New laws to shake up offshore sector

| 07/12/2018 | 43 Comments

Cayman Islands, Cayman News Service(CNS): Government has unveiled three new bills that will result in fundamental changes to the way some exempted companies do business in the Cayman Islands. Just weeks before the European Union’s deadline for offshore financial centres to address requirements over what it sees as unfair tax practices in order to dodge the latest black-list, Financial Services Minister Tara Rivers has rolled out the International Tax Co-operation (Economic Substance) Bill as well as changes to existing company laws. All three laws will need to be debated and passed before the end of the year, creating a serious shake-up in the offshore sector.

The new legislation will require offshore companies domiciled in the Cayman Islands to have some form of economic presence or carry out actual work in the Cayman Islands to “satisfy the economic substance test in relation to any relevant activity carried on by that relevant entity”, the new bill states.

In a press release issued Thursday evening from the financial services ministry, officials said that an “in-depth consultation” with Cayman’s financial industry, commerce stakeholders and regulators, as well as the OECD and the European Union had been undertaken before the laws, which are expected to have a significant impact on the sector, were completed.

“Since January this year, many representatives from more than 15 financial services and commerce associations, as well as government stakeholders outside of the Ministry of Financial Services, have participated in this consultation,” Minister Rivers said. “This breadth allowed government to ensure that our legislation is appropriate for both financial services, and local business.”

Rivers acknowledged that government had taken time to publish the bills, which had allowed the “depth of consultation” necessary to develop the best framework for the Cayman economy and industry while also fulfilling its global responsibilities as an international financial centre.

Officials explained that the new legislation and amendments to existing laws are built upon the OECD’s Forum on Harmful Tax Practices (FHTP), which falls under the Base Erosion and Profit Shifting (BEPS) Inclusive Framework which Cayman joined in 2017.

This framework sets the global tax standard for structures that aim to attract profits in jurisdictions in which they do not conduct real economic activity. The forum supports the framework’s remit by reviewing jurisdictional regimes that give preferential tax rates to these structures, which in turn can negatively affect the collection of tax in other jurisdictions.

But this also related to the European Union blacklisting, which used the framework regarding harmful tax practices to identify non-cooperative tax jurisdictions. So, providing these laws are in place by 31 December, they will ensure that Cayman is not blacklisted by the European Union. To this end, the bills will be debated in the Legislative Assembly later this month.

Rivers noted that the EU did not place Cayman on its list of non-compliant tax jurisdictions, though it was placed on a watch list and required to address this issue of economic substance. She said that the concerns of the EU needed to be addressed in order “to correct the perception that our tax system provides an unfair tax advantage to any company operating in our jurisdiction”.

The legal changes will present a new regime for the offshore sector, where exempt companies will now be able to do business locally but they will be required to follow the same rules as local companies, essentially eliminating plaque and mail box companies. The Economic Substance bill covers legal entities engaged in banking, insurance, fund management, headquarters, distribution and service centres, financing or leasing business, shipping, holding companies and intellectual property.

If a Cayman entity is conducting relevant business activities in one or more of these categories, and if that entity is not tax resident in another jurisdiction, the bill would require the entity to have “economic substance” in the Cayman Islands.

This means that the entity must undertake substantial business activity, appropriate to the line of business that are operating in, actually in the Cayman Islands. This requirement could be fulfilled by activities such as hiring staff and having physical business locations or outsourcing these activities to a local service provider, officials said.

Rivers said it was important to understand why these global developments are occurring, and why it’s important for Cayman to participate in them. “The scope of the FHTP now includes 120-plus countries, including Cayman,” she said. “This represents an evolution of the global standard in financial services, and Cayman is committed to responding to these standards.”

Given that there are now more than 106,000 registered exempt companies here in Cayman, most of which have barely any economic presence, the sector is facing a significant change. Although some members of the offshore industry have welcomed the changes, there are concerns that no substantial economic impact assessment has been done to see how this change will affect the industry and the wider economy.

The changes will increase costs significantly for exempted companies and other entities that will be caught up in the legislation, offshore experts have told CNS. And although over 120 jurisdictions have signed up for this new standard, many  don’t have this kind of legislation including various states in America.  This means that companies registered here that wish to remain as a company plaque could re-domicile to Delaware or Nevada for example which don’t require the same kind of substantive presence.

Despite concerns about what will happen to the offshore sector once the new law is implemented and in full force, Cayman Finance said it was pleased by the move to adopt the new global standard.

“We have always demonstrated the commitment to be a transparent and compliant jurisdiction, responding positively to internationally agreed standards,” the industry body stated in a short release following the publication of the bills. “Those who establish Cayman structures do not do so to engage in base erosion and profit shifting activity; they do so because Cayman is an efficient neutral hub with key expertise in handling complex transactions.”

