Offshore gets rule book on economic substance

| 01/03/2019 | 29 Comments

Ugland House, home of Maples in Cayman

(CNS): The government has produced a new guide on what offshore entities in the Cayman Islands impacted by new legislation should do to satisfy an Economic Substance Test and enable them to continue doing business here. The rule book, published by the Tax Information Authority, was recently gazetted and is designed to help those affected to comply with the law that was passed in response to requirements from the OECD and to avoid European Union blacklisting. However, it is still not clear on exactly what will be adequate to meet this new test.

Certain companies and entities registered in the Cayman Islands and other offshore jurisdictions must now have core income generating activities in this jurisdiction.

The law broadly requires companies to be directed and managed in what is described in the law as an appropriate manner in relation to the relevant activity and have an adequate amount of operating expenditure incurred in the Cayman Islands, an adequate physical presence or full-time employees with appropriate qualifications based in Cayman.

And while relevant companies will have to show that they meet this criteria by 1 July, the question of what is adequate or appropriate when it comes to the issue of substance is still not defined. The guide suggested that what would be “adequate or appropriate” for the entities affected will depend on a number of variables, such as what the company does and the circumstances of the business itself.

The 47-page booklet does, however, point out that the penalty for not meeting the substance test, whatever it turns out to be, is a $10,000 fine for a first offence rising to $100,000 if the failure is repeated the following year.

See the booklet in the CNS Library

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Category: Business, Financial Services

Comments (29)

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  1. Anonymous says:

    At the current level of law enforcement, this really makes no difference.

  2. Arthur Rank says:

    The substance issue has been around for years, remember Obama’s inauguration speech and reference to the number of companies registered at a single building? He ignored Delaware of course, but the issue is, if the entity claims to be managed out of Cayman, where is the management, are there people behind that facade that can really be undertaking oversight of the daily transactions? Take for example a mutual fund, a complex investment scheme run by a board of directors with one of them being in the Island to establish the place of control, and meetings being held here. That director probably has anything up to 1000 or more such directorships, is he really in control? The answer is fairly obvious, and illustrates the sham we are trying to protect. Who knows, the only defence in favour of this situation is the fear that the business will go somewhere with even less control.
    So the smart thing to do is to avoid any business that stinks, show we weed out the crooks, and hope that the substance issue goes away! Maybe the starting point is to go for quality business that precludes a need to stack em high, don’t allow a single person to hold 1000 directorships, or a company to house more companies than it can possibly oversee! OK, not much chance of that!

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  3. Anonymous says:

    If anyone wants to get an understanding of the bigger picture here, watch the documentary called The Panama Papers where journalists exposed the trail and web of money laundering that landed us in this spot.

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  4. A says:

    I am assuming they will deregister the Cayman company and replace it with a BVI company. As from the comforts of the lawyers office in Cayman. Like nothing every happened.

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    • Anonymous says:

      Definitely not BVI. Same requirements there, plus much less appealing for a physical office. Add that BVI are still in the pit of trying to recover and rebuild from 2017 Hurricane season, and the economic rope to do so has just been cut and fallen to the floor.

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  5. Bertie : B says:

    And you think that is a simple process 11;35 , are you serious ?

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  6. Anonymous says:

    Hey CNS: your link to the booklet doesn’t work

    CNS: Sorry, my labelling may have been a bit confusing. The link goes to the Financial Services page. The booklet is called “Economic Substance for Geographically Mobile Activities, Guidance by Tax Information Authority, Feb 2019” and is near the top.

  7. Freshie says:

    This is going to give Maples and all the others with thousands of offshore companies registered with them a HUGE headache – if indeed the law is to be enforced. No doubt it’ll be turned into a money spinner through.

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    • Anonymous says:

      Not really, all they have to do is de-register the companies from Cayman and continue them in one of their many international locations where these laws do not apply! The money stays in the family.

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      • Anonymous says:

        Or just move an executive here and hire a couple of staff. Singapore of the America’s straight ahead. Dart will need to build more than one tower, and given the alternative, that’s not such a bad thing.

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        • Anonymous says:

          Yes, but that is not going to happen unless work permit fees drop dramatically and impediments to hiring staff the business wants are removed.

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      • Anonymous says:

        yeah, if you want to move to Vanuatu and communicate via carrier pigeon – get real, every where reputable is moving this way

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        • Anonymous says:

          Not in the forecast for Delaware, where taxes are 0-6%.

        • Anonymous says:

          The zeitgeist is guided by pop politics, not compliance reputation. Canada and USA are decades behind the rest of the world in almost every category, but they get a clean pass. Canada hasn’t done anything to improve on their past FATF failings since their last checkup 8 years ago! Corporate frauds galore!

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          • Anonymous says:

            You say corporate frauds galore. Please name me a few?

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            • Anonymous says:

              For starters, how about the hundreds of CDNX companies that don’t meet minimum capitalization requirements, convene AGMs, use smurf resident directors, or are otherwise in contravention of the CBCA? There is no enforcement. Not a single anti-bribery/political corruption conviction by RCMP since 2011.

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              • Anonymous says:

                You are not correct. There have been 5 anti-bribery convictions since 2011. The current prosecution against SNC-Lavalin for bribery in Libya, looks like it will bring down Prime Minister Trudeau and probably the whole Government.

              • Anonymous says:

                8:46, There are 3 tiers with the CDNX for minimum capital requirements. Having had direct experience with them in the oil and gas and mining sectors I can assure you that the rules are enforced. To say there is no enforcement is nonsense as I have had experience with their enforcement.

          • Anonymous says:

            The US is actually decades ahead of the rest of the world in enforcing its tax laws. Corporate fraud is also prosecuted vigorously. Take Volkswagen’s diesel engine scam as an example. You hear nothing but crickets in Germany..

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          • Anonymous says:

            Fake news fact check – Canada’s last FATF review was in September 2016 and it was a healthy report.

        • Anonymous says:

          Sorry, not, they are moving OUT. Registered offices already reporting up to 15% of the clients already moved.

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      • Anonymous says:

        Alot of other jurisdictions are passing the same law…bermuda, bvi

      • Anonymous says:

        Correct. the the money moves from Cayman, into another jurisdiction. And morons in government thought this would actually create local jobs….

    • Anonymous says:

      Could one person be employed to say 10 companies receiving a prorated salary from each?

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