Cayman Islands International Focus
By Lowtax Editorial
13 December, 2012
The islands, Grand Cayman, Cayman Brac and Little Cayman cover an area of just 100 sq miles in the Western Caribbean Sea, but, together, the Cayman Islands punch well above their weight in terms of their importance to the global financial system.
The Cayman Islands has the world's largest offshore banking sector, is second only to Bermuda as a captive insurance centre, and has recently established itself as the domicile of choice for the hedge fund and offshore mutual fund industry. During 2003 and 2004, China's explosive entry into world markets saw the Cayman Islands emerge as one of the primary routes for financial flows into and out of the Chinese mainland.
There is little to say about the Cayman Islands in terms of taxation, other that there is very little of it! Besides import duties (at varying rates) and stamp duty at rates up to 7.5% on transfers of most real estate (9.5% is charged for real estate in prime locations), there are no direct taxes to speak of in the Cayman Islands, either on corporate or personal income. Alongside the jurisdictions flexible and business-friendly legal framework, this is the major reason why there are more than 92,000 companies registered in the islands.
Corporate persons registered in the jurisdiction pay company registration fees depending on company status and registered capital. At the time of writing, these range from KYD300 to KYD2,468. Annual fees are also levied on a sliding scale and are between KYD300 to KYD815.
The government briefly considered plans to introduce a 10% payroll tax on the income of expatriate workers in 2012. The so-called Community Enhancement Fee was to be applied to all foreign employees with an income from employment of USD43,200 (originally set at USD24,000). However, the proposal was quickly dropped from the 2012 Budget after a hostile response from the financial services industry.
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 states in question.
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.
In total, 7,161 reports were made to EU member states by the TIA on USD6.95m (USD12.2m in 2009) in savings income held in the Cayman Islands.
That these numbers appear small in relation to the overall size of the Cayman banking deposit base is probably an indication of how easy it is to legally circumvent the EUSTD by shifting assets into savings vehicles not covered by the legislation, for example into a corporate entity. This is something that the EU wants to change; the Commission is developing new proposals to substantially tighten the directive.
The FATF and the OECD
In June 2000, the Cayman Islands were identified by the FATF as non-cooperative in the fight against global money laundering. The result of this was that Cayman 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 the forty recommendations set out by the FATF in a code of good practice governing money laundering.
However, following the G20 London Summit in April 2009, the Cayman Islands found itself on the OECD grey list of jurisdictions which had committed to, but not substantially implemented, the internationally-agreed standard on tax transparency. The benchmark set to reach the OECDs white list was the signing of at least 12 tax information exchange agreements (TIEAs). The Cayman Islands signed its 12th TIEA with New Zealand, and moved onto the white list of countries that have substantially implemented the OECDs internationally agreed tax standard in August 2009. At the time of writing, the jurisdiction has signed 28 TIEAs, including with Canada, China, France, Germany, India, Japan, the Netherlands, the United Kingdom and the United States.
Threatening anti-offshore noises continue to emanate from the United States, and these have grown in volume since the Obama administration came to power in 2009. So far however, legislation directly targeted at tax havens like the Cayman Islands, such as Senator Carl Levins Stop Tax Haven Abuse bill, have not passed the US Congress.
Like many other small territories which are dependent on financial services and tourism, the Cayman Islands economy suffered as a result of the financial crisis, and this depleted revenues collected from such levies as company fees. As a result, and also due to increasing public expenditure, the government has struggled to balance its books.
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 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.
However, 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 in 2009 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 had been broadly accepted as the way forward for the islands, and were to 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.
However, after much foot-dragging by the Cayman government, the territory was eventually obliged to accept the terms of a Framework for Fiscal Responsibility, which was negotiated with the UK government in an attempt to put the governments finances onto a more sustainable long-term footing.
The FFR commits the Cayman government to "restoring prudent fiscal management," in order to help "create an environment in which people and businesses can plan for the future with confidence."
The FFR states that the Cayman Islands governments fiscal strategy consists of the following five components: controlling government expenditure; limiting new borrowings; re-aligning the revenue base; improving the performance of Statutory Authorities and Government Companies; and reducing costs by working in partnership with the private sector.
In August, 2012, the United Kingdom government endorsed a revised Cayman budget for 2012/13 but restricted the size of a second overdraft facility to limit Cayman borrowing.
