The Caymans Update The Economic Presence Guidelines

Recently, the newest ‘Guidelines to Cayman Substance’ has been released. This means that companies incorporated on the island are now required to prove the economic presence of their activities in this territory. If you are already working on the islands, then we advise you to start figuring out exactly what changes the new Guide to Economic Presence is making so that you have time to prepare your business for the new realities. In this blog post, we offer a short overview of legislative changes and how firms can prove a presence in the Cayman Islands.

Background info

By the end of the last decade, a global fight against tax evasion began, as a result of which most countries decided to voluntarily participate in the automatic exchange of tax information and signed the relevant Conventions (more than 100 member countries). Further, an action plan was drawn up to counter the erosion of the tax base. 

The main obstacle to complying with the principles of transparent taxation was the need for a real economic presence of the company in a particular jurisdiction. By 2019, most of the popular offshore and low-tax jurisdictions (BVI, UAE, Cyprus, Bermuda) have tightened the requirements for the economic presence of companies registered in their territory. This year, the Caymans have joined them. In this regard, many businessmen, owners of foreign companies, will have to exist in a new reality, revise their structure and pay special attention to new rules for creating substance in the Caymans.

Why substance is needed

The main reason for substance in the Caymans is the position of the tax authorities, for which the mere fact of the establishment of a company in the islands is not enough. In such circumstances, the risk of loss of tax benefits in the country of registration of a foreign company, and additional tax assessment in the country where the business is actually carried out, raises particular concerns.

Another reason requiring an economic substance in the Caymans is the reluctance of banks and other financial institutions to work with clients whose activities in the country of registration cannot be verified. This creates increased risks for banks to face money laundering or become guilty of complicity in tax evasion. Banks have tightened control over payments, as well as requirements for opening corporate accounts. Many banks refuse to work with companies that do not have confirmation of their economic presence in the Caymans. 

Therefore, all organizations operating on the islands are now expected to submit a detailed report to the local tax regulator, which makes a verdict whether the organization meets the requirements of substance or not.

Which organizations are tax exempt in the Caymans

According to the current regulation, the following companies are exempt from taxes:

• Investment funds and/or auxiliary organizations;
• Tax residents of other countries;
• Organizations authorized to conduct business in the Cayman Islands as local companies;
• Trusts.

Reporting changes

An entrepreneur wishing to set up a company in the Caymans should review the requirements for firms to provide information to the local tax authority.

The latest legislative changes now oblige all companies, without exception, not only to confirm whether they operate in the Caymans, but also to determine whether they are subjects for reporting to the regulator. 

Evasion Penalties

For not submitting the above-mentioned report to the regulator, companies will be fined in an amount equivalent to EUR 5,000, with an additional charge for each day during which the default continues.

Note that the local tax regulator has received extra powers to monitor compliance with the updated legislation on substance, including the power to audit the activities of any person. So, do not be surprised if your company is required to provide current reports or an annual report for the previous period, or an office will be visited with a check.