This week, I want to tell you about a new and important law in the Cayman Islands.
It’s called the ‘Economic Substance Law’ – and it’s affecting many investment funds in the jurisdiction.
Economic Substance Law
A common practice of many of our clients establishing an offshore investment fund (Cayman and BVI) is to also establish a licensed Investment Management Company in the offshore jurisdiction.
However, earlier this year, both the Cayman Islands and the BVI introduced new legislation which impacts offshore management companies.
Under pressure from the EU and the OECD, the Cayman Islands and the BVI introduced an ‘Economic Substance Law’ that now requires an increased level of ‘substance’ to be maintained in the Cayman Islands and BVI for all companies that fall within this new regime.
Investment Management Companies licensed in Cayman and the BVI fall within the scope of the Economic Substance Law.
What does this mean?
Basically, this law means that for a Cayman or BVI management company to comply with the Economic Substance Law, it will have to establish its core operation and business in the relevant jurisdiction.
Specifically, the management company will have to demonstrate the following:
- Conduct core income generating activities in the jurisdiction;
- Be “directed and managed” in an appropriate manner in the jurisdiction; and
- Regarding the level of relevant income derived from the investment management function carried out in the jurisdiction:
- have an adequate amount of operating expenditure incurred in the jurisdiction;
- have adequate physical presence (including maintaining a place of business) in the jurisdiction; and
- have an adequate number of full-time employees or other personnel with appropriate qualifications in the jurisdiction.
For many of our clients establishing their investment management operations in Cayman or the BVI is not a viable option.
Imagine the costs of setting up an office, obtaining work permits for the qualified staff, obtaining local trade licenses? It’s not a realistic option.
What’s the solution?
In previous blog posts, we have mentioned how ‘regulatory’ hosting services are a viable means of obtaining the necessary regulatory permissions to manage investments, including investment funds.
Well, regulatory hosting is what we are recommending to our clients seeking a solution to the Economic Substance Law.
All investment managers – wherever they are located – must be suitably regulated to manage other people’s money, including investment funds.
The regulatory hosting route is a perfect solution for the start-up manager. It is less costly than setting up your own regulated management company and can be achieved in a realistic timeframe.
IFINA works with a number of regulatory hosting firms and can assist you.
Do you need help complying with the new Economic Substance Law? We should have a Skype call. Just email me back and we can book a time that’s convenient to you.