The budget was the result of a second revision of budget proposals from the Cayman government, which had been instructed to rewrite its initial budget plans earlier in the year after the UK government blocked the territory from increasing borrowing to service the islands' recurring budget deficits. A second draft of the budget was drawn up in early August, but this draft was promptly abandoned after an outcry from the local financial industry regarding a proposal to introduce the aforementioned tax on expatriate workers' income.
The overdraft facilities, with a combined value of USD81m, are being provided in recognition of the cyclical nature of Cayman revenues from the financial services industry. At the request of the UK's Foreign and Commonwealth Office, the Cayman Islands will be required to establish a 'Budget Delivery Board' to ensure that it achieves a budgetary surplus, as well as the repayment of the two credit facilities to the UK government by January 31, 2013, and June 30, 2013.
The Companies Law 1961 (as amended, chiefly in 1990 and 1995) is based on English law and is the main law governing companies in Cayman. The law was updated, revised and consolidated in 2004, 2007 and 2010. The most recent revision came with the Companies (Amendment) Law, 2011, effective April 27, 2011, which has introduced a number of enhancements to the Companies Law (2010 Revision) such as enabling Cayman Islands companies to hold treasury shares and improving existing provisions, including the merger/consolidation regime.
There are four company types which are commonly registered in Cayman under the Companies Law: Ordinary Resident Company, Ordinary Non-Resident Company, Exempted Company and Exempted Limited Duration Company.
The Companies Law, true to its English origins, permits companies limited by shares, companies limited by guarantee, and unlimited companies; but in practice only companies limited by shares are used. Incorporation and registration of limited companies takes a day, and it can be less. Shelf companies are available but are unusual.
There needs to be one shareholder of record (of any nationality); there are no rules regarding minimum capital, par value etc. There is no statutory requirement for audit or for annual filing of accounts. All companies must maintain registered offices in Cayman.
Pressure from the OECD and other international bodies on the Cayman Islands to take steps to counter money-laundering has led to the imposition of more stringent 'KYC' rules on the offshore sector.
However, the Registry is actively targeting more company registrations from overseas, and the introduction of a new Arabic language facility in 2007 should ensure more business from the Middle East.
Investment Fund Management
The Cayman Islands are now one of the world's leading fund management centres due to the welcoming regime, well-constructed legislation, good reputation, and the presence of the Stock Exchange, whose regime is particularly well-suited to mutual funds.
Under the Mutual Fund Law 1996 (revised in 2007 and 2009), investment or mutual funds with more than 15 members must be individually licensed, or must be administered by licensed mutual fund administrators. Licenses are issued by the Governor in Executive Council ('ExCo') after scrutiny of the application by the Monetary Authority.
The number of mutual funds registered in the Caymans grew by 15.5% in the first six months of 2012 to 10,871. However, this was as a result of the inclusion of Master Funds in the statistics, following the enactment of the Mutual Funds (Administrative) Law (2011) since last year. The size of the remainder of the mutual funds industry (registered, administered, licensed) declined by 2.9%.
In December 2011, the Cayman Islands was found to be the most favoured domicile in terms of the quality of service provided by local practitioners in Hedge Funds Reviews Service Provider Rankings.
The survey results were based on the opinions of more than 1,000 hedge funds, funds of hedge funds (FOHFs) and investors (for example, family offices, pensions funds, sovereign wealth funds, insurance companies, asset allocators) who invest into hedge funds, or asset managers allocating to hedge funds and FoHFs.
Welcoming the findings, Richard Coles, the Chairman of Cayman Finance the promotional agency for the island's financial services industry, said: It is welcome yet unsurprising news that the Cayman Islands was named the most favoured domicile in the recent Hedge Funds Reviews Service Provider Rankings. The survey underscores Caymans ongoing relevance in the worldwide financial industry and role as a key player in the funds industry in particular.
Coles added that the Cayman Islands was ranked as the top domicile by 52.9% of the survey respondents well ahead of Luxembourg in second place with 13.1% - testament not only to the number of funds domiciled in the islands, but also to the quality that local service providers offer.
This is gratifying and important news for Cayman given the funds industrys extensive compliance requirements, increased regulation and industry concerns over counterparty risks, Coles continued. That Cayman shines in a time of increased due diligence by the majority of the funds industry is a major indicator of our continued success and dominance as the hedge funds domicile of choice worldwide.
