The Cayman Islands Publish Draft Economic Substance Bill

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The Cayman Islands Publish Draft Economic Substance Bill

Overview

The Cayman Islands government has published a draft International Tax-Co-operation (Economic Substance) Bill which will be debated in the Legislated Assembly this month and is expected to be passed to take effect by 1 January 2019.

This Bill is the latest series of steps by the Cayman Islands to meet its 2017 commitment as an inclusive framework member under the OECD’s global Base Erosion and Profit Shifting (BEPS) initiative. The Bill was also required to address the EU’s findings published in December 2017 that sought to ‘Blacklist’ the Cayman Islands if sufficient substance requirements were not implemented by the end of 2018.

EU Blacklist

In December 2017, the EU Council agreed on a blacklist of 17 countries that the European finance ministers considered uncooperative in tax matters. They also voted on a commitment list of 47 countries that would be deemed uncooperative, according to the EU’s own criteria, had they not agreed in writing to remedy their shortcomings by the end of 2018. The overall goal of the EU list is to improve tax good governance globally, and to ensure that the EU's international partners respect the same standards as EU Member States do.

Throughout 2018, several countries have been removed from the blacklist with only five now remaining on the list, namely, American Samoa, Guam, Samoa, Trinidad and Tobago, and the US Virgin Islands.

The Cayman Islands, along with 46 other countries were required to make commitments by the end of 2018 in order to prevent a blacklisting by the EU. The EU’s assessment considered the Cayman Islands not to have sufficient substance requirements which has brought about this draft bill.

The Draft Bill

The Cayman Islands economic substance bill is built upon the OECD's Forum on Harmful Tax Practices (FHTP), which falls under the OECD's BEPS (Base Erosion and Profit Shifting) Inclusive Framework. The Cayman Islands became a member of the Inclusive Framework in 2017. The BEPS Inclusive Framework sets the global tax standard regarding structures that aim to attract profits in jurisdictions in which they do not conduct real economic activity.

The Economic Substance bill covers legal entities engaged in any of these nine categories of business:

  • Banking
  • Insurance
  • Fund management
  • Headquarters
  • Distribution and service centres
  • Financing or leasing business
  • Shipping
  • Holding companies
  • Intellectual property

If a Cayman Islands entity is conducting relevant business activities in one or more of these categories and if that entity is not tax resident in another jurisdiction, the bill would require the entity to have 'economic substance' in the Cayman Islands. This bill should not apply where a Cayman incorporated company is centrally managed and controlled outside the Cayman Islands and the company is tax resident outside the Cayman islands.

'Economic substance' means that the Cayman entity must undertake substantial business activity, appropriate to the line of business that they are conducting, in the Cayman Islands. This requirement could be fulfilled by activities such as hiring staff and having physical business locations; or outsourcing these activities to a local service provider.

The enactment of this bill by the end of 2018 will satisfy the commitments made to the EU in respect of the EU’s non-cooperative tax jurisdiction initiative.

If you have any questions on this matter, please reach out to your usual Deloitte contact.

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