Cayman’s Minister for Financial Services Tara Rivers speaks during a Centre for European Policy Studies seminar in Brussels on May 23. Also speaking were Pascal Saint-Amans, director of the OECD Centre for Tax Policy and Administration, left, and Jeppe Kofod, Member of the European Parliament, right. CEPS’ CEO Karel Lannoom, second from left, moderated.

When late last year, Cayman avoided being placed on an EU tax blacklist by committing to remedy, before the end of 2018, what the EU called a lack of economic substance of Cayman-based entities, few knew what exactly the Cayman Islands government had promised to do.

Now, with only five months left in the year, little has changed.

While the commitment letters of other jurisdictions, like the British Virgin Islands, Bermuda, the Isle of Man or Guernsey, can be read on the European Council’s website, Cayman’s letter has not been made public.

Like Cayman, these jurisdictions have been accused of violating the EU’s fair tax criterion, which stipulates that jurisdictions should not facilitate offshore structures that attract profits without real economic activity.

In a November 2017 letter to the Cayman Islands government, the EU noted that its concerns relate mainly to a “de facto lack of substance, which may be due to the absence of legal substance requirements.”

The letter invited the government to commit to addressing the concerns and discuss with the EU Code of Conduct Group what steps it should take to “better ensure that businesses have sufficient economic presence.”

In addition, Cayman was instructed to “abolish or amend legal mechanisms that enable the granting of advantages only to non-residents or in respect of transactions carried out with non-residents.”

Minister for Financial Services Tara Rivers visited Brussels in May to talk to EU policymakers about the details of how economic substance is going to be defined.

The ministry said this dialog continued in meetings “on June 28 in Brussels, when jurisdictions and the EU discussed a paper that has been agreed by EU member states, which provides guidance as to what the EU considers to be economic substance; and on July 10 in Paris, with the EU, OECD and [the jurisdictions found in violation of the fair tax criterion], to continue the discussions.”

Because the EU’s guidance is not prescriptive, but rather provides a framework, the ministry said, it is continuing to determine the Cayman Islands’ approach to economic substance.

“[The ministry] has formed several local private sector working groups to review the EU’s guidance paper and provide feedback to the Ministry, which will be used to determine legislative proposals regarding economic substance for relevant Cayman Islands businesses. The Ministry also plans to consult the general public on these matters in due course.”

So far, so vague.

One reason for the overwhelming opacity on the topic is that EU member states have not agreed a definition of economic substance standards.

The Netherlands is currently the only EU country that has defined criteria for economic substance for tax purposes and these may well be an indication of what the EU could come to expect from Cayman in the future.

As a measure against tax avoidance, the Dutch government introduced earlier this year increased substance requirements for Dutch holding companies, as well as Dutch intra-group financing and licensing companies to ensure that a corporate structure is set up for valid business reasons and reflects an economic reality. In other words, it is not just used to shift profits from one entity to another to lower the tax burden.

Under the rules, at least half of the decision-making directors must be resident where the foreign intermediary holding company is based and all board decisions must be taken there. In addition, bookkeeping must take place where the foreign holding company is based, and the most important bank accounts must be maintained there, too. This list is likely going to be expanded with the requirements for a 100,000 euro minimum-wage cost and a physical office space where the holding company is located.

Similar requirements could pose a problem for exempted companies in Cayman which rarely have staff on island and under Cayman law are not allowed to trade locally, except to further the business carried on outside of the Cayman Islands. While some exempted companies do have substance, they are more often mere legal structures without offices and permanent staff.

The introduction of substance requirements could therefore have a significant impact on Cayman’s company regime.

Chamber President Paul Byles says Cayman should take a balanced approach to developing any measures to meet economic substance requirements.

“There are currently no globally accepted definitions of economic substance and, even within the EU, member countries have varying degrees of expectations regarding what constitutes economic substance,” he said. “Therefore, we should not go too far in arriving at definitions of economic substance primarily because that might mean tying ourselves to a commitment while simultaneously having very little influence over whether the path we choose will become a global standard. We need to avoid an unlevel playing field on this issue as well.”

He said the Chamber of Commerce is working very closely with the Ministry of Financial Services to assist in striking the right balance in relation to both the local and international business sectors in Cayman.