The OECD Forum on Harmful Tax Practices (FHTP) sets the global standard that requires companies to have substantial activities in a jurisdiction (also known as “economic substance”). To address the concerns of the FHTP, the Cayman Islands passed Economic Substance legislation and regulations, which came into force on 1 January 2019. The Cayman Islands also issued guidance notes (version 2.0) in April 2019 to assist relevant entities carrying on relevant activities to understand how to satisfy the economic substance test (the ES Test). (The foregoing legislation, regulations and guidance notes are referred to herein together as the “ES Guidance” or the “ES Law”).

This guide summarises some of the matters that clients with Cayman management companies may wish to consider when determining whether the ES Test applies to their Cayman manco.

Compliance Deadlines

The date from which a relevant entity shall satisfy the ES Test in relation to a relevant activity shall be:

(a) the date on which the relevant entity commences the relevant activity, in the case of a relevant entity that was not in existence prior to the commencement of the Economic Substance Law; or

(b) 1st July 2019, in the case of a relevant entity that was in existence prior to the date of commencement of the Economic Substance Law.

Option A

Relevant entities include entities formed in the Cayman Islands and foreign entities registered in the Cayman Islands. Clients with a Cayman manco may therefore wish to consider using a non-Cayman manco entity which is not further registered in the Cayman Islands as a foreign company. Such an entity would not be a “relevant entity” for the purposes of the ES Law. Of course, clients must consider any applicable tax, regulatory or legal consequences of using this option.

Option B

If you decide to maintain the Cayman Islands manco, then the next step is to determine whether it is carrying out a “relevant activity”.

“Relevant activity” includes “fund management business”.

“Fund management business” means the business of managing securities carried on by a relevant entity licensed or otherwise authorised to conduct business under the Securities Investment Business Law for an investment fund. The definition contemplates that the Cayman Islands manco is managing securities belonging to another person in circumstances involving the exercise of discretion.

If the Cayman manco investment management agreement is amended to remove the exercise of discretion, then the Cayman manco entity would no longer be doing “fund management business” as defined under the ES Law. This means that the Cayman manco would not be carrying out a “relevant activity”. In such a case, the investment fund’s directors may exercise the discretionary power to determine which securities are bought or sold.

Option C

Alternatively, or in addition to the above, if the Cayman manco entity was an Excluded Person prior to the commencement of the New Securities Investment Business Law Regime which came into force on 18 June 2019, the Cayman manco entity will have until January 2020 to “re-register” as a registered person. This could mean two things – (i) it is still not a “licensed” entity under the New SIBL Regime and (ii) it is not a registered person during the transitional period (unless it elects to do so before January 2020). One interpretation here is that, since Excluded Persons are not formally authorised or regulated by CIMA, the activities of the Cayman manco entity may fall outside the definition of fund management business stated under the ES Law which requires a relevant entity to be licensed or otherwise authorised to conduct business under the New SIBL Regime. This may mean that the Cayman manco entity would not be required to satisfy the ES test (until it re-registers as a registered person in January 2020 or is licensed in January 2020).

Next Steps

It is suggested that you discuss with the entity’s Cayman legal counsel what option may be best for the Cayman manco and arrange for board approval of the same prior to 1 July 2019. Should you have other structures that are not exempt from the ES Test, you may wish to appoint an additional, Cayman-based director to meet the directed and managed test. In such a case, you may contact or or, each of whom are directors approved by the Authority and licensed under The Directors’ Registration and Licensing Law.

About The Author

Alric Lindsay is a Cayman Islands investment funds lawyer and is a director approved by the Cayman Islands Monetary Authority. Alric is also licensed under The Directors’ Registration and Licensing Law. In addition, Alric acts as voluntary liquidator to Cayman Islands entities. Alric can be contacted at