In response to OECD and EU demands to combat tax base erosion, Cayman implemented the International Tax Co-operation (Economic Substance) Act (ITCA). Entities conducting "Relevant Activities" must prove they have real economic substance in the jurisdiction.
Relevant Activities
The law only applies to specific, geographically mobile activities. If your entity conducts any of the following, it must satisfy the ES test:
- Fund Management
- Banking or Insurance
- Finance and Leasing
- Distribution and Service Center Business
- Headquarters Business
- Intellectual Property Business
- Holding Company Business (Pure Equity)
The Exception for Investment Funds
Investment Funds (both mutual and private) are explicitly carved out and are not subject to the Economic Substance test, though they must still file an annual notification confirming their out-of-scope status.
How to Satisfy the Test
For in-scope entities (like a Fund Management company), they must demonstrate that:
- Core Income Generating Activities (CIGA) are conducted in Cayman.
- They are directed and managed in Cayman (board meetings held locally).
- They have adequate operating expenditures, physical presence, and full-time employees in Cayman.
Many firms outsource CIGA to local service providers, which is permitted under the law provided there is adequate supervision.
Run the Substance Test Evaluator