The ES Act requires Cayman Islands incorporated companies, limited liability companies, limited liability partnerships and registered foreign companies to file an economic substance notification. General partners of general partnerships, limited partnerships, exempted limited partnerships, registered foreign limited partnerships are also required to file an economic substance notification with respect to each partnership. It also requires a “relevant entity” conducting “relevant activity” to report to the Tax Information Authority ("TIA") and maintain economic substance in the Cayman Islands. A “relevant entity” which does not conduct “relevant activity” is not required to submit an economic substance report. A “relevant entity” which receives no “relevant income” is not required to maintain economic substance. 

Cayman Islands incorporated companies (other than certain domestic companies which carry on business within the Cayman Islands or associations not for profit), limited liability companies, limited liability partnerships, Cayman Islands partnerships (including general partnerships, limited partnerships, exempted limited partnerships and registered foreign limited partnerships, but excluding other than certain domestic partnerships which carry on business within the Cayman Islands) and registered foreign companies, are “relevant entities” unless excluded as set out below.

Investment funds, as defined in the ES Act, are excluded from the definition of “relevant entity”. The definition of an investment fund includes entities through which an investment fund directly or indirectly invests or operates (but not an entity that is itself the ultimate investment held).

An entity which is tax resident in another jurisdiction is also excluded from the definition of “relevant entity”. An entity other than a general partnership, limited partnership, exempted limited partnership or registered foreign limited partnership will be regarded as tax resident in another jurisdiction if it is subject to corporate income tax on all its income from a “relevant activity” by virtue of its tax residence, domicile or any other criteria of a similar nature in that other jurisdiction. An entity that can evidence that it is a “disregarded entity” for US income tax purposes and has a US corporation as its parent will also be regarded as tax resident in another jurisdiction. A limited partnership, exempted limited partnership, or foreign limited partnership will be regarded as tax resident in another jurisdiction if the general partner provides objective and sufficient evidence that the place of effective management of the partnership is in another jurisdiction and the partnership (a) is subject to tax in that other jurisdiction; or (b) is required to satisfy a test in that other jurisdiction which is substantially the same as the economic substance requirements under the ES Act.

Trusts are not “relevant entities”.

Each of the following activities, which have been identified by the OECD as “geographically mobile” is a “relevant activity” as defined further in the ES Act.

1. banking business;
2. distribution and service centre business;
3. financing and leasing business;
4. fund management business;
5. headquarters business;
6. holding company business;
7. insurance business;
8. intellectual property business; and
9. shipping business.

A “relevant entity” that conducts more than one “relevant activity” is required to satisfy the ES Test in relation to each relevant activity. Please see the appended schedule for further details of the relevant activities (and the corresponding CIGA).

Please click here for further details of the relevant activities.

Please click here for further details of the relevant activities and the corresponding CIGA.

A relevant entity that conducts a relevant activity must satisfy an ES Test ("ES Test") in relation to that relevant activity. A relevant entity satisfies the ES Test in relation to a relevant activity if the relevant entity: 

1. conducts its core income generating activities ("CIGA") in relation to that relevant activity in the Cayman Islands;
2. is directed and managed in an appropriate manner in the Cayman Islands in relation to that relevant activity; and
3. having regard to the level of relevant income derived from the relevant activity carried out in the Cayman Islands:
   1. has an adequate amount of operating expenditure incurred in the Cayman Islands;
   2. has an adequate physical presence (including maintaining a place of business or plant, property and equipment) in the Cayman Islands; and
   3. has an adequate number of full-time employees or other personnel with appropriate qualifications in the Cayman Islands.

Entities registered with the General Registry must provide a notification to the TIA annually via the General Registry prior to the entity submitting its annual return. Such an entity is required to confirm whether the ES Act applies to it, and in some cases provide certain details such as its financial year end date. For example, if an entity is conducting a relevant activity but its gross income in relation to that activity is subject to tax in a jurisdiction outside of the Cayman Islands, the entity is required to confirm this in the notification and may need to provide appropriate supporting evidence at a later date. For companies, limited liability companies, limited liability partnerships and registered foreign companies, this obligation commenced in 2020. For general partnerships, limited partnerships, exempted limited partnerships and registered foreign limited partnerships, this obligation will commence in 2022 as a prerequisite to filing its annual return.

Relevant entities conducting relevant activities that are required to satisfy the ES Test must prepare and submit to the TIA an annual report containing prescribed information for the purpose of the TIA’s determination whether the ES Test has been satisfied in relation to that relevant activity within twelve months after the last day of the end of each financial year.

For companies, limited liability companies, limited liability partnerships and registered foreign companies, this obligation is in respect of the financial year commencing on or after 1 January 2019 (for example, where the financial year is 1 January 2020 to 31 December 2020, such entity would be required to submit the first annual report on or before 31 December 2021.

