Economic substance requirements in 2023
- Annually before 31 January, all Cayman Islands entities must file an annual economic substance report with the Department for International Tax Cooperation. From this report, the Cayman Islands Government sends FATCA and CRS reports to foreign Governments including details of i) shareholders and directors and beneficial owner names and addresses and ii) USA taxpayer identification number (if relevant) and iii) passport details and iv) bank signatory details.
- The purpose of this annual report is to give comfort to the Cayman Islands Government that i) their local entities are not misused for overseas tax avoidance and ii) the country is not perceived as a tax haven and iii) local entities have sufficient ‘economic substance’ or permanent establishment presence in the country.
- A Cayman Islands entity has economic substance when i) it has local physical office premises and Staff and ii) important director decisions are made in the country and iii) income generating activities occur from the Cayman Islands office and iv) the Cayman entity has an adequate amount of operating expenditures incurred in or from within the Islands.
- If a Cayman Islands entity supplies evidence of paying tax in an overseas country, there is no need to prove economic substance in the Cayman Islands. Failure to prove local economic substance, then the Cayman Islands entity should be taxed in an overseas country.
- Cayman Islands entities carrying on these business activities must maintain a local permanent establishment or operational economic substance:
Parent holding companies Intellectual property Distribution and service centres Headquarters businesses Banking & Insurance Fund management Finance and leasing Shipping
- Caymans Islands companies carrying out these relevant activities are required to file a basic economic substance reporting return to the Department for International Tax Cooperation comprising details of i) the amount and type of income from the relevant activity and ii) including related expenses and assets and iii) details of management and employees and physical office; and
- Economic substance means that any entity conducting business activities in Cayman, who is not a tax resident in another jurisdiction, must undertake substantial business activity related to its core operations in the Cayman Islands.
- To comply with this requirement, such entities must file an Economic Substance notification via the Cayman General Registry system.
- Failure to comply with the ES Act will result in fines of up to US$100,000 and, potentially, in a non-compliant company being struck off. The details of non-compliant companies will also be disclosed to the relevant foreign tax authorities.