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Cayman Islands: Offshore Legal and Tax Regimes

Introduction

The Cayman Islands Government has constructed a regulatory regime that is highly favourable to offshore operations, especially since there is no taxation in Cayman other than stamp duty and import duties (see Domestic Corporate Taxation). There are more than 93,000 companies registered in Cayman, along with about 226 banks and 750 insurance companies. See Law of Offshore for a detailed treatment of the legal regimes for Banking, Insurance, Trust Management and Mutual Funds. In this section offshore corporate forms are summarised, along with details of the fees payable by the various types of financial institution.

In June 2000, the Cayman Islands was identified by the FATF as non-cooperative in the fight against global money laundering. The result of this is that the Cayman Islands was one of fifteen tax jurisdictions placed on a blacklist. Each offending tax haven had a year in which to correct its tax regulations and legislation. The FATF released its next annual report in June 2001, in which the organisation revised its list of countries and territories deemed non-cooperative. Only four were removed from the list, including the Cayman Islands (the other three being the Bahamas, Liechtenstein and Panama). The Cayman Islands was praised by the FATF for its substantial efforts to conform to forty recommendations set out by the FATF in a code of good practice governing money laundering.

During 2003 the Cayman government battled to avoid inclusion in the scope of the EU's Savings Tax Directive, but in the end was forced to give in by the UK Treasury, and began applying the information exchange model under the Directive from July 1, 2005. This means that information about interest on savings paid to citizens of European member states is being forwarded to the tax authorities of the member state in question.

The Cayman Islands authorities have put a brave face on this development, which they tried hard to avoid.

The Cayman Islands Tax Information Authority (TIA) released statistics in September 2011 that showed the number of reports made to European Union member states under the savings tax directive.

The largest number of reports on accounts based in the Cayman Islands were sent to the French tax authority, with 3,744 having been sent in 2010, followed by Portugal with 1,058 and the UK with 866. However, the USD3.8m in savings income reported to the UK was substantially higher than the USD1.2m reported to the French authorities and USD587,269 reported to the Portuguese.

The highest aggregate amount of savings income was reported to the Netherlands (USD488,781) from 72 reports.

In total, 7,161 reports were made to EU member states by the TIA on USD6.95m (12.2m in 2009) in savings income held in the Cayman Islands.

The International Monetary Fund has observed "substantial progress" by the Cayman Islands with regards financial sector regulation in its latest report on the jurisdiction, published in December 2009.

Progress areas identified include changes to legislation, rules and guidance to meet international standards, increases in the Cayman Islands Monetary Authority’s (CIMA) independence, resources and efficiency, as well as increased transparency of the funds sector arising from the implementation of CIMA’S electronic reporting system. The report makes recommendations for enhancements in 10 areas but acknowledges that these recommendations “are broadly consistent with the priorities already identified by the authorities and in most cases where policy action is already underway.”

The report is based mainly on information obtained during the IMF’s March 2-13 mission to the Cayman Islands, and on subsequent consultations with CIMA. The mission’s purpose was to review developments in Cayman’s supervisory and regulatory framework since the first assessment in October 2003.

Cayman Premier, McKeeva Bush, welcomed the report: “Once again we have an external assessment that gives evidence of this jurisdiction’s commitment to providing sound regulation in line with the best international standards. We voluntarily participated in this assessment and welcome any others that are objective as we are confident that our financial industry and the supervisory regime can stand up to any scrutiny. The government broadly accepts the recommendations and it is our intention to give priority to implementing them in a timely manner, as far as best serves this jurisdiction and contributes to the stability of the global financial system.”

CIMA’s Chairman, George McCarthy, said the report “reflects the high standards that CIMA strives to meet and the seriousness with which the Authority takes its role.”

The main recommendations contained in the IMF report are to:

  • Strengthen the legislative structure for the independence of CIMA, beginning with passage of the pending draft amendments to the Monetary Authority Law;
  • Conduct a formal risk assessment and focus CIMA’s supervisory efforts more directly on the key risks facing the jurisdiction, such as operational and reputation risk;
  • Formalize and validate the assumptions underlying CIMA’s supervisory approach that relies on the strength of supervision applied elsewhere and the contribution of licensees and other domestic professionals to the oversight of financial intermediaries;
  • Formulate a robust framework for supervising licensees cross-border and cross-sectorally to help prevent regulatory arbitrage or supervisory gaps;
  • Draw up contingency plans to handle the failure of important institutions;
  • make CIMA’s enforcement powers consistent across all administered legislation and set the monetary penalties high enough to make them effective and dissuasive;
  • Review the human resource budgeting policy and reassess the process regularly to ensure the continued adequacy and quality of regulatory resources;
  • Monitor international developments to ensure that the regulatory regime in the jurisdiction incorporates elements of international best practice as it evolves;
  • Enhance regulatory reporting and disclosure requirements of financial entities; and
  • Implement a risk-based solvency regime for the insurance industry.

