An overview of accounting, auditing, and tax compliance in the Cayman Islands
As Cayman Island is a tax-free country, it is free from several compliances. There is no requirement for tax payment or for filing financial statements. All companies incorporated in the Cayman Islands must prepare financial statements to reflect the true and fair view of the functioning of the company, but there is no requirement to publish or file the financial statement as it is not subject to any supervision by the Cayman Islands Monetary Authority (CIMA) or any state agency. Only the companies regulated by the CIMA must publish and file financial statements. CIMA-regulated companies are those companies that are incorporated in accordance with the Banks and Trusts Acts, Mutual Funds Act, Insurance Act, Securities Investment Business Act, and Companies Management Act.
No offshore company is subject to tax in the Cayman Islands. The government of Cayman Island gives a guarantee in writing that no tax will be levied for 20 years. This period of 20 years is extendable to 30 years. This guarantee ensures that the company holds the non-taxable status even if new taxes are introduced in the future. Further, all companies exempted from tax are required to file an annual return with the Registry only to ensure that the Memorandum of Association and Article of Association of the company has not been changed and whether the company has complied with the provisions of the Companies Act or not.
Audit of Accounts
There is no requirement to file the financial statements of offshore companies as there is no audit requirement. However, companies that are regulated by the CIMA are not exempted from audits. Such companies have to provide CIMA-audited financial statements. In such cases, the financial statements are required to be prepared as per the International Financial Reporting Standards (IFRS) or as per Generally Accepted Accounting Principles of the U.S., Japan, Switzerland, or any other low-risk jurisdiction. All audits must be conducted by the Cayman Islands Institute of Professional Accountants.
The time limit for the preparation and submission of accounts
Financial statements must be filed with the CIMA within 3 to 6 months from the end of the financial year of the company. However, the first and the last reporting period is extendable up to 18 months. In addition to this, if required, the deadline for filing audited financial statements can be extended at the discretion of the CIMA. Usually, a one-month extension is provided, and no questions are asked. However, in case of an extension of more than one month, an auditor's letter is required to be provided to CIMA stating the reason for an extension. In special circumstances, the CIMA may grant a 3-month extension maximum. The application for an extension of the due date for filing the financial statements should be accompanied by a registration fee. In case of failure to meet the requirement of audit and timely filing of financial statements with the CIMA, a penalty is imposed on the directors and company.
An annual return is required to be filed along with annual fees by all companies and partnerships incorporated and registered in the Cayman Islands. The Annual Return should be filed by 31st January every year. The annual return confirms that the company did not conduct activities in the Cayman Islands and that it fulfils all requirements of the company's law. In case of failure to file annual returns and fees by 31st March, the late fee starts to accrue quarterly. The late fee is imposed in the following manner:
By 31st March
Between 1st April to 30th June
33.33% of the amount of the annual fee.
Between 1st July to 30th September
66.67% of the amount of the annual fee.
Between 1st October to 31st December
100% of the amount of the annual fee.
Consolidated Financial Statements
In the Cayman Islands, there is no requirement to prepare a consolidated financial statement. However, an offshore company has to maintain the financial statements as considered necessary by the director of the company in the Cayman Islands to confirm the origin of the transaction and to give a fair view of the company's financial position.
General Accounting Information for Companies in Cayman Island
Every foreign company on Cayman Island is exempt from tax. A company exempt from taxes is required to maintain proper books of account, including contracts and invoices relating to all sums of money received and expenditures made, the sale and purchase of goods by the company, and assets and liabilities of the company. The following are the necessary papers required to be maintained by companies exempt from taxes:
- Official Banks statements
- Contracts under which activities are conducted
- Invoices, acts, and set-offs
- Financial statements of subsidiaries and associates
- Contracts relating to the purchase of shares or interest in subsidiaries and associates
- Promissory notes and financial obligations
- Brokerage statements on securities
- Accounting books
- Any other necessary papers reflecting the company’s activities
Tax Compliance in the Cayman Islands
The Cayman Islands is a tax-free country. It has no concept of Corporate Income Tax, Personal Income Tax, VAT, Withholding tax, Capital gains tax, or inheritance and gift tax. If no operations are carried out by the company in the Cayman Islands then the company is not obliged to register with the local tax authority and receive a taxpayer number in the same way as it is not obliged to pay any income tax. Hence, it is also free from any tax filing requirement. There is no requirement for any social contributions however, participation in authorized pension funds and health insurance is compulsory. These contributions are paid by employers with partial reimbursement from employees. Employees contribute at least 5% of their remuneration to the pension insurance scheme. Further, the health insurance contributions are made equally by the employer and the employee. Stamp duty is payable at the rate of 7.5% on real estate transactions and transactions involving shares in real estate companies. Stamp duty is also payable at the rate of 1% to 1.5% on mortgages and some other transactions.
International Tax Treaties and Reporting Standards
Annual Report under Foreign Account Tax Compliance Act (FATCA)
It is a mechanism to report financial account information held by U.S. persons to the U.S. Internal Revenue Service (IRS). Cayman Island is a part of FATCA, and in furtherance to FATCA, Cayman Islands has formulated the Tax Information Authority Act (TIA Act). TIA Act is the primary legislation that deals with the implementation of the Agreement. As per this Act, U.S. citizens, whether living in their home country or abroad, have to file annual reports on any foreign account holdings. The objective of this agreement and this Act is to prevent tax evasion and promote transparency in the global financial sector. Form 8938 is required to be filed by U.S. taxpayers with financial assets of more than USD 50,000. So if you're a U.S. citizen, then you will have to comply with these regulations and file annual reports.
Economic Substance Return under Economic Substance Act
The Cayman Islands Economic Substance Act came into force on 1st January 2019. This was enacted after Cayman Island collaborated with OECD Forum on Harmful Tax Practices and European Union Commission Services. It aims to implement the standard on substantial activities requirements. As per this Act, an Economic Substance Return is required to be filed to the TIA within 12 months after the end of the financial year. Economic Tax Return has to be filed by all the entities that are carrying out one or more relevant activities. An Economic Return- tax resident in another jurisdiction form (TRO Form) is to be filed by those entities which claim to be tax residents outside the Caymwho n Islands and carry on one or more relevant activities in the Cayman Islands.
Country-by-Country Report (CbC Report)
CbC Report is required to be filed by Multinational Enterprises (MNEs) that meet certain criteria to file a CbC Report with tax administration or tax authorities. This report provides a breakdown of the amount of revenue, profits, taxes, and other indicators of economic activities for each tax jurisdiction where the MNE conducts business.
Exchange of Information on Request (EOIR)
EOIR is based on the principles such as transparency and effective exchange of information, such as availability of information, appropriate access to information and the existence of exchange of information mechanisms. EOIR is modelled on the OECD Manual on Implementation of Exchange of Information Provisions for Tax Purposes. EOIR takes place when the tax authority of a requesting jurisdiction asks for particular information from the competent authority of another jurisdiction.
Common Reporting Standards (CRS)
The CRS is a mandate of the G20 by the OECD. CRS is a global standard under which financial account information is automatically exchanged for tax purposes. It is an intergovernmental approach adopted by many jurisdictions to implement the U.S. FATCA. CRS is designed in a way to maximize efficiency and minimize costs. Specified Financial Account Information is obtained by jurisdictions from their financial institutions, and on an annual basis, the information is automatically exchanged with reportable jurisdictions.