A Cayman fund with European investors is not one legal question. It is three, and they are usually answered by three different people who do not read each other’s work. The Cayman question is whether each entity in the chain is inside or outside the economic substance regime. The European question is what the authorities where the entities’ parents and beneficial owners reside are told, and by whom. The Dutch question, for anything that touches a Netherlands entity, is whether a payment crosses a list.
The first of those is the one that most often surprises people, because the fund itself is usually outside the substance test and everything standing next to it may not be. This piece sets out where those lines fall under the Act as it currently stands, what the calendar looks like, and what a European investor’s adviser will actually ask for.
The fund itself sits outside the substance test
The International Tax Co-operation (Economic Substance) Act, in the 2026 Revision consolidated as at 31 December 2025 and published as Supplement No. 10 with Legislation Gazette No. 7 of 5 February 2026, excludes investment funds from the substance test in two separate places.
An investment fund is excluded from the definition of relevant entity. Investment fund business is excluded from the list of relevant activities. Both exclusions sit in the Schedule to the Act. The definition of investment fund is drawn to cover an entity whose principal business is the issuing of investment interests to raise funds or to pool investor funds with the aim of enabling the holder of such an interest to benefit from the profits or gains from the entity’s acquisition, holding, management or disposal of investments. It expressly does not include a person licensed under the Banks and Trust Companies Act or the Insurance Act, or a person registered under the Building Societies Act or the Friendly Societies Act.
It reaches further than the top vehicle. The definition includes any entity through which an investment fund directly or indirectly invests or operates, with the express exception of an entity that is itself the ultimate investment held. That exception is the line that matters in practice, and it is where files fail.
Neither exclusion reaches the annual notification. Section 7(1) requires every entity, which section 7(10) defines as a company incorporated under the Companies Act, a limited liability company, a limited liability partnership or a foreign company registered under the Companies Act, and which paragraph 1(2) of the Schedule extends to partnerships, exempted limited partnerships and registered foreign limited partnerships, to notify the Authority annually, among other things, whether or not it is carrying on a relevant activity and, if it is, whether or not it is a relevant entity. A fund vehicle organised in one of those forms makes that notification even though it is outside the test and the report.
The entities standing next to the fund are a different matter
Under the Schedule, a relevant entity is any company, other than a domestic company, that is incorporated under the Companies Act or registered as a limited liability company, together with partnerships other than local partnerships, exempted limited partnerships, foreign limited partnerships registered in the Islands, limited liability partnerships and foreign companies registered under the Companies Act. It excludes an investment fund and an entity that is tax resident outside the Islands.
The relevant activities are banking, distribution and service centre business, financing and leasing, fund management, headquarters business, holding company business, insurance, intellectual property business and shipping. A general partner, a manager incorporated in the Islands, a lending vehicle through which the fund neither invests nor operates, a holding company that is the ultimate investment rather than a conduit, an entity providing senior management to other members of its group: each of those is capable of falling inside the definitions even though the fund above it does not.
Two consequences follow. Every entity in the chain has to be tested individually, and under section 4(8) the test is applied to each relevant activity separately, so an entity conducting two of them has two tests. And the entity that is tax resident outside the Islands is excluded, which converts a claimed foreign tax residence into something the Cayman authority will pass on rather than simply accept. Under section 7(1)(c), an entity carrying on a relevant activity that is tax resident outside the Islands must notify the Authority annually of the jurisdiction in which it claims to be tax resident, with the information reasonably required to support that claim, of the name and address of its immediate parent, ultimate parent and ultimate beneficial owner, with the information reasonably required to identify them, and of the date of the end of its financial year, and must provide appropriate evidence where the Authority reasonably requires it. Section 10(3) then sends the information provided, in accordance with relevant international standards and scheduled agreements, to the authority of that jurisdiction, among the others described below.
