As many corporate groups comprise a large number of
companies incorporated in offshore jurisdictions, this is
potentially a game changer for groups operating in Asia,
especially with respect to their approach in using, managing
and operating offshore companies going forward.
The new laws essentially require all entities that fall
within the regime to maintain a level of operational substance
that is commensurate with the income generating activities of
Effective from January 1 2019, the laws applying to the
Cayman Islands, BVI and Bermuda will apply to entities that are
conducting "relevant activities". Such activities are broadly
defined to include a wide range of businesses including:
banking, insurance, fund management, finance and leasing,
distribution and service centre business, headquarter
businesses, intellectual property businesses, shipping, and
holding company businesses.
There is likely to be a reduced level of substance
requirements for a pure investment holding company, but this
will be subject to further guidance. There are some important
carve-outs for certain companies in jurisdictions. such as the
Cayman Islands and the BVI where the entity is a tax resident
elsewhere. Furthermore, in the Cayman Islands, investment funds
and their investment holdings are specifically excluded.
Practical guidance issued by the Cayman Islands
The objective of these laws is to ensure that the
substantive operations at the local entity level are
commensurate with the profit generating activities carried out
by the entity. However, there remains a level of uncertainty
and ambiguity over the application of the new substance rules
in practice, and the level of substance that will be needed to
satisfy compliance with the rules.
The Cayman Islands issued its guidelines on February 22
2019. However, it is understood that an update to the guidance
will be issued in the near future, and it is hoped that greater
clarity will be provided around:
- The level of substance requirements
regarding the income derived from the relevant activity
carried out in the Cayman Islands;
- The necessary amount of operating
expenditure that must be incurred in the Cayman Islands;
- What is considered a sufficient physical
presence (including maintaining a place of business or plant,
property and equipment) in the Cayman Islands;
- The number of full-time employees or other
personnel with appropriate qualifications needed in the
Cayman Islands; and
- Whether outsourcing of "core
income-generating activities" within the jurisdiction is
permitted and can count towards satisfying the substance
requirements, provided the entity can monitor and control the
carrying out of that activity by any delegate.
Transition period and reporting obligations
Generally speaking and subject to local variation, existing
companies at December 31 2018 will have a six-month transition
period (i.e. until July 1 2019) to comply with the new rules.
For companies established on or after January 1 2019, substance
requirements need to be satisfied from the time they provide
the relevant activities.
In some cases, there will also be annual reporting
obligations to the local tax authorities with respect to
compliance with the new rules. In addition, penalties for
failing to satisfy the requirements may be imposed and other
sanctions such as entities potentially being struck off local
registers may arise.
Many organisations use these offshore jurisdictions within
their group holding and operating structures. The laws will
require such organisations to review their entities to evaluate
whether or not they will need to comply, or be carved out and
exempted from the new substance requirements.
Furthermore, if they need to comply, a determination of the
level of additional substance required will need to be
This presents another challenge for these offshore
jurisdictions following broader scrutiny by the EU and the OECD
through their tax transparency related initiatives.
Amongst these, country-by-country reporting is now starting
to be reviewed by tax authorities, and groups with significant
assets or income in entities in jurisdictions with little or no
substance and tax paid currently will likely be a particular