Cayman Islands Regulatory Update – The December 2023 Economic Substance Return Filing Deadline – – Cayman Islands

In our latest economic substance briefing, Appleby and its
affiliate Appleby Global Services remind clients subject to the ES
Test of this economic substance filing obligation.

DECEMBER 2023 FILING DEADLINE

A relevant entity carrying out one or more relevant activities
(as described below) must demonstrate that there is a sufficient
nexus between their business activities and the Cayman Islands, and
maintain substance in the Cayman Islands by satisfying the economic
substance test (ES Test).

As part of complying with the ES Test, all relevant entities are
also required to file an economic substance return (ES
return) with the Tax Information Authority
(TIA) within twelve months following the last day
of their financial year end.

This means that entities with a financial year end of 31
December are required to file their ES
return by 31 December 2023 for their 2022
financial year in order to demonstrate compliance with the ES
Test.

JANUARY 2024 FILING DEADLINE

All legal entities domiciled or registered in the Cayman Islands
are required to file an economic substance notification
(ESN) to the TIA by 31 January
each calendar year irrespective of whether or not they are a
relevant entity conducting a relevant activity during their
previous financial year. The ESN is filed with the General Registry
and is a prerequisite to filing an entity’s annual return.

Appleby and Appleby Global Services can guide you through this
process to help ensure you are fully compliant with all economic
substance compliance obligations including reporting
requirements.

ES TEST

The test for determining whether or not an entity is subject to
the ES Test is as follows:

• an entity must be a relevant entity; and




• that entity must be carrying on one or more relevant
  activities.

A relevant entity means any of the following
entities:

• ordinary company;




• limited liability company;




• limited liability partnership and exempted limited
  partnership;




• Cayman Islands registered foreign company; and




• Cayman Islands registered foreign limited partnership.

A relevant activity means one or more of the
following nine relevant activities:

• banking business;




• distribution and service centre business;




• financing and leasing business;




• fund management business;




• headquarters business;




• holding company business;




• insurance business;




• intellectual property business; and




• shipping business.

The ES Test requires a relevant entity conducting a relevant
activity:

• to conduct core income generating activities in relation to
  that relevant activity in the Cayman Islands;




• be directed and managed in an appropriate manner in the Cayman
  Islands in relation to that relevant activity; and




• having regard to the level of relevant income derived from the
  relevant activity carried out in the Cayman Islands
  

  • incur an adequate amount of operating expenditure in the Cayman
    Islands;

  
  

  • have a physical presence (e.g., place of business, property and
    equipment) in the Cayman Islands; and have an adequate¹
    number of full-time employees or other personnel with
    appropriate² qualifications in the Cayman Islands.

The TIA Economic Substance Guidance for Geographically Mobile
Activities (version 3.2 July 2022) (available here) contains sector specific guidance on the
practical application of the ES Test to the various types of
relevant activities.

CONSEQUENCE OF BREACH

Under the ES Act, a breach of the economic substance
requirements permits the TIA to take enforcement action against an
entity which may result in the TIA imposing a financial penalty
and/or requiring remediation action against the entity responsible
for the breach. The TIA has published standalone economic substance
enforcement guidelines (available here) which sets out, amongst others, the
TIA’s processes for commencing enforcement action through the
imposition of financial penalties for non-compliance with the
Economic Substance Regime.

HOW APPLEBY AND APPLEBY GLOBAL SERVICES CAN HELP

ES return: we can prepare and file the
ES return with the TIA following receipt of all required
information and supporting documentation (e.g., financial
statements) to ensure this important filing obligation is satisfied
and no financial penalties against your entity are imposed.

ESN: we can also prepare and file the
ESN via the General Registry for new and existing clients where
Appleby Global Services provides registered office services. All
Cayman Islands entities (incorporated, established or foreign
registered) must file this ESN irrespective of whether or not they
are subject to the ES Test.

Economic substance analysis and
compliance: Appleby’s regulatory and risk
advisory practice group can provide tailored legal advice and
guidance specific to your business in order to comply with economic
substance requirements.

Footnotes

1. The term “adequate” shall mean “as much
or as good as necessary for the relevant requirement or
purpose”.

2. The term “appropriate” shall mean
“suitable or fitting for a particular purpose, person,
occasion”.

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.