Directed and managed, as the Act sets it out
Where the test applies, section 4(2) treats it as satisfied where the entity conducts core income generating activities in relation to the relevant activity, which the Schedule defines as activities of central importance to generating relevant income that must be carried on in the Cayman Islands; is directed and managed there in an appropriate manner in relation to the activity; and, having regard to the level of relevant income derived from the activity carried out in the Islands, has adequate operating expenditure incurred in the Islands, an adequate physical presence there and an adequate number of full-time employees or other personnel with appropriate qualifications in the Islands. Section 4(4) accepts core income generating activities conducted by another person where the entity is able to monitor and control how that person carries them out.
The Act then sets out with unusual precision how the directed and managed limb can be met. Under section 4(3) an entity complies with that limb where the board as a whole has the appropriate knowledge and expertise to discharge its duties as a board, meetings of the board are held in the Islands at adequate frequencies given the level of decision making required, there is a quorum of directors present in the Islands during those meetings, the minutes of those meetings record the making of strategic decisions of the entity at the meeting, and the minutes of all board meetings, together with the entity’s appropriate records, are kept in the Islands.
The third and fourth of those, the quorum and the minutes, are the operative ones. A quorum present in the Islands is a fact that either happened or did not, and it is recorded in travel arrangements as well as in minutes. Minutes recording the making of strategic decisions are different from minutes recording approval of decisions taken elsewhere, and a reviewer can tell the two apart at a glance.
Where the entity is only carrying on the business of a pure equity holding company, section 4(5) applies a reduced test. It is satisfied where the entity confirms that it has complied with all applicable filing requirements under the Companies Act and that it has adequate human resources and adequate premises in the Islands for holding and managing equity participations in other entities. That is materially lighter, and it lasts only while the entity stays inside the Schedule’s definition of a pure equity holding company, one that only holds equity participations in other entities and only earns dividends and capital gains.
The calendar, and the price of missing it
Under section 7(3), a relevant entity that carries on a relevant activity and is required to satisfy the test must prepare and submit a report to the Authority no later than twelve months after the last day of each financial year. Section 7(4) prescribes its content, including the type of relevant activity, the amount and type of relevant income, expenses and assets, the location of the place of business or plant, property or equipment used for the relevant activity in the Islands, the number of full-time employees or other personnel with appropriate qualifications who are responsible for carrying on the relevant activity, the name and address of any other person conducting the core income generating activities, information showing the core income generating activities conducted, and a declaration as to whether the test is satisfied.
Under section 7(8A), failure to file on time carries a penalty of five thousand dollars, with an additional five hundred dollars for each day the failure continues. That is a running charge rather than a fixed one, which makes an administrative oversight expensive very quickly. Section 7(8) requires a relevant entity that is required to satisfy the test to retain records relating to the information required to be provided to the Authority for six years after the end of the financial year.
Where the Authority determines that the test has not been satisfied, section 8(2) sets the penalty at ten thousand dollars. Where it then determines a failure for the following financial year, section 8(4) imposes a penalty of one hundred thousand dollars, and section 8(6) then requires the Authority to report to the Registrar, who under section 8(10) must apply to the Grand Court for an order under section 8(11). If satisfied that the entity was required to satisfy the test and failed to do so, the court may make such order as it sees fit, including an order requiring the entity to take specified action or, for a company registered or incorporated under the Companies Act, a limited liability company or a limited liability partnership, an order that it is a defunct company or that it be struck off. Under section 9(1) an entity may appeal a determination and penalty to the Grand Court within twenty-eight days after the notification, and the appeal stays enforcement of the penalty.
The information goes to where the parents and owners reside
This is the provision that changes how the file should be built. Under section 10(1), where a relevant entity fails to satisfy the test for a financial year, the Authority provides the information given to it under the Act, in accordance with relevant international standards and scheduled agreements, to the competent authority in the relevant jurisdiction, which the Schedule defines as a country or territory that is a party to a scheduled agreement, in which the immediate parent, the ultimate parent and the ultimate beneficial owner reside, and, where the entity was incorporated outside the Islands, to the competent authority of the place of incorporation.
