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Cayman Islands: Economic substance law addressing profit shifting

Cayman Islands: Economic substance law, profit shifting

The Cayman Islands Tax Information Authority has issued guidance concerning the economic substance law—a regime that has an effective date of 1 July 2019 for “relevant entities” that were in existence prior to 1 January 2019, and an effective date of 1 January 2019 for all new entities in 2019 and later.

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  • The tax authority issued updated guidance notes (Guidance v2.0 dated 30 April 2019) to supplement the Cayman economic substance law and to replace previously issued guidance notes (Guidance v1.0 dated 22 February 2019). 
  • Additionally, a second amendment was made to the Regulations (Amendment of Schedule, No. 2). The regulations include slight changes to definitions in the economic substance law—including definitions of fund management business, investment fund, and relevant income.

The guidance notes and amendment to the regulations are available on the Tax Information Authority [PDF 430KB] website.

Economic substance law

The Cayman Islands economic substance law aims at compliance with base erosion and profit shifting (BEPS) Action 5(1), to mitigate harmful tax practices of shifting profits to low or no tax jurisdictions with the intent to avoid tax.

The key concept is that relevant entities conducting relevant activities must be in compliance with the Cayman economic substance law; otherwise, the tax authority can administer penalties (in amounts of KYD $10,000 or approximately U.S. $12,200) for a failure to meet the requirements in the first year. Increased penalties can be applied for the second year of a failure to comply, and entities also may be “struck off” for continued non-compliance. 

KPMG observation

The definition of “relevant entities” does not extend to limited partnerships, investment funds, and Cayman entities that are tax residents outside of the Cayman Islands. Also, with regard to the insurance industry, “953d companies” are considered tax residents outside of Cayman and therefore will not be within the scope of the Cayman’s economic substance law.


Read a May 2019 report [PDF 114 KB] prepared by the KPMG member firm in the Cayman Islands

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