Cayman Finance said the jurisdiction and its service providers “are used to constantly evolving to meet global requirements” and was confident that this will be no different. “We anticipate that our sophisticated clients will adapt as required and take this in their stride. It is worth noting that all of Cayman’s main competitor jurisdictions are in a similar position as BEPS Inclusive Framework members.”

Following the release of the bills, the government will be issuing related guidance notes, providing insight into how the legislation is intended to operate in practice. However, it is not clear when or how long the transition period will be for compliance, given the rushed arrival of the laws and the expectation that the bills will be passed in less than three weeks.

See the bills in the CNS Library

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Category: Business, Financial Services, Laws, Politics

Comments (43)

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  1. Anonymous says:

    An appropriate time of year for turkeys to vote for Christmas.

  2. Anonymous says:

    What is the definition of the “work” and how is it quantified?

  3. Anonymous says:

    Those in the industry realise that this hasn’t been well thought out and not much consultation has occurred behind the scenes. This is being rushed through as usual without giving the industry time to digest and respond.

    If economic substance rules are forced, how will this affect the 10,000 funds that are registered in Cayman? Will they all be required to set up an office here and employ staff? How about the insurance captives? How about the lending vehicles which provide billions of dollars to the worldwide credit markets?

    Will one staff member be sufficient? two? three? Who decides? The EU?

    If this goes through, it’s game over folks!

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    • Chris Johnson says:

      I am not sure if all this has been thought out. For many years overseas owners of condos have been allowed to form exempted companies to own them. This is actually contrary to the law but the Registrar let it go. Similarly a local owned a hedge fund that went belly up a few years back and used exempted companies for local investors. The Registrar seemed to have missed that as well.

      If we have more regulation I hope that someone keeps a watching brief. However that is wishful thinking.

      By the way what becomes of the tax exemption guarantee that goes with the exempted companies.

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  4. Eliminating the competition says:

    Our government needs to grow a pair and start pushing back on these threats of blacklisting. The Cayman Islands should start taking bullies like the OECD to international court and make them prove that the Cayman Islands makes it any easier to facilitate tax evasion or illicit business. Why should we bend over backwards to adopt rules and legislation that EU countries, the US and the UK don’t play by themselves? Why is it far easier to open a bank account or start up a company in the US and UK than it is in Cayman? It is clear that these “organizations” such as OECD and FATF only exist to eliminate the competition! They exist to make it more difficult to do business in Cayman, which pushes more business their way. The US is the biggest tax haven in the world for Russians and Chinese!

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  5. Anonymous says:

    The whole point is that the companies are non-resident and are not doing business here. So they aren’t regulated and don’t pay taxes here and probably wouldn’t even if Cayman had taxes. If they are doing business in the EU, it should be up to the EU to tax and regulate them in the EU. If their laws leave a loophole, that is their problem, not Cayman’s. If you make the companies be residents, then the EU will say you are unfairly not taxing them enough. They have already done this to Ireland and others in the EU and you should realise where they are going with this. Please CIG, make sure you consult with the lawyers and accountants who know what brings the business here before you change things to suit EU regulators. In the US I can say on personal knowlege that we structured deals so that the investors would each have a Cayman LLP as a “bucket” to keep its investment and profits in until such time as the investor chose to bring the profits home and pay US tax. If each LLP had had to be a full-fledged Cayman resident company, I guarantee that Cayman would not have gotten the business. The costs do matter when you may be talking several hundred LLPs.

  6. Stockbroker says:

    Does the UK have similar legislation? If not why should we?

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  7. Anonymous says:

    Which is worse: a standard, tax-compliant, beneficial ownership declaring, faceplate entity; or one conducting an elaborate artificial substantive presence effort with a corporate service provider answering the phone for 400+ companies and pretending there is a real office doing something substantive? There shouldn’t be anything offensive about compliant entities doing what companies do all around the world without the physical make-believe window-dressing for people that don’t understand how the world works.

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  8. Anonymous says:

    CEC shut down a week after they broke ground! hahahaha

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    • Anonymous says:

      You don’t seem to understand what CEC is. These changes should actually drive more business to them.

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      • Anonymous says:

        We understand what the CEC is. Just a better iteration of what already exists and what could be offered to the entire economy. There is nothing engenious about the CEC.

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    • Anonymous says:

      The very esssence of CEC’s business is that they offer an easy way to get the “substance” these laws want to promote. Far from being shut down, they are probably the happiest people to hear this news.

