Economic substance in the Cayman Islands and the BVI

Recently legislation has been introduced in the Cayman Islands and the BVI in relation to economic substance, which might also have an impact on certain fund structures. In the Cayman Islands, this is done by way of the International Tax Co-operation (Economic Substance) Law, 2018. In the BVI, the applicable legislation is the Economic Substance (Companies and Limited Partnerships) Act, 2018. Both are further implemented by lower laws and regulations.

The general background is that entities must have sufficient economic substance in the Cayman Islands or the BVI to make sure they are not profiting from a low or zero tax rate in these jurisdictions. Investment funds are currently excluded from the regime, but investment managers are within scope.

Certain entities will need to comply with the economic substance requirements when they conduct relevant activities (as defined in the applicable legislation), such as managing investment funds. In each individual case, it must be assessed whether the entity (i) is conducting core income generating activities in the Cayman Islands or the BVI, (ii) is directed and managed from the Cayman Islands or the BVI and (iii) furthermore has sufficient substance (as detailed in the applicable legislation).

Every relevant entity in the Cayman Islands and the BVI needs to notify, through its registered agent, the applicable authority in case it performs any relevant activity. These entities have been or will be approached by their registered agent to arrange for the necessary notification. And if they conduct any relevant activity, these entities will also need to report periodically on their compliance with the applicable economic substance requirements. Again, this reporting is done via the registered agent.

If you want to know more about the implications for your fund structure, please do not hesitate to contact us at info@circlepartners.com

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