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The Economic Substance Requirement
The International Tax Co-Operation (Economic Substance) Act (Revised) and its associated regulations and guidance (the "Act") requires that certain entities ensure that where they receive income in respect of certain "Relevant Activities"1 they satisfy an Economic Substance Test which requires that the following occur in the Cayman Islands in respect of those Relevant Activities:
- the conduct of core income generating activities;
- the direction and management of the entity:
- the maintenance of adequate staff and premises; and
- the incurring of adequate expenditure.
Our original briefing on the Act as it applied to companies, LLCs and limited liability partnerships can be found at https://www.dilloneustace.com/legal-updates/the-cayman-islands-international-tax-co-operation economic-substance-law and provides some useful background on the application and requirements under the Act.
Extension of Scope
The International Tax Co-Operation (Economic Substance) (Amendment of Schedule) Regulations, 2021 take effect on 30 June 2021 and bring the following entities into scope for the purposes of the Act.
- all partnerships formed under the Partnerships Act (Revised) other than certain local partnerships;
- all exempted limited partnerships formed under the Exempted Limited Partnership Act (Revised); and
- all limited partnerships formed outside the Cayman Islands and registered under the Exempted Limited Partnership Act (Revised) (for example a Delaware limited partnership acting as a general partner of a Cayman Exempted Limited Partnership).
Transitional Provisions
Partnerships affected by the amended Act that were formed before
1 July 2021 will need to meet the economic substance requirements
from 1 January 2022.
Partnerships affected by the amended Act that are formed on or after 1 July 2021 will need to meet the economic substance requirements from the date on which they commence a "Relevant Activity" under the Act.
Footnote
1 Fund Management Business, Financing and Leasing Business and Holding Company Business, Headquarters Business, Insurance Business, Intellectual Property Business, Shipping Business, Banking Business and/or Distribution and Service Centre Business.
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.