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  9. Anonymous says:

    They are not thinking of the full impact of this. There are not enough rentals for all these “people on the ground” that will have to be here. Then all these people wanting to apply for residency eventually etc. and too many vehicles on the road as it is.

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    • Jotnar says:

      And if we get blacklisted as a jurisdiction because we dont do it, there will be plenty of accommodation to go around and a lot fewer vehicles on the road as 60% of our GDP walks out the door. We wont have all that tax revenue to pay for free education, subsidised healthcare for civil servants and all the civil servants and statutory bodies, the bright new jets for Cayman Airways, or even the Nice program.

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    • Anonymous says:

      Yeah, I want new really expensive cruise ship docks that can increase the population by 20000 people (about 1/3 of the population) that contribute almost nothing big but garbage instead. God forbid we actually have anyone come here and work that increases our GDP and spends money year round funded entirely by the company that employs them.

  10. V says:

    Time to put an end to the subsidized fees, and fast lane governmental service to the CEC and work a new plan across the system that all business can take part in. Ordinary resident companies and CEC are currently in competition in various spaces pertaining to substantial business presence services. It is unfair a private enterprise such as CEC gets special accommodation thus perverting equity and access to business opportunities. CEC is its current form should not continue.

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    • Anonymous says:

      Don’t they have a written agreement with Government guaranteeing these special accomodations? Not sure how CIG can get out of that….unles the agreement is soon expiring.

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    • Justsayin says:

      Cayman has essentially been a special economic zone like no before Mr. Charlie bought into it. But you have to give them credit for squeezing their special position out of the government.

  11. Anonymous says:

    Well there goes half of our economy.

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  12. Anonymous says:

    Credit goes to the Ministry and the Minister for Financial Services for having extensive private sector consultation.

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  13. Anon but concerned for future..... says:

    Haven’t read the bills yet, but if an exempted company “will now be able to do business locally but they will be required to follow the same rules as local companies” doesn’t that make it a resident company? Goodbye Cayman – this will ultimately end the offshore jurisdiction status as it defeats the whole offshore company purpose.

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  14. Anonymous says:

    Meanwhile the USA, the largest economy in the world has refused to sign up.

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  15. Anonymous says:

    Cayman will adjust. Interesting prospect of Exempted Companies essentially becoming Cayman Ordinary Resident Companies over night. Plenty of possibilities to grow economically, but should be measured, looking to forward, future thinking not just for the here and now. Especially how this will impact immigration and the high number of PR approvals that is already happening. More wealthy people to become “Caymanian” I guess?

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    • Anonymous says:

      or…in reality…it will make Cayman a more expensive jurisdiction to do business as compared to the competition. One can incorporate and have a holding company in Delaware at a fraction of the cost without any of these regulations.

      “Cayman will adjust”? Until when? They keep moving the goal posts and our leaders are like schoolchildren in front of these bureaucrats. They get wined and dined in class every time they head to Europe and come back with a worse deal for us all the time. They’re the classic “Uncle Toms”.

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    • Anonymous says:

      One can hope

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    • Forgetting about LCCL's? says:

      It does make one wonder what will happen to LCCL’s….

  16. Anonymous says:

    That wont stop them big bank accounts from been open here tho. And them million dollars bought on empty condos all over the island. Yes EMPTY!!

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  17. Anonymous says:

    So we pass these new laws which could potentially remove hundreds of millions of dollars from our economy over generations to come….but things will be fine as we’re going to build a dock to sell more T-shirts to tourists. Wow.

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  18. Anonymous says:

    Ha ha Alden gave us all that bull sh1t previously and now the Muppets are going to pass legislation that could cripple the off shore sector in the space of 30 days.
    No sorry not 30 days the lazy overpaid muppets will probably and sit for a couple of days.
    Absolutely disgraceful I wonder who has bent over furthest to accommodate the EU.

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  19. Anonymous says:

    Well that’s Cayman screwed unless it reduces the costs of work permits drastically.

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    • Anonymous says:

      There goes the neighborhood.

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    • Anonymous says:

      Do you really believe a 10K to 20K work permit fee is a material consideration for the mind, management and control of any international business professing to be based here?

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      • Anonymous says:

        The commenter clearly hasn’t understood the article and doesn’t understand the industry. We are screwed if this happens.

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  20. Anonymous says:

    Two words – ‘Never Happen!’ Look at the current legislation – not one prosecution to date.

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  21. Anonymous says:

    Amazing how CIG is happy to bend over backwards to accommodate the EU which will never support Cayman as a jurisdiction and will add additional requirements until we are forced to close shop. Soon enough the cost to meet EU requirements will more than outweigh the value of our EU book of business.

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