The Cayman Islands Stock Exchange opened in July 1997 under the Stock Exchange Company Law 1996, specifically targeted at mutual funds and specialised debt securities (SPVs). Funds of funds and umbrella funds are both accepted, and there are no restrictions on investment policies. Funds can be established locally, or in a recognised jurisdiction, meaning the EU, the USA, Japan, Switzerland, Canada, and a number of other IOFCs.
By the end of 2011, the CSX had 1,156 listings, up from 1,113 at the same time in 2010. Market capitalisation was just under USD144bn.
The astonishing Cayman Islands banking industry had 234 banks under the supervision of the Banking Supervision Division at the end of December 2011, of which 15 held Class A licenses permitting local and offshore business activity, while the remainder hold Class B licenses, permitting only offshore business - a local office is allowed, but only very limited transactions can be carried out with Cayman Islands residents. Banks do not need to be incorporated locally: a foreign bank can register as a foreign company and then obtain a license.
Cayman banks must be licensed under the Banks and Trust Companies Law (2009 Revision) (formerly the Banks and Trust Companies Law 1995, as amended in 2001 and 2003).
Cayman Islands' banks are supervised by the Cayman Islands Monetary Authority (CIMA), which concentrates on banks for which Cayman is the home-country supervisor. CIMA recently extended its bank inspection programme to on-shore subsidiaries of Cayman banks.
A very wide range of services is offered: the 92,964 offshore companies registered in Cayman include many treasury management or investment management subsidiaries of multinationals taking advantage of the excellent banking environment and absence of taxation. Evidently, private banking is a major component of the industry: asset protection rather than tax avoidance as such is the driving force, so that the stability of Cayman alongside stringent banking secrecy and its sophisticated investment environment are very attractive to wealthy individuals, particularly those from the US where Cayman has a very good reputation.
As of December 2011, total assets were reported at USD1.607 trillion, down 7.0% since the same period of the previous year when total assets stood at USD1.728 trillion.
However, data shows that the Cayman banking sector endured a difficult year in 2012: According to figures released by the Cayman Islands Statistics Office, the number of banks and trusts registered in the jurisdiction has declined in the 12 month period to the end of June 2012. The number of Class 'A' bank & trust licenses fell by one, to 15, while the number of Class 'B' licenses fell by 14, to 220 with the sector shrinking by 6% in size. Banking sector liquidity declined by 2.5% as foreign currency deposits fell by 5.6%, predominantly due to a fall in US dollar-denominated deposits by 6.3%.
It also remains to be seen how much of an impact the US Foreign Account Tax Compliance Act (FATCA) has on the Cayman banking industry.
Enacted by the United States Congress in March 2010, FATCA will require foreign financial institutions (FFIs) to disclose information about financial accounts held by US taxpayers, or by foreign entities in which US taxpayers hold a substantial ownership interest. Failure by an FFI to disclose information would result in a requirement to withhold 30% tax on US-source income. Presently, it is anticipated that FFIs will only need to begin reporting income received by these clients by January 1, 2016, in respect of the calendar year 2015. Despite the lengthy transitional period envisaged, FFIs have warned of the substantial compliance burden attached to the reporting requirements.
In October, the Cayman Islands government released an update on whether the territory will negotiate a government-to-government reporting arrangement with the United States to ease the compliance burden on local financial institutions of complying with the requirements.
The United States and France, Germany, Italy, Spain and the United Kingdom have already collaborated on the negotiation of a landmark inter-governmental agreement, designed to allow relevant information to be transmitted to US authorities via a centralized authority in each nation, and several other nations have also announced their intent to launch similar negotiations with the US.
The island's Premier, McKeeva Bush, said: The government is keeping track of the discussions surrounding FATCA, and evaluating both information and dialogue in order to make the best choice for our jurisdiction regarding a reporting arrangement. We will be in a position to decide on the best way forward once the Model 2 Intergovernmental Agreement [involving Switzerland and Japan] is published and we have been able to fully evaluate all the options."
As government continues this process, it is encouraging that FFIs in the Cayman Islands are moving ahead with their particular preparations, in accordance with US requirements," Bush added.
