Economic Substance For Geographically Mobile Activities ...

1 Tax Information Authority CAYMAN ISLANDS Economic Substance For Geographically Mobile Activities GUIDANCE Issued pursuant to section 5 of The International Tax Co-operation ( Economic Substance ) Act (2021 Revision) as amended ( ES Act ) Date of Issue: July 2022 Version This Guidance version replaces the Guidance version issued on 30 June 2021. i Cayman Islands Economic Substance Guidance July 2022 Contents I. Legislative Framework .. 1 A. ES Act .. 1 1. Introduction .. 1 2. Background .. 1 3. Summary of the ES Act .. 2 4. The Authority .. 2 5. Notification and Reporting .. 3 6. Circumvention .. 3 B. ES Regulations .. 3 C. This Guidance .. 4 1. Purpose of this Guidance .. 4 2. Interpretation in this Guidance .. 4 II. Scope of the ES Act .. 5 A. Entity .. 5 B. Relevant Entity .. 5 1. Relevant Entity carrying on relevant Activities .. 6 2. Entities that are not Relevant Entities.

2 6 3. Cayman Enterprise City s Special Economic Zones (SEZ) .. 13 C. Relevant Activities .. 14 1. Types of relevant Activities .. 14 2. Liquidation or otherwise ceasing to carry on relevant Activities .. 14 D. Relevant Income .. 15 E. Ultimate Parent and Group .. 15 III. The Economic Substance Test ( ES Test ) .. 17 A. General 17 1. Compliance with the ES Test .. 17 2. Core Income Generating Activities (CIGA) .. 17 Figure 1: CIGA for each type of relevant activity .. 19 3. Meaning of adequate and appropriate .. 25 4. Outsourcing .. 26 5. Directed and managed .. 27 ii Cayman Islands Economic Substance Guidance July 2022 B. Sector-Specific Guidance on Relevant Activities .. 28 IV. Notification and Reporting .. 28 A. Notification to the Authority .. 28 B. Reporting to the 29 C. Example timetables for existing and new relevant entities .. 31 Figure 2: Example timetable for an existing relevant entity.

3 32 Figure 3: Example timetable for an new relevant entity .. 33 V. Authority s functions .. 34 A. Determination of whether ES Test is satisfied .. 34 1. Failure to satisfy ES Test .. 35 2. Misleading information .. 36 3. Offence by officers of a body corporate .. 36 B. Sharing of information .. 36 1. Other Competent Authorities .. 36 2. Monitoring Processes .. 37 3. Confidentiality .. 37 VI. Glossary .. 38 VII. External Reference Materials .. 46 A. OECD Reference Materials .. 47 B. EU Reference Materials .. 48 The Schedule: Sector Specific Guidance .. 49 A. Banking Business .. 50 1. Scope of Banking Business .. 50 2. CIGA for Banking Business .. 52 3. Outsourcing .. 52 4. Examples .. 52 5. Reporting on Banking Business .. 53 B. Distribution and Service Centre Business .. 54 1. Scope of Distribution and Service Centre Business .. 54 2. CIGA for Distribution and Service Centre Business.

4 54 3. Examples .. 55 4. Reporting on Distribution and Service Centre Business .. 56 iii Cayman Islands Economic Substance Guidance July 2022 C. Financing and Leasing Business .. 57 1. Scope of Financing and Leasing Business .. 57 2. CIGA for Financing and Leasing 57 3. Examples .. 58 4. Reporting on Finance and Leasing Business .. 59 D. Fund Management Business .. 60 1. Scope of Fund Management Business .. 60 2. CIGA for Fund Management Business .. 62 3. Reporting on Fund Management 63 E. Headquarters Business .. 64 1. Scope of Headquarters Business .. 64 2. CIGA for Headquarters Business .. 64 3. Examples .. 65 4. Reporting on Headquarters Business .. 66 F. Holding Company Business .. 67 1. Scope of Holding Company Business .. 67 2. The ES Test for Holding Company Business .. 67 3. Examples .. 67 4. Reporting on Holding Company Business .. 69 G. Insurance Business .. 70 1. Scope of Insurance Business.

