On 9 October, the Cayman Islands Government released consultation drafts of the European Union Tax Co-Operation (Economic Substance) Bill and the Companies (Amendment) (No.2) Bill (together the “Draft Bills”) for industry consultation and feedback.
The Draft Bills are a response to the EU’s claims that there is a lack of economic substance of Cayman-based entities, and that Cayman houses structures which attract profits without real economic activity.
Amongst other things, the Draft Bills aim to bring about changes which will see enhanced information gathering, rules on direction and management of companies in the Cayman Islands, substance requirements for affected businesses, sanctions and ongoing monitoring.
The Draft Bills refer to “relevant businesses” and “relevant activity”. Affected companies are those carrying on “relevant activity” such as financing, headquartering, intellectual property holding business, shipping business, banking business, insurance business or fund management business.
Affected companies will be required, within 12 months of the end of their financial year, to prepare and submit a report to the Tax Information Authority to allow the TIA to assess the economic substance requirements that the company is required to comply with based on the relevant activity.
Reports will include matters such as the amount of income generated, expenses and assets related to the activity, the location of premises where the activity was carried out, the number of employees performing the activity and information about where the core income generating activity was conducted.
Affected companies will be deemed to have satisfied the economic substance requirements if they are managed and directed in an appropriate manner from within the Cayman Islands, they have an adequate level of annual expenditure incurred in the Islands, they have adequate resources in the Islands and an adequate number of employees, and they have appropriate books and records in the Islands.
The Draft Bills are still in the Consultation stage and the Cayman Islands Government will be liaising with various working groups to finalise the Draft Bills and subsequently develop draft Regulations, expanding upon the Draft Bills and providing some definition around economic substance standards.