Cayman Also Pass Economic Substance Bill
As Bermuda’s legislators were passing a Bill designed to keep the island off the European Union’s blacklist, lawmakers in the Cayman Islands were doing the same, with the Cayman also passing an Economic Substance Bill on Monday.
This follows after the European Union threatened to blacklist jurisdictions that did not meet their specifications on various matters including tax transparency and what they deem to be fair tax practices.
In December 2017, the EU named [PDF] 17 jurisdictions as “non-cooperative tax jurisdictions”, while Bermuda and dozens of other nations and territories were deemed to be “co-operative, subject to the successful delivery of their commitments.”
Various jurisdictions made different commitments, and in Bermuda’s case, the island committed to “addressing the concerns relating to economic substance”, as did the Cayman Islands, Guernsey, Isle of Man, Jersey and Vanuatu.
The EU describes their concern about “economic substance” as the “existence of tax regimes that facilitate offshore structures which attract profits without real economic activity.”
In order to stay off the EU blacklist, Bermuda’s House of Assembly passed the Economic Substance Bill on Monday, and the Cayman Islands also passed a similar Bill on Monday with the same aim.
The Cayman Compass report, “Government pushed through new economic substance rules and other bills during a marathon Legislative Assembly session on Monday in a bid to avoid a European Union tax blacklisting.
“The EU is specifically targeting companies based in low- or no-tax jurisdictions that have little or no economic activity but attract substantial profits generated elsewhere.
“The new rules require Cayman-registered companies active in nine defined areas to demonstrate they have “adequate” economic activity locally to justify the profits they make.
Cayman Premier Alden McLaughlin is cited as saying that companies registered in the Cayman can either “go back to onshore jurisdictions with direct taxation or they can increase their level of substance in Cayman by having adequate physical office space, management presence and a sufficient number of qualified staff employed locally.”
The report added that “the effect of the legislation on the economy is far from clear” and “rough estimates suggest that up to 20,000 companies may be affected.”
The Cayman News Service has also reported on the matter saying, “As he defended the eleventh hour bills, McLaughlin said that without them Cayman would be blacklisted and that would be a disaster.
“He said the changes would likely result in an increased population, and if that is the case, it ‘would be an incredibly good thing.’ While it will come with challenges, he said, if it doesn’t happen and instead there is a flight of business, that would be far worse for Cayman’s future.”
Their report added that the “three bills paving the way for a new dawn in offshore company registration — the International Tax Co-operation [Economic Substance] Bill and amendments to the local company control and companies laws are “likely to fuel an increase in the population” because “currently exempt companies domiciled in Cayman will, in future, need to do actual work in the islands.”
“Depending on each individual entity and the circumstances surrounding their business, they will be required to have some form of office and staff, many of whom will inevitably be work permit holders,” the Cayman News Service added.
After the Bill passed in Bermuda, Finance Minister Curtis Dickinson said the legislation “was to satisfy requirements from the European Union that companies registered in Bermuda must maintain a physical presence, employees and revenue generating activities.
“Bermuda does in fact have a large presence of these companies, but we do also receive revenues and support corporate activity from companies without an actual presence. The new regulations from the EU seek to end this practice. This could, in fact harm our country and economic activity in a very meaningful way.”
“Passing this legislation was necessary, however, as had we not, we would have been blacklisted, and that would cause harm in an even more immediate way, as current financial activity from legitimate and fully compliant financial organizations could be compromised.
“Hence, the collective government of Bermuda did what we had to do to preserve our economy. The public must be aware that between this current issue, and the issue of beneficial ownership, that the EU and UK watchdogs are vigilant,” the Minister added.
The beneficial ownership matter the Minister referenced also affects the Cayman Islands, meaning that both Bermuda and the Cayman are in similar positions dealing with both the economic substance requirements to avoid the EU blacklist, and the legislation passed by the British Parliament seeking to order all British Overseas Territories to make their beneficial ownership registers public.
The increasing regulations from the EU and UK come as the two powers negotiate their Brexit deal and continue to wrestle with the global and digital economy, with the EU’s plans to implement a digital tax on the tech giants such as Google and Facebook receiving some push back from the United States, who urged them to “abandon the proposal” which they described as “designed to discriminate against US companies.”
