In March the Cayman Islands avoided being placed on the European Union’s blacklist of countries which are, what they term, uncooperative when it comes to their tax practices; however, we have been placed on a grey list which means we must pass laws to ensure that companies in Cayman meet the EU’s economic substance rules. This means companies domiciled in the Cayman Islands must show a physical presence here, in terms of staff and offices.
I think we will have to look closely as to the finer points of this legislation, with regard to exactly how much of a physical presence companies will need to demonstrate, in order to comply with the EU’s requirements. At the end of the day, it is up to the company in question as to whether they feel the advantages of setting up a Cayman company outweigh the fact that they must relocate part of their business here. If they want to take advantage of our tax neutral environment, they will have to invest in renting or purchasing offices and transferring their staff to Cayman. This will be a huge balancing act for such businesses who will need to closely monitor the cost of living, fees, relocation costs and ongoing fees to government in order to justify such a move.
This may have the effect of pushing some companies out of the Cayman Islands, but the ones that end up staying will, in my mind, contribute greatly to our economy. This is because they will need to invest here, purchase or rent homes, participate in the local economy when it comes to day-to-day living, send their children to school here, and so on. I see this as a positive thing for the community as they will have the potential to contribute considerable substance to the country. The knock-on effect of investment in property, whether residential homes for staff or commercial offices for the businesses themselves, could have the potential to keep Cayman’s real estate industry on an upturn for many years to come and create a longevity in our market that could well survive the swings of economic cycles abroad.
In my opinion, it’s extremely important that we are able to manage the downside and recognise the opportunities.
In order to embrace this new investment into our community, real estate industry and overall economy, I think it would be useful if government considered how it will approach its fees imposed on such entities, as government is in control of many of the costs involved with such as move. In order to get such companies to make a five or possibly even 10-year commitment, it might be useful if government were to offer stable business fees over that period of time. This would be a great way to entice people to make more of a commitment to their Cayman-based entity. Businesses want stability and flat lines so they can budget for the future. Having a constant base-line for costs is an important plus factor when making a decision as to where to set up shop, in any line of business. Anything the Cayman Islands government can do to help encourage investors to use the Cayman Islands as their domicile of choice will be a win for all of us.
Please read more of my thoughts on Cayman and the EU’s economic substance laws in the latest edition of Cayman Financial Review.