The Cayman Islands government has published draft tax legislation that will have far-reaching impact for the offshore finance industry operating in the jurisdiction by demanding that certain Cayman-registered companies have an adequate level of economic substance locally.
The International Tax Co-operation (Economic Substance) Bill 2018 introduces a substance test for banking, insurance, fund management and shipping companies; entities functioning as headquarters or distribution and service centres; and businesses engaged in financing and leasing or holding intellectual property.The legislation - published on December 6 - seeks to incorporate the OECD's proposals under Action 5 of the base erosion and profit shifting (BEPS) project, on countering harmful tax practices, as well as the new EU substance requirements.
For a business to qualify as tax resident in Cayman, entities must have substantial business activity locally; for example, in terms of staffed offices and management decisions made on island, local news outlet Cayman Compass reports.
The Ministry of Financial Services said the new requirements "could be fulfilled by activities such as hiring staff and having physical business locations; or outsourcing these activities to a local service provider."
Under the proposed legislation, companies will pass the economic substance test if they conduct core income generating activities on island; incur an adequate amount of operating expenditure in Cayman; have a physical presence locally; and have an adequate number of full-time staff locally.
"If a Cayman 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," the ministry said.
Cabinet will define what is adequate in related regulations, according to the legislative proposal.
There are more stringent standards for intellectual property holding companies, which must prove that they historically maintained control on island over intangible property assets, to be recognized as tax resident in Cayman.
The government has also released a bill to amend the Local Companies (Control) Law that would allow exempted companies to carry out business in the islands.