The Cayman Islands insurance sector is regulated under the Insurance Law 1979 as amended and revised in 2004 and 2008. Class A insurance licenses cover domestic insurance in Cayman itself; Class B licenses cover Cayman or (registered) foreign companies conducting external business; restricted Class B licenses are for captives. Applications for licenses are made to the Cayman Islands Monetary Authority (CIMA).
Legislation in 1998 introduced a Segregated Portfolio Company Law. The SPC is an exempted company which may create one or more segregated portfolios in order to segregate the assets and liabilities of the company held within or on behalf of the portfolio from the assets and liabilities of other portfolios. As originally passed, SPCs were available only to certain types of insurance company, but in 2002 amendments extended the provisions relating to segregated portfolios to any exempted company. In essence, the new law provided that any new company may apply to be registered as a segregated portfolio company. A segregated portfolio company must pay additional fees and must provide notice to the Registrar of the names of all segregated portfolio accounts created.
There were a total of 739 Class B companies under the supervision of the Insurance Supervision Division at the end of December 2011, one less than at the end of 2010. Pure captives and Segregated Portfolio Companies represent the two main categories of Class B entities, with 615 and 124 companies respectively.
New legislation has entered into force in the Cayman Islands to create a conducive regulatory environment to foster the development of the reinsurance sector.
The Cayman Islands Insurance Law 2010, which was passed by the island's legislative assembly in September 2012 and has now entered into force, creates two new categories of licenses:
Class C - in relation to the provision of reinsurance arrangements financed through the issuance of catastrophe bonds and similar instruments; and
Class D - in respect of the carrying on of reinsurance business.
According to the Insurance Managers Association of Cayman (IMAC), the law will have a broader impact on the islands' insurance industries. The law also:
- Abolishes the distinction between unrestricted and restricted Class B licences, instead providing for three new sub-classes of Class B licence for non-domestic insurers, based on the percentage of net premiums originating from the insurers related business;
- Tightens the definition of the carrying on of "insurance business," in particular removing references to contingent contracts for money;
- Establishes more comprehensive annual return reporting requirements for licensed insurers, agents, managers or brokers;
- Regulates transfers or the amalgamation of long-term business between licensed insurers, including requiring the approval of the Cayman Islands Monetary Authority;
- Provides for the settlement of disputes in relation to contracts of domestic insurance by way of arbitration, even in circumstances where there is no arbitration agreement in place; and
- Clarifies and significantly strengthens the penalties for non-compliance with the law, in order to provide a real and effective deterrent to the carrying on of insurance business without a licence, or in contravention of the terms of the relevant licence or of the law.
Although already established as an insurance company domicile, the Cayman Islands announced at the start of 2012 that it would seek to challenge Bermuda's supremacy as the leading domicile for insurance companies serving the US market.
Crucially, unlike Bermuda, the Cayman Islands will not seek equivalence with the EU Solvency II Directive, meaning that the territory will in theory attract insurers looking to circumvent the stringent capital buffer requirements.
This message was pressed home by a Cayman delegation at the 50th Annual Risk and Insurance Management Society - the largest gathering of risk professionals in North America - in April 2012.
Commenting following the event, Head of Insurance Supervision for the Cayman Islands Monetary Authority (CIMA), Gordon Rowell said: As the second largest captive jurisdiction globally, the Cayman Islands presence at RIMS is critical to our ongoing success. CIMA hosted several positive meetings with clients - both existing and potential - and we look forward to continuing to strengthen our relationship with the Insurance Managers in promoting the Cayman Islands as a premium financial services jurisdiction for captives and reinsurance.
Premier Bush, added: The Cayman Islands is finalizing a new legal and regulatory framework that will help to pave the way for new opportunities for our jurisdiction as a leading domicile for captive insurance and a centre of excellence for reinsurance."
Entry and Residence
Citizens of the US, Canada and of Britain and its dependent territories do not require visas to enter Cayman. Due to pressure on the local housing supply, work and residency permits are, however, strictly controlled, and preference is given to Caymanian residents.
A temporary work permit may be issued for any occupation for periods of up to six months. Annual Work Permits are available for longer periods of employment in the Cayman Islands.
Temporary work permits are issued by the Chief Immigration Officer, while annual work permits are issued by either the Chief Immigration Officer (or Work Permit Administrators designated by him), the Work Permit Board or the Business Staffing Plan Board (BSP Board) depending on whether the employer in question is required to possess a Business Staffing Plan.
