Economic Substance in the Cayman Islands

Economic substance requirements in the Cayman Islands ensure that companies claiming tax residence there must have a real business presence, not just a paper entity. This was implemented as part of international pressure from the OECD and EU to combat tax evasion and ensure fair tax practices.

Key Points of Economic Substance:

1. Core Income-Generating Activities (CIGA): Companies must conduct actual business activities (like management, operations, or R&D) within the Cayman Islands.
2. Local Management and Employees: Companies need local directors and/or employees who can make decisions, not just offshore directors.
3. Physical Presence: Office space and physical assets are often required to show a genuine local operation.

Benefits of Setting Up in Cayman Islands for Web3 Projects:

1. Tax Efficiency: Cayman Islands have no corporate income tax, capital gains tax, or withholding tax, making it highly attractive for projects looking to optimize profits.
2. Regulatory Clarity: The Cayman Islands offer a friendly regulatory framework for digital assets and blockchain projects, with clear guidelines and minimal interference compared to other jurisdictions.
3. Global Reputation: Despite the lack of direct taxation, the Cayman Islands is seen as a reputable financial center due to compliance with international regulations (FATF, OECD guidelines).
4. Access to Capital: The Cayman Islands have a robust financial services ecosystem, including fund administrators, legal experts, and financial institutions that cater specifically to digital asset projects.
5. Strategic Location: The timezone, legal system based on English common law, and a well-connected financial network make it convenient for global business operations.

Why Web3 Projects Are Moving There:

• Favorable Tax Environment: Allows projects to keep more of their revenue and reinvest in growth.
• Regulatory Flexibility: Offers a proactive approach towards innovative digital asset projects.
• Investment Opportunities: Attracts venture capital and institutional investors who are familiar with the Cayman-based legal structure for digital assets.

In summary, the combination of tax benefits, regulatory support, and a strong financial services infrastructure makes the Cayman Islands an attractive jurisdiction for Web3 companies seeking to scale and operate efficiently.