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New Substance Tax Requirements in the Cayman Islands

New Substance Tax Requirements in the Cayman Islands

Doing business in the Cayman Islands? New tax rules could apply to you


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Multi-national corporations may be affected by the Cayman Islands' new economic substance requirements. Under these rules, certain Cayman-based entities (including certain foreign companies registered in the Cayman Islands) must show "substantial activity" in the Caymans or be subject to penalties or, where the failure continues, a possible court-ordered strike-off of the Cayman entity from the Register of Companies.

These rules are effective for new entities formed January 1, 2019 or later, and will be effective as of July 1, 2019 for pre-existing entities formed before January 1, 2019.

Affected entities
These new rules may apply to certain Cayman-based entities conducting the following businesses: banking, fund management, insurance, financing and leasing, intellectual property (IP), headquarters, holding company, shipping and distribution and service centre. They will not apply to investment fund businesses. They apply to Cayman Companies, LLCs and LLPs, as well as some foreign companies registered under the Cayman Companies Law (2018).

These rules do not apply to limited partnerships or investment funds. They also do not apply to Cayman entities that are tax-resident outside of the Cayman Islands and are not centrally managed and controlled from the Cayman Islands.

Substance requirements
Under the rules, entities will satisfy the economic substance requirements if they:

  • Conduct Cayman Islands core-income generating activities
  • Are directed and managed in an appropriate manner from the Cayman Islands
  • Adequately carry out certain operating functions in Cayman (i.e., expenditure, physical presence, full-time employees or other personnel in the Cayman Islands).

OECD and EU substance requirements
Under the OECD's BEPS Action 5, entities must show "substantial activity" in order to qualify under preferential tax regimes, such as intellectual property (IP) regimes. The OECD announced last November that it would also apply a "substantial activities" requirement to entities with certain types of income in no-or nominal-tax jurisdictions.

According to the EU, economic substance must be considered when determining whether a tax measure or tax regime is harmful or 'fair', and ultimately whether a state should be placed on the EU economic blacklist. Jurisdictions that are placed on the blacklist risk facing EU defensive measures such as sanctions and limited access to EU funding, as well as other potential measures.

For more information, contact your KPMG adviser.

Information is current to February 12, 2019. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500

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