5 70 2. CIGA for Insurance Business .. 72 3. Reporting on Insurance Business .. 74 H. Intellectual Property Business .. 75 1. Scope of IP Business .. 75 2. Economic Substance Test (ES Test) for IP Business .. 75 3. CIGA for IP Business: .. 75 4. High Risk IP: .. 77 Figure 4. Application of Substance requirements for IP income .. 79 5. Examples .. 80 6. Reporting on IP Business .. 81 I. Shipping Business; .. 82 iv Cayman Islands Economic Substance Guidance July 2022 1. Scope of Shipping Business .. 82 2. CIGA for Shipping Business .. 83 3. Examples .. 84 4. Reporting on Shipping Business .. 85 Appendix to Guidance .. 86 General Partnerships, Limited Partnerships, Exempted Limited Partnerships & Foreign Limited Partnerships .. 86 A. 2021 Amendment Regulations and 2021 Prescribed Dates Amendment Regulations .. 86 1. Economic Substance Notification form (ESN) .. 90 2. Economic Substance Return (ES Return).

6 90 3. Tax Resident Outside the Islands form (TRO) .. 90 1 Cayman Islands Economic Substance Guidance July 2022 I. Legislative Framework A. ES Act 1. Introduction This Guidance for the International Tax Co-operation ( Economic Substance ) Act (2020 Revision) as amended by the International Tax Co-operation ( Economic Substance ) (Amendment) Act, 2020 (the ES Act ) provides support for understanding the law s scope, and how to comply with the law. The Economic Substance concepts underpinning the ES Act are similar to those found in legal systems of other jurisdictions. The common denominator for these systems is the OECD Forum on Harmful Tax Practices ( FHTP ), which sets the global standard that requires companies to have substantial Activities in a jurisdiction (also known as Economic Substance ). Over 135 jurisdictions are members of the OECD beps Inclusive Framework including the Cayman Islands and all other UK Crown Dependencies and Overseas Territories ( UK CDOTs ).

7 The FHTP is a sub-body of the Inclusive Framework, and is responsible for assessing and monitoring the beps action 5 (which can impose Substance requirements) for all member jurisdictions. In November 2018, the OECD beps Inclusive Framework agreed to resume the application of the substantial Activities factor to no or only nominal tax jurisdictions, and agreed guidance on how this factor was to be interpreted. That decision is recorded in OECD (2018), Resumption of application of substantial Activities for no or nominal tax jurisdictions beps action 5, OECD, Paris. All UK CDOTs with no or nominal corporate income tax are now included in the FHTP s work. The FHTP does not consider that the absence of a corporate tax rate, or any particular level of corporate income tax, is in itself harmful. The purpose of considering nominal tax jurisdictions along with zero tax jurisdictions is to ensure that there is not an incentive for zero rate jurisdictions to shift to a rate near zero.

8 The FHTP will review compliance with the Substance requirements to ensure that the requirements are implemented effectively, and to ensure a level playing field (as between the no or only nominal tax jurisdictions, as well as with jurisdictions offering preferential regimes). 2. Background The ES Act was enacted in response to the work of the OECD and the European Union (EU) on fair taxation. Please refer to the Section VII below headed External Reference Materials for background information on that work. This is useful context for gaining insight into the beps action 5 international standard developed by the FHTP. That standard requires Geographically Mobile Activities to have Substance regardless of whether the Activities are conducted in a no or nominal tax jurisdiction or in a preferential tax regime of a jurisdiction that has corporate income tax.

9 2 Cayman Islands Economic Substance Guidance July 2022 3. Summary of the ES Act The ES Act came into force on 1 January 2019. The Economic Substance test ( ES Test ) requires that a relevant entity conducting a relevant activity: (a) conducts core income generating Activities ( CIGA ) in relation to that relevant activity; (b) is 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 - (i) has an adequate amount of operating expenditure incurred in the Islands; (ii) has an adequate physical presence (including maintaining a place of business or plant, property and equipment) in the Islands; and (iii) has an adequate number of full-time employees or other personnel with appropriate qualifications in the Islands.

10 A relevant entity is subject to the ES Test under the ES Act from the date on which the relevant entity commences a relevant activity unless the relevant entity was in existence prior to 1 January 2019, in which case it must comply with the ES Act by 1 July 2019. CIGA means Activities that are of central importance to a relevant entity in terms of generating relevant income and must be carried on in the Cayman Islands. The definition lists Activities included in CIGA in respect of each type of relevant activity. A relevant entity conducting a relevant activity may satisfy the ES Test by outsourcing the conduct of its CIGA to another person in the Islands. A relevant entity that outsources its CIGA must be able to monitor and control the carrying out of the CIGA. Please refer to Section below headed Relevant Entity , Section below headed Relevant Activities and to Section below headed Core Income Generating Activities (CIGA) for the meaning of those key terms.