The International Tax Co-operation (Economic Substance) Law, 2018 (the “Law“) was brought into force in the Cayman Islands on 1 January 2019 and introduced the application of an economic substance test (the “ES Test“) for certain types of Cayman Islands entities i.e. Relevant Entities (as hereinafter defined), which engage in certain prescribed activities.

The ES Test seeks to identify and monitor those Relevant Entities which carry on geographically mobile activities but do not engage in any real economic or management activities in Cayman.  The enactment of the Law affirms Cayman’s conformity to global tax standards set out in the OECD’s Base Erosion and Profit Shifting Inclusive Framework, which seeks to abate abusive tax planning strategies that facilitate the shifting of corporate profits to low tax or tax neutral jurisdictions.  Similar legislation  has been enacted in other offshore financial  centres including Bermuda, the British Virgin Islands, the Isle of Man, Jersey and Guernsey.

The following is a summary of the key elements of the Law.

1. Scope of the Law

The Law applies to the following entities (each a “Relevant Entity” and collectively “Relevant Entities“):

  1. a company which is:
    1. incorporated under the Companies Law (2018 Revision) (the “Companies Law“);
    2. a limited liability company registered under the Limited Liability Companies Law (2018 Revision); or
    3. not a domestic company[1]; or
  2. a limited liability partnership registered under the Limited Liability Partnership Law, 2017; or
  3. a foreign company registered under the Companies Law.

Domestic companies, all investment funds  (including entities through which investment funds invest or operate) and entities that are tax resident in a foreign country, fall outside the scope of the Law [2].  

2. The ES Test

A Relevant Entity which conducts any of the following activities (each a “Relevant Activity“)[3] must satisfy the ES Test:

  1. banking business;
  2. distribution and service centre business;
  3. financing and leasing business;
  4. fund management business[4];
  5. headquarters business;
  6. holding company business;
  7. insurance business;
  8. intellectual property business; or
  9. shipping business.[5]

Any Relevant Entity established after 1 January 2019 are immediately subject to the EST requirements from the date on which it commences a Relevant Activity. A Relevant Entity established prior to 1 January 2019 must comply with the Law by 1 July 2019. [6]

A Relevant Entity satisfies the ES Test if:

  1. it conducts Cayman core income generating activities (“CIGA“) that are of central importance in generating income in relation to a Relevant Activity;
  2. it is managed and directed in accordance with prescribed corporate governance standards (as described below);
  3. having regard to the level of relevant income derived from its CIGA, it has an adequate:
    1. amount of operating expenditure incurred in Cayman;
    2. physical presence (including maintaining a place of business or plant, property and equipment) in Cayman; and
    3. number of full-time employees or other personnel with appropriate qualifications in Cayman[7]; and
  4. its CIGA are conducted by a third party and it is able to monitor and control the conduct of such activities.

3. Corporate Governance Requirements

A Relevant Entity must be directed and managed in an appropriate manner and will meet the imposed corporate governance requirements forming part of the ES Test if:

  1. its board as a whole has appropriate knowledge and expertise to discharge its duties;
  2. board meetings are held in Cayman at adequate frequency given the level of decision-making required, although it is not necessary for all meetings to be held in Cayman;
  3. there is a quorum of directors in Cayman during board meetings; and
  4. board meeting minutes record the strategic decisions taken at such meetings and are kept in Cayman along with other appropriate records.

4. Notification and Reporting Requirements

Commencing in 2020,  a Relevant Entity which falls within the scope of the Law will be required to notify Cayman’s Tax Information Authority (the “TIA“) annually of:

  1. its financial year end;
  2. whether it is conducting a Relevant Activity; and
  3. if it conducts a Relevant Activity, whether or not all or any part of its gross income in relation to the Relevant Activity is subject to tax in a foreign jurisdiction.[8]

The notification of the type of Relevant Activity (if any) conducted will be made by disclosure on the Relevant Entity’s annual return to the Registrar of Companies in Cayman (the “Registrar“) which must be filed in January of each year. At a date to be specified by the TIA, the Relevant Entity will need to complete the notification process via an ES Portal to be established by the TIA to facilitate the electronic submission of notification and reporting.

A Relevant Entity which is required to satisfy the ES Test must also submit a report within twelve (12) months of the end of its financial year. Information to be provided in the report includes the following confirmations in respect of the conduct of the Relevant Activity (the “Report Confirmations“):

  1. the type of Relevant Activity conducted;
  2. the amount and type of relevant income;[91]
  3. the amount and type of expenses and assets;
  4. the location of the place of business or plant, property or equipment used in Cayman;
  5. the number of full-time employees or other personnel with appropriate qualifications who are responsible for the execution of the Relevant Activity[10];
  6. information showing the CIGA; and
  7. a declaration as to whether or not the ES Test is satisfied.

The TIA may require a Relevant Entity to provide additional information (including copies of books, documents or other records, or of electronically stored information) and failure to provide requested information without lawful excuse or within the time specified by the TIA is an offence. 

5. Enhanced Requirements for Intellectual Property Company Business

The Law imposes enhanced requirements in relation to the conduct of intellectual property business. A Relevant Entity conducting intellectual property business must, in addition to providing the Report Confirmations, also provide the TIA with a declaration as to whether it is a high-risk intellectual property business.

