The International Tax Co-operation (Economic Substance) Act (2024 Revision) (the “ES Act”) was brought into force to demonstrate the commitment of the Cayman Islands as a member of the Organization for Economic Co-operation and Development (the “OECD”) and as a response to the work of the OECD and European Union on fair taxation and global standards.

The ES Act since being introduced has undergone various updates and is assisted by the Economic Substance Guidance Notes, Enforcement Substance Enforcement Guidelines and other Economic substance material to assist entities with their economic substance filings.

The ES Act applies to all entities registered and domiciled in the Cayman Islands. Economic Substance Practice Points (the “ES Practice Points”) state that all entities, before the 31 January each year, must submit a completed economic substance notification (the “ESN”) outlining the entity’s economic substance position with respect to the ES Act.

Within 12 months of the entity’s financial year end, all relevant entities must file a subsequent economic substance filing being either an economic substance return (the “ESR”) or a tax resident outside the jurisdiction form (the “TRO”) with the Cayman Islands Tax Information Authority (the “TIA”).

The ES Act defines a relevant entity and has confirmed that all entities registered in the Cayman Islands will need to consider whether their business activities fall within one of the nine categories and the required reporting filings based on these activities. The TIA monitors the compliance of entities and any entity that fails to comply may be subject to administrative penalties or fines and other enforcement actions the TIA may impose.

New Economic Substance Enforcement Guidelines

The recently updated Enforcement Guidelines: Economic Substance (the “Guidelines”), issued on 31 March 2023, outline the enforcement powers and processes of the TIA in respect of administrative penalties against parties in breach of the ES Act. To be read in conjunction with the Guidance on Economic Substance for Geographically Mobile Activities V 3.2 and Practice Points, the Guidelines outline principles for the application of the administrative penalty framework to entities that are potentially subject to enforcement action as a consequence of contravening the ES Act.

The Guidelines reflect the TIA’s objective to ensure that entities comply with obligations under the ES Act by reporting complete and accurate information as to whether they are carrying on relevant activities and, if so, whether or not they are relevant entities under the legislation and are thereby required to satisfy economic substance requirements in the Cayman Islands (the “ES Test”).

Administrative Penalties

The Guidelines apply to all persons within the scope of the TIA’s compliance, monitoring and enforcement powers under the ES Act. The TIA has power to impose administrative penalties under the ES Act for missed reporting, failure of the ES Test in year 1 and failure of the ES Test in a subsequent financial year:

  1. Section 7(8)(A): CI$2,500/US$3,049 (year 1) or CI$5,000/US$6,098 (any year other than year 1) where a relevant entity fails to submit an economic substance report (“ES Return”) to the DITC Portal no later than 12 months after the last date of the end of each financial year under section 7(3) of the ES Act with an additional penalty of CI$500.00/US$610 for each day during which the breach continues. This includes circumstances where a relevant entity misclassifies itself and the deadline for submitting its ES Return has passed;
  2. Section 8(2): Up to CI$10,000/US$12,195 where a relevant entity fails to meet the ES Test in any reporting period that is not a “subsequent financial year” (i.e. a financial year following a financial year in which a notice was issued pursuant to section 8(1) of the ES Act); or
  3. Section 8(4): Up to CI$100,000/US$121,950 where a relevant entity fails to meet the ES Test in a subsequent financial year.

The Guidelines outline baseline penalty amounts for each of the contraventions above which may be applied at greater or lesser amounts depending upon general principles considered by the TIA discussed below. It should be noted that different penalty amounts apply where the entity is a pure equity holding company or is classified as high risk intellectual property.

Penalty Calculations – Worked Examples

The Guidelines outline a number of worked examples demonstrating how the administrative penalties are calculated in various situations, two of which are reproduced below:

Example 1

The date of the Penalty Notice is 1 May 2022. The date indicated on the Penalty Notice from which the additional penalty will begin to accrue is 1 June 2022. The ES Return is submitted on 15 June 2022. The penalty amount will be (assuming it is Year 1):

$2,500 (primary penalty) + $750 (additional penalty of $50 per day for 15 days) = CI$3,250

Example 2

The date of the Penalty Notice is 1 January 2023. The date indicated on the Penalty Notice from which the additional penalty will begin to accrue is 1 January 2023. The ES Return is submitted on 16 February 2023. The penalty amount will be (assuming it is not Year 1):

$5,000 (primary penalty) + $4,600 (additional penalty of $100 per day for 46 days) = CI$9,600

Determining Failure of the ES Test

If the information provided by the relevant entity in its ES Return is sufficient to show whether it has satisfied the ES Test in accordance with section 6(1) of the ES Act, the TIA will make the appropriate determination and will not request any further information from the relevant entity. Where the TIA is unable to make a determination on the basis of information provided by the relevant entity, it will engage with the relevant entity and conduct an investigation into the matter.

If a relevant entity indicates that it has not passed the ES Test on its ES Return without submitting any evidence to the contrary, the TIA will rely on this representation and will not explore reasons behind this self-determination as part of its investigation. However, if the relevant entity provides information that suggests it has in fact passed the ES Test, the TIA will seek to clarify the reasons that the relevant entity believes it did not do so.


In exercising its powers and taking enforcement action for contraventions of the ES Act, the TIA adheres to general principles of reasonableness, transparency, lawfulness, rationality, proportionality and procedural fairness. The TIA must also exercise discretion, consider the available facts to determine the nature of the contravention and penalty to be applied to the entity in each case and take action that is timely and effective in dissuading future breaches of the ES Act.