In April 2009, the Cayman Islands Financial Services Association denounced the OECD’s decision to ‘grey’ list the Cayman Islands despite its evident commitment to the OECD standard.

“The Cayman Islands Financial Services Association is extremely disappointed to see the inclusion of the Cayman Islands in the OECD ‘grey’ list. It had been hoped that the OECD would undertake a rational objective analysis of the tax transparency established by the Cayman Islands over the past decade. In reverting to its political origins, the OECD has not improved its credibility and indeed in acting in an arbitrary and prejudicial manner raises questions about the value that is attributed by the G20 to the cooperation in tax and criminal matters that the Cayman Islands has demonstrated.”

“The Cayman Islands has full and relevant tax transparency not only with the United States under the November 2001 Tax Information Exchange Agreement but proactive reporting with 27 European Union nations under the 2005 European Union Savings Tax Directive, the figures for which, not incidentally, show monetarily and fiscally insignificant deposits by European residents in the Cayman Islands. However, according to the OECD the Cayman Islands finds itself characterized with the wholly non-compliant nations, which are the root cause of the current tax evasion furore. The determination by the OECD to ignore the unilateral mechanism, which is well respected by a number of OECD members, shows the OECD still applies a double standard which clearly has nothing whatsoever to do with the good faith disclosure of information in tax matters, assuming that Cayman Islands financial institutions have anything of interest to disclose.”

“However we are encouraged to see that the OECD has now set an objective test for positioning on the ‘white’ list which is less than the total number of tax exchange arrangements that the Cayman Islands currently has in place. Accordingly, since the Cayman Islands government has throughout maintained its commitment to execution of further bilateral treaties, assuming its approaches are met in good faith, we anticipate that the OECD will be obliged to remove Cayman from its current list swiftly.”

The Cayman Islands has subsequently been promoted to the OECD 'white list.'

Cayman Islands’ Financial Secretary, Kenneth Jefferson on October 2, 2009, tabled an austerity budget designed to tackle the significant challenges the jurisdiction is facing as a result of the financial crisis, which left the government little choice but to increase a multitude of taxes and fees. These included, among others, annual company and general registry fees, mutual fund licence fees, banking and trust licence fees, insurance licence fees, securities and investment business fees.

The Cayman Islands Legislative Assembly on December 2 passed the Money Services Amendment Bill, 2009, which amends fees payable by financial services businesses.

The effect of the amending legislation, coupled with associated Regulations that the Cabinet passed on December 1, is to:

  • Increase the annual license fee payable by money services businesses to KYD10,000 (USD12,345);
  • Introduce an annual fee of KYD1,000 for each additional subsidiary, branch, agency or representative office that a money services business operates; and
  • Introduce a new transaction fee payable to the government, equal to 2% of the gross amount transferred overseas by a money services business on behalf of its customers. However, such a fee cannot exceed KYD10 per transaction.

"The government made a deliberate decision to limit the fee to a maximum of KYD10 recognizing that the majority of persons transferring funds overseas are lower-paid employees,” explained Financial Secretary Kenneth Jefferson.

“The Money Services Law makes it clear that banks, building societies and cooperative societies do not fall within its ambit. Hence, wire transfers, drafts and overnight funds in the banking system are not subject to the new transaction fee,” he added.

In March 2010, the Cayman Islands government welcomed the general thrust of the conclusions of the Miller Report, particularly its main recommendation that the introduction of direct taxation in the jurisdiction should be avoided.

The Miller Commission was created by the Cayman government last year in response to the UK government's concerns that the global economic and financial crisis has damaged the territory's long-term economic and fiscal health, given its reliance on a healthy international financial services industry. In a statement, Cayman Premier, McKeeva Bush, said that the proposals have been broadly accepted as the way forward for the islands, and will be instrumental in drafting final proposals.

Commenting on the content of the Miller report, Bush noted:

“On the first recommendation, that there should be no introduction of direct taxation in the Cayman Islands, it would be no surprise for you to hear that we agree with this general conclusion and believe that ideally new revenue measures will need to be kept at a minimum for the short- to medium-term. However, we are committed to examining ways to broadening the revenue base and we have given that commitment to the UK. We received no indications during the meetings that the FCO (UK Foreign and Commonwealth Office) will be pushing for direct taxes, although this is something that they would like for us to continue to consider in our efforts to broaden the revenue base.”

 

 

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