Checking in with Cayman Islands Economic Substance
As we are all perhaps painfully aware, in recent years the Cayman Islands have been facing increased scrutiny from international regulatory bodies over its use of offshore financial structures. As a result, the government of the Cayman Islands has taken steps to ensure that the jurisdiction is compliant with global standards for transparency and accountability. One of these steps was the introduction of economic substance legislation.
The Cayman Islands Economic Substance Act (ES Act) came into force on January 1, 2019. The ES Act requires certain entities that are incorporated or registered in the Cayman Islands to demonstrate that they have sufficient economic substance in the Cayman Islands. The legislation aims to address concerns raised by the European Union and the Organisation for Economic Co-operation and Development (OECD) over the use of offshore financial structures for tax avoidance purposes.
Under the legislation, certain entities, including those engaged in banking, insurance, fund management, financing and leasing, and intellectual property activities, are required to demonstrate that they have a physical presence in the Cayman Islands and that their business operations are conducted locally. They must ensure the entity’s mind and management is suitably qualified and experienced to perform the role and are present in Cayman when material and strategic decisions are being made. They must also have an adequate number of qualified employees, incur a sufficient amount of operating expenditure, and have adequate physical assets in the jurisdiction to successfully meet the ES test.
The first reviews of economic substance compliance by the Cayman Islands authorities have now been completed. The authorities have indicated that they are taking a “proactive” approach to enforcement.
The government has also stated that it is committed to working with the private sector to ensure that the legislation is implemented in a way that is both practical and efficient.
While the authorities have generally been satisfied with the level of compliance that they have seen, there have been many cases where entities have been found to be non-compliant or merely partially compliant. In discussion with various parties, it appears clear that the authorities have had plenty of ‘low hanging fruit’ to concentrate their efforts on.
It is our understanding that the authorities will be working their way ‘up the tree’ and entities that may have been deemed compliant in year one, will perhaps face increased scrutiny in subsequent years as the authorities refine and develop their review and investigative procedures.
In our view, the ES Act is a positive regime for the Cayman Islands. While clearly, some stakeholders have expressed concerns that the legislation will lead to increased costs and administrative burdens, particularly for smaller businesses, others have welcomed the legislation as a necessary step to protect the Cayman Islands’ reputation as a reputable and transparent financial centre. The government’s commitment to working with stakeholders to ensure its effective implementation suggests that it will ultimately benefit both the jurisdiction and the global financial system.
At Artemis, we specialise in helping investment management companies, and finance and leasing businesses meet their economic substance obligations.
