Legal Updates

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.

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.