HSM

HSM Corporate Services

29/09/2021 | hsmoffice

Timing Considerations for Year-end Company Dissolutions

As we draw closer to the end of 2021, many clients will be considering their Cayman Islands company structures and querying whether any entities are surplus to requirements. The desire to wind up any Cayman entities before the end of Read more +

26/07/2021 | hsmoffice

HSM Produces Updates to the Cayman Islands Economic Substance Regime

Most clients are now relatively familiar with the Cayman Islands Economic Substance regime requiring real economic substance for certain entities (known and ‘Relevant Entities’) carrying or certain activities (known as ‘Relevant Activities’). Our firm’s previous article on the introduction of Read more +

26/05/2020 | hsmoffice

Fee Concessions for Small and Micro Businesses in the Cayman Islands

The Trade & Business Licensing (Amendment of Schedule) Regulations, 2020 (the “Amendment Schedule”) has been gazetted as of 1 May 2020. Whilst earlier amendments to the Cayman Islands Trade & Business Licencing (“TBL”) regime got much coverage in the local Read more +

23/03/2020 | hsmoffice

Cayman Set to Introduce New Virtual Asset Legislation

Further to the Cayman Islands Governments’ recent changes to the Anti Money Laundering (AML)/Combatting the Financing of Terrorism (CFT) regime to include virtual asset services as “relevant financial business” the jurisdiction is now set to implement a registration and licensing Read more +

HSM Produces Economic Substance Overview

Through the International Tax-Co-operation (Economic Substance) Law, 2018, the concept of an Economic Substance Test has been introduced and certain businesses must satisfy new requirements. The test applies to any “in scope” businesses and requires that any “relevant entity” carrying on a “relevant activity” must pass a 3 pronged test. Download our client guide to determine if your business is within scope or continue reading below.

Economic Substance HSM Guide

Economic Substance Test
Certain categories of business operating from within the Cayman Islands must be in a position to demonstrate that, relative to the size and nature of their operations, they have sufficient “economic substance”. Such substance is measured in terms of a demonstrable physical presence, including of the mind, management and control of a relevant organisation.

If you are a relevant entity carrying on a relevant activity – you must:
(a) conduct Cayman Islands core income generating activities in relation to that relevant activity
(b) be directed and managed in an appropriate manner in the Islands in relation to that relevant activity; and
(c) having regard to the level of relevant income derived from the relevant activity carried out in the islands –
a. have an adequate amount of operating expenditure incurred in the islands;
b. have an adequate physical presence (including maintaining a place of business or plant, property and equipment) in the Islands; and
c. have an adequate number of full time employees or other personnel with appropriate qualifications in the Islands.

Definitions

A relevant entity is:

1. A company (other than a domestic company) that is-
a) incorporated under the Companies Law (as Revised) or
b) an LLC registered under the Limited Liability Companies Law (as Revised).

2. A Limited Liability Partnership that is registered under in accordance with the Limited Liability Partnership Law (as Revised)

3. A foreign company registered in the Cayman Islands under part IX of the Companies Law (as Revised)

Investment Funds or entities which are tax resident outside of the Islands are not considered relevant entities.

An “Investment Fund” is defined as an entity whose principal business is the issuing of investment interests to raise funds or pool investor funds with the aim of enabling a holder of such an investment interest to benefit from the profits or gains from the entity’s acquisition, holding, management or disposal of investments and includes any entity through which an investment fund directly or indirectly invests or operates.

A domestic company is a company that is not part of an MNE Group that is:

1. Carrying on business in the islands and which complies with s.4(1) of the Local Companies Control Law (as Revised) i.e. is Caymanian owned and controlled (at least 60% of the board of directors is comprised of Caymanians and at least 60% of the issues shares are held in the names of Caymanians) or holds a valid Trade and Business Licence under the Trade and Business Licensing Law (as Revised), is licensed under the Banks & Trust Companies Law (as Revised) or is otherwise operating under a franchise granted by the Cayman Islands Government.

2. A Company Limited by Guarantee or an “Association not for Profit” under s.80 of the Companies Law (as Revised).

Or a subsidiary of such company.

An MNE Group is a Group with annual revenues of at least US$850m total consolidated group revenue.

“Group” means a collective of two or more enterprises that are tax resident in different jurisdictions and are related through ownership or control such that it is (or would be traded on a public securities exchange) required to prepare Consolidated Financial Statements for financial reporting purposes.

A relevant entity is in scope if it is carrying on one or more of the below relevant activities:

a) Banking business;
i.e. 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.

b) Distribution and service centre business;
i.e. the business of either or both of the following –
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 islands
b) providing services to an entity in the same Group in connection with the business outside of the Islands

but does not include any activity included in any other relevant activity except holding company business. For the avoidance of doubt, b) above only falls within the definition in the specific circumstances where the relevant entity is operating as a service centre for entities in the same Group.

c) Financing and leasing business;
i.e. 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.

d) Fund management business;
i.e. the business of managing securities as set out in paragraph 3 of Schedule 2 to the Securities Investment Business law (2019 Revision) carried on by a relevant entity licensed or otherwise authorised to conduct business under that Law for an investment fund.

e) Headquarters business;
i.e. 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.

f) Holding company business;
i.e. the business of a ‘pure equity holding company’, which itself is defined to mean ‘a company that only holds equity participations in other entities and only earns dividends and capital gains’.

g) Insurance business;
i.e. 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.

h) Intellectual property business; or
i.e. the business of holding, exploiting or receiving income from intellectual property assets and ‘intellectual property asset’ means an intellectual property right including a copyright, design right, patent and trade mark.

i) Shipping business
Means any of the following activities involving the operation of a ship anywhere in the world other that in the territorial waters of the Islands or between the 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 describe 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.

Given the above, the test can be substantially satisfied through the employment of persons within the Islands to carry out the relevant activity or activities. The Cayman Islands may already have persons with the requisite skills and expertise already resident, but where such skills are unavailable, or if available, are not available in sufficient number, then any required persons can be brought into the Islands from overseas. Such persons can bring with their spouses and children (amongst others) following a well-established immigration regime overseen by a Cayman Islands Government Department, “Workforce Opportunity and Residence Cayman” (WORC).

Compliance, Filings and Penalties
Relevant Entities in existence prior to 1 January 2019 must satisfy the economic substance test in relation to a Relevant Activity from 1 July 2019. Relevant Entities formed on or after 1 January 2019 must satisfy the economic substance test in relation to a Relevant Activity from the date on which the Relevant Entity commences the Relevant Activity.

Starting in 2020 all Relevant Entities carrying Relevant Activities are required to satisfy the economic substance test and submit details to the Cayman Islands Tax Information Authority (the “TIA”). Failure to comply can result in an initial fine of CI$10,000 which can increase to CI$100,000 with continued failure to comply and being struck from the Registrar of Companies.

Next Steps
If you are affected by this Law or if you are unsure, contact our team for tailored advice. We can help determine whether a client is “in scope” or “out of scope” in relation to the economic substance test and if affected, provide administrative support as well as provide immigration advice to issues that may arise.

Key Contacts:

Nick Joseph Economic Substance Cayman

Nick Joseph (Partner)
njoseph@hsmoffice.com
Tel: +1 345 815 7425

Peter de Vere Economic Substance Cayman

Peter de Vere (Head of Corporate and Commercial)
pdevere@hsmoffice.com
Tel: +1 345 815 7360