Every company employing fifteen or more persons on work permits must submit to the BSP Board a Business Staffing Plan in accordance with the Third Schedule to the Immigration Regulations. The BSP Board meets weekly to consider proposed Business Staffing Plans and applications for the grant or renewal of work permits approved under a Business Staffing Plan Certificate. Each industry will be given at least one month's notice of the dates upon which their proposed Plan will be heard and each business or company within the industry will be invited to meet with the BSP Board on the date that their Plan is being heard. Once a Plan has been approved, the BSP Board will issue a Business Staffing Plan Certificate under which work permits may be issued, upon application, in relation to specific positions listed in the Business Staffing Plan Certificate. For certain positions the BSP may waive the requirement to advertise before submitting an application for the grant or renewal of a work permit. In addition, the Business Staffing Plan Certificate will indicate if there are other conditions to be fulfilled such as, if, and by when, a position should be filled by a Caymanian or scholarship requirement.
The maximum period that a person who is not designated as a key employee may remain in the Cayman Islands on a work permit is seven years. Persons designated as key employees may remain for a maximum of nine years.
Work permit applicants must also demonstrate proficiency in the English language. If a prospective employee is not a national of an English-speaking country and they are already in the Cayman Islands they will be required to take an English test. Where such an employee is not yet in the Cayman Islands they will be required to take an English test upon arrival at the airport. If they are found not to possess a sufficient knowledge of the English language, they will be refused entry or, if they are resident, may have their permission to remain or work permit revoked.
Following a revision to the Cayman Island budget, higher work permit fees entered into force on September 13, 2012.
The changes, introduced as part of the islands' revised budget, are contained in the Immigration (Amendment) (No. 2) Regulations, 2012. Increases to work permit fees were agreed as a more favourable alternative, during talks between the local financial services industry and the government, to a controversial tax on the remuneration of non-resident workers.
Under the changes, work permit fees for executive persons engaged in financial services businesses in Grand Cayman (such as a managing directors, chief executive officers, general managers, vice presidents) rise from KYD20,500 (USD25,000) to KYD30,375. Work permit fees for key non-executive roles, such as directors of marketing/trading, financial controllers etc. have increased to KYD20,925 from KYD15,500.
Work permits for highly-skilled financial services roles will generally now range from KYD13,650-KYD20,925, from KYD10,500 previously, affecting roles such as trust officers, senior business analysts/senior financial analysts, trust/fund administrators, and auditor/audit officers, among numerous others.
The Immigration Law amendments passed alongside the Cayman Islands Insurance Law 2010 have introduced new ten-year work permits for executives and managers in the reinsurance industry and free work permits for various categories of administrative staff for their first five years of residence in the islands. In addition, Permanent Residence with the Right to Work will now be available to approved persons who make a substantial investment in a home or other developed real estate.
Wealthy individuals who invest in businesses that contribute to the prosperity of the islands can also apply for 25-year permits under legislation approved by the Cayman parliament in 2010.
The new legislation introduces the opportunity for foreign individuals to apply for a Residential Certificate for Investment. While this will cost KYD20,000 (USD24,000), it allows the investor, their spouse and any dependents the right to live in the islands without the need for a work permit on certain conditions. Under the new law, investors must:
- Have a net worth of at least KYD6m;
- Invest at least KYD2.4m in licensed businesses with workforces comprising of at least 50% Caymanians, that contribute towards the prosperity of the territory;
- Pass checks on business competence, show financial records of their businesses stability, and show they undertake a managerial role in their given area; and
- Possess a clean criminal record and be of sound health with adequate health insurance.
While its laws and regulations continue to come under the OECDs the USs and the EUs microscope, the same pressures are being exerted on IOFCs the world over, not just the Cayman Islands. True, the governments fiscal troubles nearly led to the introduction of the first direct tax in the Cayman Islands in 2012, but the industry is likely to fight hard to keep its tax advantages, and the government would probably only countenance any new taxes on the financial sector in extreme circumstances; the recent agreement with the UK seems to have put the governments finances onto a surer long-term footing. So for those seeking an offshore base in which to establish a company, with its almost complete absence of taxation and business-friendly legal framework, Cayman is clearly hard to beat.
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