Cayman Islands: Cayman Islands Economic Substance Legislation

New legislation came into effect on 1 January 2019 in the Cayman Islands which requires certain Cayman Islands entities ("Relevant Entities") carrying on certain activities ("Relevant Activities") to demonstrate that they have sufficient "economic substance" in the Cayman Islands (the "Regime").

All Cayman Islands entities need to determine whether the Regime will apply to them and, if so, what measures are required to comply with the Regime.

Cayman Islands entities existing prior to 1 January 2019, which are subject to the Regime, will need to comply by 1 July 2019, and newly established entities will need to comply as soon as they commence any Relevant Activity.

We strongly suggest that you obtain advice to classify your entity under the Regime (even if you believe you are out of scope) and determine what, if any, additional substance you will need to put in place to meet the requirements of the Regime. As a matter of good governance you should document this determination in preparation for notification and reporting which will commence in 2020. Please get in touch with your usual Collas Crill contact or contact us at for further advice in relation to classification and documentation.

The Cayman Islands Tax Information Authority (the "Authority") is responsible for monitoring compliance with the Regime.

Relevant Entity

Under the Regime, a Relevant Entity is:

  • a company, other than a domestic company, that is (i) incorporated under the Companies Law (2018 Revision); or (ii) a limited liability company registered under the Limited Liability Companies Law (2018 Revision);
  • a limited liability partnership that is registered in accordance with the Limited Liability Partnership Law, 2017;
  • a company that is incorporated outside of the Cayman Islands and registered under the Companies Law (2018 Revision);

but does not include:

  • an investment fund; or
  • an entity that is tax resident outside of the Cayman Islands.


Investment Funds

An investment fund is considered to be an entity whose principal business is the issuing of investment interests (meaning a share, unit trust, partnership interest or other right that carries an entitlement to participate in the profits or gains of the entity) to raise funds or pool investor funds with the aim of enabling a holder of such an investment interest to benefit from the profits or gains from the entity's acquisition, holding, management or disposal of investments and includes any entity through which an investment fund directly or indirectly invests or operates (but not an entity that is itself the ultimate investment held).

The definition of investment funds will include mutual funds licensed or registered with the Cayman Islands Monetary Authority ("CIMA") pursuant to the Cayman Islands' Mutual Funds Law (2019 Revision) (the "Mutual Funds Law"), mutual funds exempted from registration under section 4(4) of the Mutual Funds Law and closed-ended investment funds.

Tax Residency

An entity which would otherwise be a Relevant Entity as set out above, will not be considered a Relevant Entity if it is tax resident outside of the Cayman Islands.

An entity may be regarded as tax resident outside the Cayman Islands if it is subject to tax in another jurisdiction by reason of its domicile, residence or any other criteria of a similar nature. An entity which is a "disregarded entity" for US income tax purposes and has a US corporation as its parent will be considered tax resident outside the Cayman Islands provided satisfactory evidence is provided.

Relevant Activity

Relevant Entities will be required to comply with the economic substance requirements under the Regime, if they carry on one or more Relevant Activities.

Relevant Activities are defined as activities in the following categories:

  • banking business;
  • distribution and service centre business;
  • financing and leasing business;
  • fund management business;
  • headquarters business;
  • holding company business;
  • insurance business;
  • intellectual property business; or
  • shipping business.

Investment fund business, defined as the business of operating as an investment fund, is specifically excluded from the definition of a Relevant Activity.

Economic Substance Test

A Relevant Entity conducting one or more Relevant Activities will be required to satisfy an economic substance test in relation to those Relevant Activities which it conducts (the "Test").

In order to satisfy the Test, a Relevant Entity must:

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

For the purpose of the Test, the terms "adequate" or "appropriate" as applicable to each Relevant Entity will be determined on a case-by-cases basis taking into account the particular facts of the Relevant Entity and its Relevant Activity. Collas Crill can advise further in respect of these requirements as they may apply to each Relevant Entity and its Relevant Activity. Please get in touch with your usual Collas Crill contact or contact us at for specific advice on this.

A Relevant Entity that carries on a Relevant Activity but which has no relevant income is not obliged to meet the requirements of the Test. However, the Relevant Entity will still be required to satisfy its notification and reporting obligations under the Regime.