6. Reduced ES Test for Pure Equity Holding Companies

A Relevant Entity that is a pure equity holding company[11]  and which passively holds equity interests is subject to a reduced ES Test. The reduced ES Test is satisfied if the pure equity holding company confirms that it has complied with applicable filing requirements under the Companies Law and has adequate human resources and premises in Cayman for the conduct of holding company business.  FG Services Limited as a licensed registered office service provider may be engaged to satisfy these requirements. 

7. Outsourcing

A Relevant Entity may outsource the conduct of its CIGA to a Cayman service provider as a means of satisfying the ES Test.[12]  Where the conduct of CIGA is outsourced, the TIA will consider the resources of the service provider in the determination of whether the “people and premises” test has been met.[13]  Double counting of one task for more than one Relevant Entity is prohibited and the Relevant Entity must demonstrate that it has adequate supervision over the outsourced activity (whether it is outsourced to third parties or entities in the same group). The Relevant Entity remains responsible for  ensuring the accuracy of the information provided in its report to the TIA.

8. Enforcement and Sanctions

If the TIA determines that a Relevant Entity has failed to satisfy the ES Test for a financial year, it  may issue a notice to the Relevant Entity setting out reasons for such determination and prescribing actions to be taken by the Relevant Entity.  The TIA may also impose a penalty of Twelve Thousand, One Hundred and Ninety-five United States Dollars (US$12,195.00) to be paid within twenty-eight (28) days of the date of the notice.[14]  A second notice may be issued by the TIA and a penalty of One Hundred and Twenty-one Thousand, Nine Hundred and Fifty-one United States Dollars (US$121,951.00) may be imposed where a Relevant Entity fails to comply with the ES Test for a subsequent financial year. Where a second notice is issued, the TIA will inform the Registrar of such action. The Registrar is then duty bound to apply to the Grand Court for an order to be made requiring the Relevant Entity to take a specified action or declare that the Relevant Entity is defunct, in the case of a company, or has ceased to carry on business in the case of a limited liability partnership.

A person who commits an offence of knowingly providing  false or misleading information to the TIA is liable on summary conviction to a fine of Twelve Thousand, One Hundred and Ninety-five United States Dollars (US$12,195) and/or to imprisonment for five (5) years. The failure to provide information required by the TIA or the alteration, withholding or destruction of such information also constitute an offence which carries a penalty on conviction to a fine of Twelve Thousand, One Hundred and Ninety-five United States Dollars (US$12,195.00) and/or a two (2) year term of imprisonment. [15]

9. Sharing of information

The TIA may share information provided to it under the Law with competent authorities in other jurisdictions in relation to:

  1. the failure of a Relevant Entity to satisfy the ES Test;
  2. high risk intellectual property business; and
  3. an entity which claims to be tax resident in another jurisdiction.

The TIA may also share information with competent authorities in the jurisdiction of tax residence of the Relevant Entity’s parent company, ultimate parent company and ultimate beneficial owner.


[1]  Domestic companies include companies which a) conduct business in Cayman; b) are licensed under the Banks & Trust Companies Law (2018 Revision); c) are limited by guarantee; or d) are licensed not for profit associations.

[2]  An entity will be regarded as tax resident outside Cayman if it is subject to corporate income tax on its gross income arising in Cayman from a Relevant Activity in another jurisdiction by reason of their domicile, residence or other similar criteria

[3]  Where more than one Relevant Activity is conducted, the ES Test will apply in relation to each activity.

[4]   Discretionary fund managers who are registered as Excluded Persons under the Securities Investment Business Law (2019 Revision)  are required to satisfy the ES Test.

[5] Shipping business does not include a holding company business or the operating of a pleasure yacht.

[6] The relevant commencement dates for compliance  are not the same as the commencement dates for reporting .

[7] The TIA has issued Guidance to assist in clarifying the general requirements of the Law which states that “adequate shall mean as much or as good as is necessary for the relevant requirement or purpose and that and the  term “appropriate” shall mean  suitable or fitting for a particular purpose, person or occasion.

[8] The Relevant Entity will be required to provide the TIA with evidence to support tax residence.

[9] Relevant income refers to all of the Relevant Entity’s income that arises from its Relevant Activity.

[10] Where a Relevant Entity has been organized as a Special Economic Zone Company, compliance with the requirement to have at least one Cayman-based employee will not automatically satisfy the ES Test.

[11] A pure equity holding company is one that only holds equity participations in other entities and only earns dividends and capital gains.

[12] Outsourcing must not be used to circumvent compliance with the ES Test .

[13] Non-Cayman core income generating activities can be outsourced to foreign persons that perform such activities entirely outside Cayman.

[14] The TIA will  not impose this penalty after the earlier of (a) one year after becoming aware of the contravention; or  (b) six years after the contravention occurred.

[15] Where it is proven that an offence under the Law has been committed by a Relevant Entity with the consent or connivance of or is attributable to the negligence of any of  its directors, officers or members (in the case of a Relevant Entity managed by its members) such persons also commit that offence and are liable to be proceeded against and punished accordingly.


This note is intended to be a general guide only and should not be relied upon as a substitute for specific legal advice. If you would like further information on any aspect of this note or on any other Cayman Islands legal issue please contact:

Natasha Hernandez
Corporate & Commercial Practice Group
Email: Natasha.Hernandez@francisgreylaw.com
Tel.: 1 345 815 2809