For general background on The International Tax Co-operation (Economic Substance) Law, 2018 (as amended by relevant regulations, the "Economic Substance Law"), the related Guidance on Economic Substance for Geographically Mobile Activities (the "Guidance") and for the meaning of 'relevant entity', please click here.
This update assumes that an entity has already been determined to be a 'relevant entity' under the Economic Substance Law and that the 'relevant entity' is now considering whether it is carrying on one of the nine categories of geographically mobile 'relevant activities' - in particular, under the 'shipping business' category.
What is 'shipping business'?
'Shipping business' in the Economic Substance Law 'means any of the following activities involving the operation of a ship anywhere in the world other than in the territorial waters of the Islands or between the Islands:
(a) the business of transporting, by sea, passengers or animals, goods or mail for a charge;
(b) the renting or chartering of ships for the purpose described in paragraph (a);
(c) the sale of travel tickets and ancillary ticket related services connected with the operation of a ship;
(d) the use, maintenance or rental of containers, including trailers and other vehicles or equipment for the transport of containers, used for the transport of anything by sea; or
(e) the functioning as a private seafarer recruitment and placement service,
but does not include a holding company business or the operating of a pleasure vessel.'
Economic Substance Test
If a 'relevant entity' carries on the 'relevant activity' of 'shipping business' it will be subject to the economic substance test set out in the Economic Substance Law. The economic substance test can be satisfied in relation to that 'shipping business' if the 'relevant entity':
(a) conducts 'Cayman Islands core income generating activities;
(b) is directed and managed in an appropriate manner in the Cayman Islands; and
(c) has adequate operating expenditure, physical presence and personnel in the Cayman Islands.
Cayman Islands Core Income Generating Activities (Cayman Islands CIGA)
The relevant 'Cayman Islands core income generating activities' in the context of 'shipping business' include:
(a) managing crew (including hiring, paying and overseeing crew members);
(b) overhauling and maintaining ships;
(c) overseeing and tracking deliveries;
(d) determining what goods to order and when to deliver them, organising and overseeing voyages.
Guidance on 'Shipping Business'
There is no sector specific guidance in relation to 'shipping business' in the Guidance.
What to do if a 'Relevant Entity' is carrying on the 'Relevant Activity' of 'Shipping Business'
It is worth noting that there are a range of consequences for breaches of the Economic Substance Law (including financial penalties and potential striking-off).