Economic Substance: An overview of requirements in the Cayman Islands

Any company registered in Cayman is required to to make an annual notification as to whether or not it was carrying out one or more of a defined list of relevant activities in the prior year. The company is required to meet the economic substance test for this activity. The test varies depending of the relevant activity conducted. Each entity must make an economic substance return in order to meet compliance requirements.

If a company does not comply with economic substance requirements, a progressive penalty system applies. The company's information may be shared with the relevant authorities of the parent company or ultimate beneficial owner jurisdiction of incorporation or country of residence. Failure to meet the requirements may also lead to the company to be struck off or take such action as the Grand Court specifics.

If you set up your Cayman company with Clara you will be setting up an Exempted company. Exempted companies are relevant entity and therefore falls into the economic substance regime.

Acting as a Holding Company - defined as "pure equity holding business" (i.e. holding only equity participations in other entities and earning only dividends and capital gains).

Banking – “Banking” is defined in s.2 of the Banks and Trust Companies Law (2018 Revision).

Distribution and Service Centre - meaning any of the following: (a) purchasing, from an entity in the same Group: (i) component parts or materials for goods, or (ii) goods ready for sale, and reselling such component parts, materials or goods outside the Cayman Islands; or (b) providing services to an entity in the same Group in connection with the business outside the Cayman Islands (but does not include any activity included in any other relevant activity except holding company business).

Financing and Leasing - being the business of providing credit facilities for any kind of consideration to another person, but does not include financial leasing of land or an interest in land, banking business, fund management business or insurance business.

Shipping - being any of the following activities involving the operation of a ship anywhere in the world other than in the territorial waters of the Cayman Islands or between the Cayman Islands: (a) the business of transporting, by sea, passengers or animals, goods or mail for a charge; (b) the renting or chartering of ships for the purpose described in item (a); (c) the sale of travel tickets and ancillary ticket related services connected with the operation of a ship; (d) the use, maintenance or rental of containers, including trailers and other vehicles or equipment for the transport of containers used for the transport of anything by sea; or (e) the functioning as a private seafarer recruitment and placement service, but does not include a holding company business or the owning, operating or chartering of a pleasure yacht.

Fund Management - being the business of managing securities belonging to another person in circumstances involving the exercise of discretion (as set out in paragraph 3 of Schedule 2 to the Securities Investment Business Law (2015 Revision) (“SIBL”)) which is carried on by a relevant entity licensed or otherwise authorised to conduct business under SIBL for an investment fund.

Acting as Headquarters - being the business of providing any of the following services to an entity in the same Group: (a) the provision of senior management; (b) the assumption or control of material risk for activities carried out by any of those entities in the same Group; or (c) the provision of substantive advice in connection with the assumption or control of risk referred to in item (b) (but does not include banking business, financing and leasing business, fund management business, intellectual property business, holding company business or insurance business).

Insurance - Insurance business is defined in section 2 of the Insurance Law, 2010 (as amended).

Intellectual Property - being the business of holding, exploiting or receiving income from intellectual property assets. Note that this term does not apply to a business which owns intellectual property merely as an adjunct to its business.

Note: Core income generating activities means activities that are of central importance to the company in terms of generating relevant income and that are being carried out in the Cayman Islands.