Cayman’s Economic Substance Regime Extended to Partnerships
The International Tax Co-operation (Economic Substance) Act (as amended) (the “ES Act”) was recently amended to expand the definition of a “relevant entity” to include partnerships. The amendments were introduced by the International Tax Co-operation (Economic Substance) (Amendment of Schedule) Regulations, 2021 (the “Regulations”) which came into effect on 30 June 2021.
Prior to this, a limited liability partnership was the only type of partnership included in the definition of “relevant entity”. A “relevant entity” is now defined as:
A partnership will not be a relevant entity and will not be required to establish economic substance if it is:
The ES Act imposes an annual notification obligation on all entities as a prerequisite to filing their annual returns. General partnerships, limited partnerships, ELPs and FLPs are now required to notify the Department of International Tax Co-operation (“DITC”), whether they are carrying on a relevant activity by submitting an economic substance notification (“ESN”).
Where the General partnerships, ELPs or FLPs is a relevant entity that is conducting relevant activities, they are required to:
satisfy the economic substance test in relation to a relevant activity: AND A “local partnership" is defined under the International Tax Co-operation (Economic Substance) (Amendment of Schedule) Regulations, 2021 as a partnership that is not a part of a Multinational Enterprise Group and is only carrying on business in the Cayman Islands and is licensed under or complies with section 3(a) of the Trade and Business Licensing Act (2021 Revision) or is a franchise granted by government
prepare and submit to the DITC, an economic substance return (“ESR”) no later than 12 months after the last day of the end of each financial year commencing on or after 1 July 2021.
The prescribed dates from which a general partnership, ELP and FLP shall satisfy the economic substance test from:
1 January 2021 - where the partnership was in existence prior to 30 June 2021.
the date it commences the relevant activity- for partnerships formed after 1 July 2021.
Based on the Regulations, the Guidance for Economic Substance for Geographically Mobile Activities (“Guidance”) has been updated to include an appendix on general partnerships, ELPs and FLPs.
The Guidance confirms that a general partner of a limited partnership, ELP and FLP will not be required to file a separate ESR for itself if it declares that
it is not conducting any relevant activity for itself which is different from the relevant activity it conducts for a partnership; and
its relevant income for such relevant activity is only derived from the relevant income it receives from the partnership.
A similar declaration will be required from a general partner where a limited partnership, ELP and FLP seeks to rely on the tax residency outside of the Cayman Islands exemption.
Please note that this briefing is intended to provide a very general overview of the matters to which it relates and is not intended as legal advice and should not be relied upon as such.
© Bransens 2021