and
• Shipping.

The ES Test has three main components, which are satisfied if the relevant entity:

• carries out CIGA in the Cayman Islands;
• is directed and managed in the Cayman Islands; and
• has adequate physical presence, staff and operating expenditure in the Cayman Islands in relation to that relevant activity.

What constitutes CIGA varies from sector to sector. CIGA constitutes activities that are of central importance to a relevant entity in terms of generating relevant income that must be carried on in the Cayman Islands. For example, fund management businesses would need to show sufficient evidence of conducting within the Cayman Islands activities such as:

• Risk and reserve calculations;
• Investor and regulator returns and reporting;
• Portfolio allocation decisions such as selling or holding investments; and
• Hedging positions on market factors such as interest rates or foreign exchange.

The directed and managed component of the ES Test is designed to ensure that its board of directors, as a whole, has the appropriate knowledge and expertise to discharge its duties as a board of directors in relation to the relevant activity, and there is an adequate frequency of board meetings held and attended in the Islands.

Additionally, having regard to the level of relevant income derived from the relevant activity carried out in the Islands, the relevant entity is required to have an adequate amount of operating expenditure incurred, an adequate physical presence and an adequate number of full-time employees or other personnel with appropriate qualifications in the islands.

The Department for International Tax Cooperation (“DITC”) guidance defines ‘adequate’ in terms of the ES test as “as much as or as good as necessary for the relevant requirement or purpose”, and that what is adequate or appropriate for each relevant entity will be dependent on the particular facts of the relevant entity and its business activity. As such, the directors (or equivalent) of each relevant entity should address their minds to these questions and make their determination in good faith. A relevant entity must ensure that it maintains and retains appropriate records to demonstrate the adequacy and appropriateness of the resources utilised and expenditures incurred.

What are the key deadlines for Cayman Islands economic substance reporting?

A relevant entity that is carrying on a relevant activity in the Cayman Islands and is required to satisfy the ES Test as defined under the Act must prepare and submit an annual Economic Substance return with supporting documents for the purpose of the DITC’s determination whether the ES Test has been satisfied in relation to that relevant activity. The ES return must be made within 12 months after the last day of the end of the relevant entity’s fiscal year (commonly 31 December) via the DITC portal on the DITC website.

The DITC may impose penalties for not meeting annual reporting requirements, as well as failing to meet the ES Test:

Economic Substance penalty overview

How does the Maples Group assist with Economic Substance returns?

The Regulatory Services team at the Maples Group has deep experience and expertise in regulatory deadlines and reporting, including filing of annual Economic Substance returns. As a secondary user, the Maples Group can file on behalf of relevant entities that have notified the DITC that they are engaging in relevant activities necessitating Economic Substance reporting.

The team will collaborate with clients to obtain information about the relevant entity, including key operating information, ownership, financial data, CIGA, assets, physical presence, employees, outsourcing, expenditure and management within the jurisdiction, as applicable, which will be included on the Economic Substance return and filed via the DITC portal to satisfy the annual reporting requirements.

Beyond regulatory reporting such as AEOI and country-by-country reporting (“CbCR”), the Maples Group offers extensive services to support fund management and operations. The Group offers a full suite of fund services solutions, including anti-money laundering, management company (“ManCo”) support for EU fund structures such as AIFM and UCITS, Depository Lite  and EMIR obligations. Complementing our array of fund services are fiduciary and legal teams, ensuring seamless, complementary service under one roof.