New Economic Substance Requirements in the Cayman Islands
Following an investigation by the European Union Code of Conduct Group (EUCCG) into jurisdictions with zero or nominal tax rates, new legislation has recently come into effect in the Cayman Islands: the International Tax Co-operation (Economic Substance) Law 2018. This applies to, amongst other entities and activities, companies incorporated under the Cayman Companies Law (2018 Revision) that are engaged in business activities relating to shipping.
The legislation does not apply to Cayman Islands-flagged private yachts as the guidance to the law excludes “the operating of a pleasure vessel”. The legislation may, however, affect owners of commercially-registered yachts because it applies to companies that are in the business of renting or chartering ships for the purpose of “transporting, by sea, passengers…for a charge”. The new law requires applicable companies to satisfy an economic substance test by as early as 1 July 2019 or otherwise risk being subject to penalties. Affected companies must file an annual report providing information including, but not limited to, (i) the type of the company’s business activity being conducted in the Cayman Islands and (ii) the amount and type of income, expenses and assets held in respect of such business activity.
Many other jurisdictions with low or no corporate income tax regimes are in the process of enacting similar laws as a result of the EUCCG investigation, including the Bahamas, Bermuda, the British Virgin Islands, Guernsey, the Isle of Man and Jersey. Whilst the legislation is already in place in some jurisdictions, uncertainty remains regarding interpretation of these laws. We would therefore recommend that owners of commercially-registered yachts in the Cayman Islands (and indeed other affected jurisdictions) seek advice from their local corporate services provider and/or legal advisors to discuss whether and how these legislative changes may affect their businesses, and what steps – if any – need to be taken.
By Elle Murphy, Clyde & Co