The same disclosure applies without any failure in two further cases. For a high risk intellectual property business, section 10(2) provides for it regardless of the outcome. And under section 10(3), where an entity carrying on a relevant activity is tax resident in a jurisdiction outside the Islands, the information is provided to the authority in that jurisdiction, to the authorities of the parent and beneficial owner chain and, where the entity is incorporated outside the Islands, to the authority of the place of incorporation.
For a fund with European investors this is the point at which the Cayman file stops being a Cayman matter. A substance failure in George Town can arrive unprompted on the desk of the tax authority where the parent or the ultimate beneficial owner resides, and it arrives with the entity’s own declaration attached.
The Dutch list, and what it does to a payment
The Cayman Islands appear on the Dutch list of designated jurisdictions in the Regeling laagbelastende staten en niet-coöperatieve rechtsgebieden voor belastingdoeleinden, in the version in force from 1 January 2026, on the limb reserved for low tax states rather than the limb that tracks the European list of non-cooperative jurisdictions. The other names on that limb are Anguilla, the Bahamas, Bahrain, Bermuda, the British Virgin Islands, Guernsey, the Isle of Man, Jersey, Turkmenistan, the Turks and Caicos Islands and Vanuatu.
The effect is on payments rather than on the fund. Under the Wet bronbelasting 2021 the Netherlands levies a conditional withholding tax on interest, royalties and, since 1 January 2024, dividends paid to affiliated entities in designated jurisdictions and in the other cases set out in article 2.1 of that Act. Article 4.1 of that Act sets the rate at the highest percentage in article 22 of the Wet op de vennootschapsbelasting 1969, which is twenty five point eight per cent in 2026. A Dutch entity in the structure that pays interest or a dividend to a Cayman entity is inside that charge where the recipient is affiliated in the sense of article 1.2, which article 3.4a narrows for dividends to some of those relationships, and the other statutory conditions are met. Affiliation turns on a qualifying interest, defined as an interest that gives such influence over an entity’s decisions that its activities can be determined, which makes it a question to answer in writing rather than by assumption.
The designation is tied to a date. Under article 1.2 of the Wet bronbelasting 2021, a low tax jurisdiction is a state designated by ministerial regulation that, on 1 October of the calendar year preceding the period, does not subject entities to a tax on profits or does so at a rate below nine per cent, or that appears on the European list of non-cooperative jurisdictions applying in that preceding year. A structure built on this year’s list should be re-tested against next year’s, and the review belongs in the same file as the substance work rather than in a separate one.
What a defensible file contains
The practical test is whether the file could be handed to a reviewer without narration. An entity by entity map of the chain, stating for each whether it is a relevant entity, whether it is an investment fund or an entity through which the fund invests, and which relevant activities it has income from. That map should be refreshed annually rather than at formation, because a single intercompany loan can add a financing activity to an entity that previously had none.
Alongside it, minutes recording deliberation in the Islands with a quorum present in the Islands, a record of where each director was when each resolution passed, records held in the Islands, a calculation of personnel and expenditure with the administrator’s own time records behind it, and a note of the reporting date for each entity with the person responsible named.
The Cayman fund structure has not stopped working, and nothing in the current Act suggests it is meant to. What has changed is that the vehicle no longer carries the file on its own. The entities standing beside it now do. Every entity within the Act’s definition notifies annually, those required to satisfy the test report annually, and the Authority passes what they say, on a failure and in the other cases described above, to the jurisdictions where their parents and beneficial owners reside, among others, and section 10(4) allows it, in accordance with relevant international standards and scheduled agreements, to provide any information provided to it under the Act as appropriate.
This article is informational and does not constitute tax or legal advice. The treatment of any structure depends on its facts and on the law of each jurisdiction involved. Each engagement is subject to scope and applicable regulation.