ES Enforcement Guidelines (Version 1.4, March 2023)

Summary

This is the Cayman Islands Tax Information Authority's (administered by DITC) Enforcement Guidelines (Version 1.4, March 2023) explaining how it applies the administrative penalty regime under the International Tax Co-operation (Economic Substance) Act and related regulations. The guidance is stated to be non-binding but sets out the Authority's approach to determining whether a relevant entity has satisfied the Economic Substance (ES) Test, how it investigates and verifies filings (Economic Substance Notifications, ES Returns, Tax Resident Outside the Islands forms), and how it calculates and issues penalties for missed reporting or failure to meet the ES Test.

It applies to 'relevant entities' as defined under the ES Act — broadly, companies (other than domestic companies) incorporated under the Companies Act, LLCs, LLPs, partnerships, exempted limited partnerships and foreign limited partnerships that carry on a 'relevant activity' (e.g. banking, financing and leasing, fund management, headquarters business, holding company business, insurance, intellectual property business, shipping, or distribution and service centre business), excluding investment funds and entities tax resident outside the Islands.

• Missed reporting (section 7(8A)): US/KY$5,000 plus $500/day.
• Failing ES Test in Year 1 (section 8(2)): $10,000.
• Failing ES Test in a subsequent year (section 8(4)): $100,000.

The guidance also describes escalating daily penalties for continued non-submission of the ES Return, the process for penalty notices, notice to the Registrar of Companies for repeated failures, the appeals process to the Grand Court, and payment instructions including a 30-day appeal window and specific payment/banking details.

Key obligations

• Relevant entities required to satisfy the ES Test must submit the ES Return to the Authority within twelve months after the last day of their financial year (the statutory deadline).
• Relevant entities must prepare and submit the report required under section 7(3) of the ES Act within the time specified, or face a penalty of $5,000 plus an additional $500 for each day the failure continues.
• A relevant entity that fails the ES Test in Year 1 is subject to a $10,000 penalty under section 8(2); failure in a subsequent financial year results in a $100,000 penalty under section 8(4).
• An entity that fails to submit its ES Return by the deadline specified in a penalty notice will be deemed to have failed the ES Test and will be issued a further Penalty Notice under section 8(1).
• Entities must respond to Authority requests for clarification or additional documentary evidence during investigations/verification of submitted information.
• An entity wishing to appeal a Penalty Notice issued under section 7(8A) or sections 8(1)/8(3) must lodge an appeal to the Grand Court within 30 days of the date of the Penalty Notice.
• Entities must pay any penalty imposed in accordance with the specified payment instructions, including referencing the Penalty Reference and confirming payment details to DITC.Payment@gov.ky.

Applies to

relevant entities under the ES Act (companies other than domestic companies incorporated under the Companies Act), limited liability companies registered under the LLC Act, limited liability partnerships registered under the LLP Act, partnerships under the Partnership Act (excluding local partnerships), exempted limited partnerships under the ELP Act, foreign limited partnerships registered under the ELP Act, entities carrying on relevant activities (banking, distribution and service centre business, financing and leasing, fund management, headquarters business, holding company business, insurance business, intellectual property business, shipping business)

Deadlines

• twelve months after the last day of the entity's financial year: Statutory deadline for a relevant entity to submit its ES Return to the Authority.
• 30 days from the date of the Penalty Notice: Time limit for an entity to appeal a Penalty Notice (issued under section 7(8A), 8(1) or 8(3)) to the Grand Court.
• not later than six years after the end of the financial year: Limitation period within which the Authority must make a determination as to whether a relevant entity satisfied the ES Test.
• [DATE] specified in individual Penalty Notice: Escalating additional daily penalties ($50, then $100, then $250 KYD per day) apply for continued failure to submit the ES Return past dates specified in the penalty notice.