A company incorporated or established in the Islands is not regarded as a relevant entity for the purposes of the economic substance law if it is tax resident outside the Islands.
The Cayman tax authority will regard an entity as tax resident in a jurisdiction other than Cayman if the entity is subject to corporate income tax on all of its income from a relevant activity by virtue of its tax residence or domicile in that other jurisdiction.
Additionally, in the event that the entity is a “disregarded entity” for U.S. income tax purposes, and has a U.S. corporation as its parent, the Cayman Authority will consider the entity as tax resident outside of the Islands if satisfactory evidence is provided.
The Cayman Authority will require any entity claiming to be tax resident outside the Islands to produce satisfactory evidence to substantiate the same. For example, the evidence may include a Tax Identification Number, tax residence certificate and assessment or payment of a corporate income tax liability on all of that entity’s income in the Islands from a relevant activity, or, in the case of a disregarded entity for U.S. income tax purposes, a signed statement under penalty of perjury from an external tax advisor or ‘C’ level officer stating that all of that entity’s income has been included on the corporate tax return of the U.S. parent company.
In the absence of such evidence the entity will be regarded as a relevant entity that is subject to the economic substance law.
The economic substance test must be satisfied with respect to any part of relevant income that is not subject to corporate income tax imposed by a jurisdiction other than the Islands. The Cayman Authority will systematically exchange this information with other competent authorities.
A relevant entity should take care that it does not falsely claim to be tax resident or subject to corporate income tax in another jurisdiction on all of that entity’s income in the Islands from a relevant activity such that the result would be a circumvention of the economic substance test.
The Cayman authority will also regard any branch of a relevant entity as tax resident outside the Islands if the branch is subject to corporate income tax on all of that branch’s income in another jurisdiction by reason of its domicile, residence or any other criteria of a similar nature. The Cayman authority will require any relevant entity which claims that its branch is tax resident outside the Islands to produce, with respect to its branch, satisfactory evidence of the type described in the previous paragraph. In this context, a “branch” refers to a business unit or division of the relevant entity that is not a separate legal person from the relevant entity. For example, the Authority would not require a Cayman Islands incorporated company which carries on a leasing business from an UK branch which is subject to UK tax on all of that UK branch’s income to satisfy the ES Test in the Islands with respect to the leasing business carried on by that UK branch.