Cayman Islands: CEC And Economic Substance Legislation

Last Updated: 28 May 2019
Article by Charlie Kirkconnell

As advancements in technology continue to enhance business' ability to operate from almost anywhere in the world, the need grows for legislators to modernise tax laws, increase regulations, and seek new ways to deal with the profit shifting associated with the exploitation of intangible assets. The taxation of "intangibles" (including intellectual property rights as marks, patents and copyrights) is a significant topic of global discussion, particularly for businesses who conduct work through low-tax or tax neutral jurisdictions such as the Cayman Islands.

In an effort to curtail profit shifting and improve the integrity of global tax systems, the 2012 G20 Los Cabos summit tasked the Organisation for Economic Cooperation and Development (OECD) to develop a Base Erosion and Profit Shifting (BEPS) action plan. The BEPS framework, which was adopted November 2016, refers to tax avoidance strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations. Over 125 countries and jurisdictions are collaborating to implement measures which tackle base erosion and profit shifting.

The Cayman Islands Amongst 1st to Implement Economic Substance Legislation

The Cayman Islands has adopted, and has been amongst the first to adopt, the Common Reporting Standard (CRS), the Foreign Account Tax Compliance Act (FATCA), and has put into practice Anti-Money Laundering Regulations (AML), the Countering the Financing of Terrorism Law (CFT), and most recently the International Tax Co-operation (Economic Substance) Law. A British Overseas Territory, the Cayman Islands is recognised globally as a jurisdiction committed to tax transparency where anti-money laundering and anti-terrorist financing legislative regimes meet and, in many cases, exceed international standards.

To comply with Cayman's 2017 commitment and in a move to adopt new global standards, the Cayman Islands Government recently passed three laws to strengthen the Island's compliance with international benchmarks: The Companies (Amendment) (No. 2) Law, 2018; The Local Companies (Control) (Amendment) Law, 2019; and The International Tax Co-Operation (Economic Substance) Law, 2019. These laws have been passed in consultation with the bodies that required changes, including the OECD's Forum on Harmful Tax Practices (FHTP), which falls under the OECD's BEPS Inclusive Framework. Cayman's new regime strives to nullify structures which facilitate offshore profitmaking with little or no economic substance within its tax neutral environment.

Companies registered in the Cayman Islands that have little or no genuine economic substance in Cayman and that fall within specified categories of business activity, must now adapt or face penalties. As such, intellectual property businesses, commercial maritime sector businesses and commodities and derivatives fund managers registered in the Cayman Islands will have to look carefully at the new rules, and the majority will be required to add local substance.

A Solution for Offshore Commodities and/or Derivatives Fund Managers, Intellectual Property Businesses, and the Maritime Sector

With growing international pressures and a changing offshore landscape, offshore businesses that have only nominal economic substance or registrations in offshore jurisdictions have a decision to make.

Will they relocate offshore business activity onshore? Will they seek to outsource core income generating activity to third party service providers within an offshore jurisdiction? Or will they establish a genuine physical presence of their own within their offshore jurisdiction of choice to conduct core income generating activity locally?

Unique to the Caribbean, the Cayman Enterprise City (CEC) special economic zones project offers a built for purpose solution for global intellectual property businesses, commercial shipping businesses, and commodities and/or derivatives fund managers (as well as businesses in aviation, media, marketing, and technology). Through CEC, businesses are able to cost-effectively and time-efficiently establish a physical presence that leverages Cayman's tax neutral platform while also meeting globally recognised economic substance requirements.

In 2011 Cayman's Special Economic Zones Law was passed and the following year CEC's award-winning development project was launched. CEC is specifically designed to attract knowledge-based and specialised-services businesses to set up a genuine physical presence in the Cayman Islands and is now home to a vibrant community of over 250 global businesses. Within five years, we conservatively estimate that there will be over 500 businesses operating from CEC's special economic zones, with roughly 60% of those operating from within the Cayman Tech City special economic zone and 20% from within the Cayman Commodities & Derivatives special economic zone. Moreover, the CEC project is diversifying the Cayman Islands' economy, supporting a flourishing digital economy, and providing new career opportunities for the next generation.

By setting up a physical presence with CEC, global companies will not only be compliant with global standards but will also positively impact Cayman's sustainable future and growing knowledge-based economy.

Setting up a Physical Presence in the Cayman Islands

With accelerated offshore set-up and personalised services and support, CEC can have special economic zone (SEZ) companies fully established within four to six weeks, including with renewable five-year work/residency visas for any required expatriate staff. Once a company is established within a CEC special economic zone, work visas can be processed in as little as five working days.

While businesses established within the CEC special economic zones are still required to comply with the substantive requirements of the laws governing company set-up and operation within the Cayman Islands (including those related to AML and CFT), the SEZ Law and certain amendments to the Companies Law and the Immigration Law ensure a fast-tracked business set-up process and reduced Customs, business licensing, and work visa fees. The Special Economic Zone Authority (SEZA) regulates all SEZ businesses in the Cayman Islands, oversees all licensing, compliance and enforcement activities, and maintains statistical data. The administrative functions of SEZA are handled by the SEZ Secretariat, which falls under the Cayman Islands Department of Commerce and Investment (DCI).

Unlike other island nations such as the Bahamas or Bermuda, a minimum capital investment is not required, so businesses can develop at their own pace, and there are no closed or restricted job categories. Permits, visas, trade certificates, and turn-key office solutions, are conveniently bundled into affordable serviced office packages, which are delivered by CEC's Client Experience team through a tried-and-tested, streamlined process. CEC supports innovative entrepreneurs and start-ups who are seeking to develop intellectual property, grow commercial shipping businesses and manage commodities and/or derivatives focused funds in the Cayman Islands, as well as established businesses who are looking to protect and further develop intangible assets.

A comprehensive support programme helps businesses connect with leading service providers, community networks, and a range of local contacts – from doctors to educators, so businesses and their staff can focus on growth without having to go through the administrative set-up and relocation process alone. Even after the application process is done and dusted, our team is in constant contact and remains in a supportive role to help knowledge-based and technology-focused businesses thrive.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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