Compliance with the ES Act is monitored and enforced by the TIA. The ES Act provides for civil penalties up to CI$100,000/US$121,950 to be applied in relation to non-compliance with the applicable ES Test.

Where a relevant entity has satisfied elements of the ES Test, the TIA may adjust the amount of the penalty accordingly in consideration of the facts. The Guidelines provide an example in which a relevant entity has satisfied the “directed and managed” element of the ES Test but failed the other elements. In this scenario, the penalty under section 8 (2) would be assessed at CI$8,000 instead of the maximum amount of CI$10,000, effectively representing a 20% discount on the amount of the penalty.

A penalty notice will be issued to a relevant entity where it fails to submit an ES Return, fails to meet the ES Test or fails to meet the ES Test in a subsequent financial year. Where a relevant entity fails to submit its ES Return, it will have 30 days from the date of the penalty notice to do so. If the entity fails to file within this deadline, it will be deemed to have failed the ES Test and the maximum penalty will be imposed under section 8(2) or section 8(4) of the ES Act, as applicable.

Where the TIA issues a penalty notice due to an entity failing to meet the ES Test in a subsequent financial year, it must provide the Registrar with a report of the relevant matters and any additional requested information. Upon receiving the report, the Registrar will apply to the Grand Court for an order under section 8(11) of the ES Act.


It is an offence for a person to knowingly or wilfully supply false or misleading information to the TIA under the ES Act. On summary conviction, this is punishable by a fine of CI$10,000 or with imprisonment for a term of five years, or both.

A person also commits an offence if they fail to provide or make available to the TIA within the time specified, or knowingly or wilfully alter, destroy, mutilate, deface, hide or remove, any information requested by the TIA under the ES Act that is in that person’s possession or control. This offence is punishable on summary conviction by a fine of CI$10,000 or with imprisonment for a term of two years, or both.

It is also an offence to disclose information relating to the affairs of the TIA, a relevant entity or any officer, customer, investor, member, client or policyholder of a relevant entity. Such an offence is punishable on summary conviction to a fine of CI$10,000 or imprisonment for one year, or to both, and on conviction on indictment to a fine of CI$50,000 (or US$60,000), or to imprisonment for a term of three years, or to both.

In the circumstances that an offence under the ES Act has been committed by a body corporate and it is proved to have been committed with the consent or involvement of, or to be attributable to any neglect on the part of any director, manager, secretary or other officer of the body corporate, or any person who was purporting to act in such a capacity, the officer or any person purporting to act in that capacity, as well as the body corporate, commits that offence and is liable to be punished accordingly. Where the affairs of a body corporate are managed by its members, the aforementioned will apply in relation to defaults of a member in connection with the member’s functions as if the member were a director of the body corporate.

Limitation Period

The TIA may not impose a penalty after either (i) one year of becoming aware of the breach; or (ii) six years after the breach occurred, whichever is the earlier date. Where a statutory filing deadline has been breached, the TIA is deemed to become aware of the breach on the day after the filing deadline. If it is necessary for the TIA to investigate matters to determine whether an entity has failed the ES Test, the TIA is deemed to be aware that the entity has failed the ES Test on the date that the investigation is complete.


A relevant entity that fails to report by its deadline has 30 days within which to appeal after receiving a penalty notice from the TIA. Where an entity fails the ES Test in its first year or a subsequent year, an appeal must be made within 28 days after receipt of a penalty notice.  An appeal has the effect of a stay on enforcement proceedings pending a decision by the Court as to whether the TIA’s determination stands and/or whether a penalty is appropriate or a different penalty should be imposed.

TIA Recent Updates

In December 2023, the TIA issued administrative penalties to various entities who were not in compliance with the ES Act. The administrative fines issued were in relation to entities that failed to submit its 2021 TRO or ESR for the relevant reporting period. The administrative penalties amounts ranged from US$3,048.78 to US$6,097.56 being statutory maximum because the relevant entity’s obligation to file an ESR arose in respect of at least one financial year prior to the 2021 financial year.

The administrative fines issues by the TIA gave entities that were issued the Economic Substance Penalty Notice (the “ES Penalty Notice”) until 1 February the following year to:

  • pay the issued administrative fine for the relevant entity; and
  • submit the relevant economic substance report for the 2021 reporting period with respect to the relevant activity of the entity.

If an entity failed to comply with either action outlined in the ES Penalty Notice, the TIA issued a further administrative fine to the non-compliant entity, directing the entity to pay the administrative fine if not paid and remediate any and all outstanding economic substance filing to place the entity in compliance with the ES Act.

In conclusion, the TIA has the authority, in cases where the TIA thinks that an entity has not satisfied the ES Test, to determine that the entity has failed the ES Test whereby allowing the TIA to issue administrative fines or penalties in accordance with the Guidelines.

Recent Case Law

In October 2023 an application was made by China Construction Bank (Brasil) Banco Multiplo S/A in cause number FSD 313 of 2023, against the TIA, seeking an order under section 9 to reverse the issue of a penalty under the ES Act and a declaration that liability to the penalty did not arise. A consent order dated 12 January 2024 was granted to discontinue to the motion, with each party bearing their own costs.

This was an interesting result; whilst such applications are not frequent, we do anticipate an increase in similar applications, which may not resolve without contention.

If you’d like to discuss the application of the Cayman Islands economic substance regime to your business and how to comply with the requirements of the ES Act or learn more about how Conyers Regulatory & Risk Advisory team can assist, please do reach out. We’re always happy to chat.


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