As mentioned above, entities that re-registered as “registered persons” with CIMA prior to 15 January 2020 have only been required to comply with the ES Act in respect of fund management business since the date of re-registration. Therefore, such entities were not be required to file a first annual report until 2021. 

 General partnerships, limited partnerships, exempted limited partnerships and registered foreign limited partnerships that are conducting relevant activity are required to submit an annual report no later than twelve months after the last day of the end of each financial year of the relevant entity commencing on or after 1 July 2021. For example, if such a partnership has a financial year end of 31 December, the first financial year after 1 July 2021 will commence on 1 January 2022. The end of that financial year will be 31 December 2022. The partnership would be required to file an economic substance annual report by 31 December 2023. That being said, as noted above, general partnerships, limited partnerships, exempted limited partnerships and registered foreign limited partnerships formed on or after 30 June 2021 must have satisfied the ES Test from the date the entity starts carrying out a relevant activity.

 Where a relevant entity that is required to satisfy the ES Test fails to prepare and submit the annual report to the TIA by the deadline, the entity may be subject to a penalty of CI$5,000 (or US$6,250) and an additional penalty of CI$500 (or US$625) for each day during which the failure to comply continues.

A relevant entity will, so long as it exists, continue to have any obligations which the ES Act imposes on it (and which the liquidators or equivalent must ensure it satisfies). However, a relevant entity which is finally dissolved or completes winding up before it is possible to notify or report for the purposes of the ES Act will not be required to do so.

The TIA has the power, in accordance with the ES Act and the ES Guidance, to make a determination as to whether a ”relevant entity” satisfies the ES Test for any financial year. The TIA takes a principles-based approach to determining whether or not a “relevant entity” has satisfied the ES Test with respect to its “relevant activities”.

If the TIA determines that a relevant entity has failed to satisfy the ES Test for a financial year it will issue a notice to the relevant entity notifying the relevant entity of such determination, giving the reasons, directing any action to be taken to satisfy the ES Test and advising of the relevant entity’s right to appeal.

The TIA will impose a penalty of CI$10,000 (or US$12,500) on a relevant entity for failing to satisfy such ES Test or CI$100,000 (or US$125,000) if it is not satisfied in the subsequent financial year after the initial notice of failure. Following failure after two consecutive years the Grand Court may make an order requiring the relevant entity to take specified action to satisfy the ES Test or an order that the relevant entity is defunct or to be struck off.

It is an offence for a person to knowingly or wilfully supply false or misleading information to the TIA under the ES Act. Such an offence is punishable on summary conviction by a fine of CI$10,000 or with imprisonment for a term of five years, or both. A person also commits an offence if they fail to provide or make available to the TIA within the time specified, or knowingly or wilfully alter, destroy, mutilate, deface, hide or remove, any information requested by the TIA under the ES Act that is in that person’s possession or control. This offence is punishable on summary conviction by a fine of CI$10,000 or with imprisonment for a term of two years, or both.

It is also an offence to disclose information relating to the affairs of a relevant entity or any officer, customer, investor, member, client or policyholder of a relevant entity. Such an offence is punishable on summary conviction to a fine of CI$10,000 or to imprisonment for one year, or to both, and on conviction on indictment to a fine of CI$50,000 (or US$60,000), or to imprisonment for a term of three years, or to both.

Where an offence under the ES Act that has been committed by a body corporate is proved to have been committed with the consent or connivance of, or to be attributable to any neglect on the part of any director, manager, secretary or other officer of the body corporate, such person as well as the body corporate, commits that offence and is liable to be proceeded against and punished accordingly. Where the affairs of a body corporate are managed by its members, the foregoing will apply in relation to defaults of a member in connection with the member’s functions of management as if the member were a director of the body corporate.

When considering mitigating steps to ensure an entity’s compliance with, or exemption from, the ES Act, it is worth noting that the TIA will monitor arrangements which appear to be circumvention mechanisms and will investigate cases where a person has entered into any arrangement the main purpose or one of the main purposes of which is to circumvent any obligation under the ES Act. This will be the case where an entity seeks to manipulate or artificially suppress its income to circumvent substance requirements.

Entities that are potentially in scope of the ES Act should consider the implications of restructuring (or similar) exercises which have the ultimate effect of seemingly removing or reducing economic substance requirements while not otherwise factually altering the activities carried on in the Cayman Islands.

International standards are continuing to develop and it is anticipated that the ES Act and ES Guidance may also evolve and are subject to further clarification. The Cabinet may make regulations prescribing anything that may be prescribed under the ES Act and amending the ES Act, including to further define the scope of relevant entities that are required to satisfy the ES Test and the scope of relevant activities.