Cayman Islands Core Income Generating Activities

A Relevant Entity must ensure that it conducts its Cayman Islands CIGA in respect of the Relevant Activities in accordance with the Guidance. CIGA are those activities which are of essential importance to a Relevant Entity in terms of income generation. The Guidance sets out a non-exhaustive list of what the CIGAs are considered to be for each category of Relevant Activity.

"Directed and Managed"

The reference within the Test to a Relevant Entity being "directed and managed in an appropriate manner in the Cayman Islands in relation to a Relevant Activity" relates primarily to the requirement for decision-making at a board level to be conducted in the Cayman Islands at an adequate frequency given the level of decision-making required. It is expected that the majority of board meetings will be held in the Cayman Islands and that, even for Relevant Entities with a minimal level of Relevant Activity, there will be at least one meeting of its board of directors in the Cayman Islands per annum.


Outsourcing of Cayman Islands CIGA within the Cayman Islands is permitted and may contribute to the satisfaction of the Test in relation to a Relevant Activity, provided the Relevant Entity is able to adequately monitor and control the carrying out of the Cayman Islands CIGA by that other person. Outsourcing includes outsourcing, contracting or delegating to third parties or entities in the same group and the resources of the outsourced service provider will be taken into consideration when determining whether the people and premises element of the Test is met.

Collas Crill Corporate Services Limited is able to offer certain outsourced services to assist with compliance with the Test. Please get in touch with your usual Collas Crill contact or at for further information.

Variations to Test Requirements

Pure Equity Holding Companies

At present, pure equity holding companies (i.e. entities which only hold "equity participations" in other entities) will be subject to a reduced Test which is satisfied if the company confirms that it has complied with all applicable filing requirements under the Companies Law (2018 Revision) and that it has adequate human resources and adequate premises in the Cayman Islands for "holding and managing" such equity participations. A pure equity holding company may be able to satisfy these reduced substance requirements where it engages and maintains a registered office service provider in the Cayman Islands. A pure equity holding company is not required to be "directed and managed" in the Cayman Islands.

High Risk Intellectual Property Business

A high risk intellectual property business (as defined under the Regime) is subject to a more stringent Test than other intellectual property businesses.

A Relevant Entity that is carrying on a high risk intellectual property business is presumed not to have met the Test for a financial year, even if there are Cayman Islands CIGA relevant to the business and the "intellectual property assets" (as defined) being carried out in the Cayman Islands.

A Relevant Entity may rebut this presumption if it can produce materials to the Authority which demonstrate that there is, and historically has been, a high degree of control over the development, exploitation, maintenance and, protection and enhancement of the intangible "intellectual property asset", exercised by an adequate number of full time employees with the necessary qualifications that permanently reside and perform their activities within the Cayman Islands.

Notification and Reporting


Beginning in 2020, a Relevant Entity will be required to notify the Authority annually of whether or not it is carrying on a Relevant Activity and if so, whether or not all or any part of its gross income in relation to the activity is subject to tax in a jurisdiction outside of the Cayman Islands. A Relevant Entity will also be required to notify the Authority of the date of the end of its financial year.


Within 12 months of the end of its financial year, a Relevant Entity performing a Relevant Activity must prepare and submit a report to the Authority which will allow the Authority to determine whether the Test has been fulfilled by such entity.

The report will include the information relating to the type of Relevant Activities conducted; the amount and type of relevant income, expenses and assets; the location of place of business, plant, property or equipment; and the number of full-time employees or other personnel with appropriate qualifications responsible for carrying on Relevant Activity. The Authority has indicated that it will take a "principles-based" approach to determining whether or not a Relevant Entity has satisfied the Test.

A Relevant Entity which is required to satisfy the Test must retain records in respect of this for a period of 6 years after the end of a financial year.

The Authority may, on notice, require a Relevant Entity to provide certain information or access for inspection various information by the Authority to determine compliance with the Regime.


Relevant Entities conducting Relevant Activities which do not meet the Test may be given direction by the Authority on how shortcomings may be resolved and may face a fine of up to CI$10,000 (US$12,200 equivalent). Ongoing failure by a Relevant Entity to meet the requirements of the Test in the following year may result in additional fines of up to CI$100,000 (US$122,000 equivalent) and further failures could lead to a Relevant Entity being struck off the register after two consecutive years of failure.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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