News

Cayman Holdings：Economic Substance


Date：2025/06/23

Date: 2025/06/23

Since 2019, the Cayman Islands has implemented the International Tax Co-operation (Economic Substance) Act (“Economic Substance Act”), which requires entities incorporated or registered in the Cayman Islands—including companies and partnerships—to comply with applicable economic substance requirements. This includes Pure Equity Holding Companies (PEHCs), which must file an Economic Substance Return (ESR) annually and declare whether they conducted any Relevant Activities during the preceding financial year.

What Is a Pure Equity Holding Company (PEHC)?

A Pure Equity Holding Company is an entity that:

  • Primarily holds equity interests in other companies; and
  • Does not conduct any commercial activities other than holding such equity.

The statutory definition provides that a PEHC:

“only holds equity participations in other entities and only earns dividends and capital gains.”

As further outlined in the ES Guidance Notes, if an entity engages in any other activities or derives income that is not part of, or incidental to, its function as a pure equity holding company, it falls outside the definition and must instead satisfy the higher substance requirements applicable to the Relevant Activity it carries on.

Equity interests include not only company shares, but also other investments that grant rights to share in the profits of a business.

When Does an Entity Not Qualify as a PEHC?

An entity generally will not be treated as a Pure Equity Holding Company if it:

  1. Holds assets or investments other than equity interests, such as:
    • Interest-bearing bonds
    • Government securities
    • Beneficial interests in real estate
  2. Carries on any other business activities
  3. Earns income unrelated to pure equity holding

If a company engages in activities beyond passive shareholding—for example:

  • group financing
  • management or advisory services
  • charging service or consulting fees
  • operational or commercial activities

—then it will no longer qualify as a PEHC and must meet the full economic substance requirements, which may include having an adequate physical presence and employees in the Cayman Islands.

Economic Substance Requirements for PEHCs

Under the Economic Substance Act, a Pure Equity Holding Company must satisfy the following:

  1. Maintain a registered office in the Cayman Islands
  2. Comply with applicable corporate governance and administrative requirements
  3. Does not need to maintain physical premises or employees in Cayman

Do PEHCs Need Audited Financial Statements?

Generally:

  • A PEHC must submit financial statements,
  • Audit is not required,
  • Sufficient information must be provided to demonstrate that the entity qualifies as a PEHC.

The Cayman Islands Tax Information Authority (the “Authority”), through the Department for International Tax Cooperation (DITC), reviews ESR filings—including submitted financial statements—to verify their accuracy. If the filing is incomplete or inconsistent, the entity will be required to provide additional documentation.

The Authority, through the DITC, has conducted an initial assessment of the ES Return submitted by the Entity (“ES Return”).

Penalties for Non-Compliance

Failure to comply with ES obligations or submitting inaccurate information may result in:

1. For failure to file or incorrect filing

  • First-year penalty: KYD 10,000 (approx. USD 12,000)
  • Subsequent penalties: up to KYD 100,000
  • Possible direction for the entity to cease operations or be struck off the register

2. For providing false or misleading information

  • Penalty: KYD 10,000
  • Or imprisonment up to 5 years

The Act clearly states:

It is an offence to knowingly or wilfully provide false or misleading information to the Authority under the ES Act.

Compliance Recommendations

  • Regularly assess the company’s business activities to confirm PEHC status
  • Avoid inadvertently engaging in activities that may trigger higher substance requirements
  • Ensure timely and accurate submission of ESN and ES Return
  • Keep internal records, company documents, and supporting materials properly maintained for audit purposes
  • Since Cayman ES laws and related regulations are updated periodically, entities should routinely consult the DITC’s official website for the latest guidance

References

Back