In an Industry Advisory dated 3 May 2019, the Cayman Islands ('Cayman') Department for International Tax Cooperation ('DITC') advises that the The International Tax Co-operation (Economic Substance) (Amendment of Schedule) (No. 2) Regulations, 2019 ('Regulations') and the Economic Substance Guidance v2.0 ('Guidance') have been approved. Important definitions used in The International Tax Co-operation (Economic Substance) Law, 2018 ('Law') have been updated and these changes incorporated into the updated Guidance.
What is new?
The Regulations amend certain definitions in the Law to bring them into line with requirements of the OECD Forum on Harmful Tax Practices ('FHTP') and the EU Scoping Paper on what are known as '2.2 jurisdictions' (which include Cayman). For more detail on the changes see the list below, but an important change is to the definition of core income generating income ('CIGA') to emphasise that to count as Cayman CIGA all CIGA must be carried on in Cayman. The Guidance amendments are to bring it into line with the changes in the Regulations.
What are the new definitions?
In brief, the Regulations amended the following defined terms in the Schedule to the Law:
|Cayman Islands Core Income generating Activities||Fund management business||Pleasure vessel (replaced with pleasure yacht)||Territorial waters|
|Consolidated financial statements||Group||Relevant entity||Constituent Entity|
|High risk intellectual property business||Relevant Income||Domestic company||Investment fund||Shipping business|
The International Tax Co-operation (Economic Substance) (Amendment of Schedule) Regulations, 2019 issued at the end of February 2019 had already amended the definition of 'relevant entity' ('Relevant Entity') in the Law. A Relevant Entity does not include limited partnerships, investment funds and Cayman entities that are tax resident outside of Cayman. It is also now clear that Relevant Entity does not include non-US insurance companies that have made the '953d' election to pay US Federal income tax. Also not included in the definition are disregarded entities i.e. a foreign business entity that is a separate entity from its owner, but which, due to elections made by the owner, is considered to be one and the same owner for federal tax purposes.
Among other changes, the Guidance also has expanded its Sector Specific Guidance on Relevant Entity business activities, with examples.
Is there more to come?
The DITC advises that it is developing systems and resources for notification, reporting, compliance and enforcement functions under the Law, and will publish a user guide once the systems are ready.
Where can I find out more information?
We will be writing more detailed advisories on the Regulations and Guidance and how they affect the Law. For more information on the international standard to which this new legislation relates, please see our earlier pieces Five Steps to Compliance with the Cayman Economic Substance Test, Cayman economic substance legislation expected to be in force by 1 January 2019 and Cayman Government Advisory on OECD Substantial activity requirements. The TIA has provided resources, including external resources from the Organisation for Economic Co-operation and Development ('OECD') and European Union which may be found at the Economic Substance Legislation and Resources page, here.
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.