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Cayman Islands International Focus

By Lowtax Editorial
11 December, 2013


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.


Taxation

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 jurisdiction’s flexible and business-friendly legal framework, this is the major reason why there are more than 93,000 companies registered in the islands.

Corporate persons registered in the jurisdiction pay company registration fees depending on the type of company and its registered capital. At the time of writing, these range from KYD300 to KYD3,168. Annual fees are also levied on a sliding scale and are between KYD300 to KYD4,568.

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.

It is, however, easy 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, and the European Commission is developing new proposals to substantially tighten the directive.


Company Law

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. 

The General Registry also maintains a Register of Patents and Trade Marks, governed by the Patents and Trade Marks Law (1999 Revision). Rather than a registry of original registration, the Cayman Islands registry serves to extend to the Cayman Islands patent and trade mark rights that have been registered in other jurisdictions.

The registration process is straightforward. Once the Registrar is satisfied that an application is in order, the right is recorded and published in the Gazette. Such publication is prima facie evidence of the recording. The fee structure for trademarks is based on the number of classes in which the trade mark is registered.


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 1993 (2012 Revision), a mutual fund is defined as any company, trust or partnership either incorporated or established in the Cayman Islands, or if outside the Cayman Islands, managed from the Cayman Islands, which issues equity interest redeemable or re-purchasable at the option of the investor, the purpose of which is the pooling of investors' funds with the aim of spreading investment risk and enabling investors to receive profits or gains from investments. Hedge funds also fall within this definition.

The categories of funds regulated under the MFL are set out below.

  • Licensed Mutual Fund: The MFL (section 4(1)) specifies that a mutual fund operating in and from the Cayman Islands must have a licence unless: a licensed mutual fund administrator is providing its principal office; it meets the criteria set out in section 4(3), which allows for funds to be registered, or it is exempt from regulation under section 4(4). The provisions relating to licensed mutual funds benefit large, well known and reputable institutions, which do not propose to appoint Cayman Islands service providers.
  • Administered Mutual Fund: To be approved as an administered mutual fund, the fund must have a CIMA-licensed mutual fund administrator providing its principal office. The regulatory responsibility for the administered fund, which has more than 15 investors and which is not a licensed or registered mutual fund, is placed largely in the hands of a licensed Mutual Fund Administrator.
  • Registered Mutual Fund: A Registered Fund must have either a minimum aggregate equity interest of KYD80,000 (USD100,000) purchasable by a prospective investor or the equity interests must be listed on a stock exchange approved by the Cayman Islands Monetary Authority (CIMA).

The Mutual Funds (Amendment) Law, 2011, published with the Extraordinary Gazette No. 113 dated 22 December, 2011, amended the Mutual Funds Law (2009 Revision) to require all Master Funds, as defined therein, to become registered by CIMA. 

A Master Fund must have either a minimum aggregate equity interest of KYD80,000 (USD100,000) purchasable by a prospective investor in the master fund or the equity interests of the master fund must be listed on a stock exchange approved by CIMA.

The legislative framework for funds in the Cayman Islands allows for sophisticated investment techniques, which may include leveraging portfolios to a substantial extent, making loans of securities on an unlimited basis and investing without restriction in any currency or instrument, among other features.

Vehicles commonly used for operating mutual funds are the exempted company, the unit trust and the exempted limited partnership. An exempted company can also be established as a "Segregated Portfolio Company" (SPC) with protected cells or portfolios. The SPC makes it possible to provide a means for different groups to protect their assets when carrying on business through a single legal entity.

After a dip in registrations following the financial crisis, the number of hedge funds in the Cayman Islands has been increasing lately, due to a growth in master funds, which were first registered in 2012. Between April and June 2013, the total number of registered master funds increased by 318 to 2,449. By the end of June the total number of master funds was up 41 percent from a year earlier. However, funds other than master funds decreased in number by 41 in the second quarter and 379 over the previous 12 months, totalling 8,760. Hedge funds in the country totalled 11,209, up 3 percent year-on-year.

In March 2013, the Government legislated to allow the island's regulator, the Cayman Islands Monetary Authority, to enter into cooperation agreements with regulators in the European Union as part of the jurisdiction's preparations for the entry into full effect of the European Union's Alternative Investment Fund Managers Directive (AIFMD) from July 2013.

The Cayman Islands' Government explained that a legislative amendment had been made after consultations with the European Securities Markets Authority on the detail of a model Memorandum of Understanding that will be used as a basis in negotiations with EU member states.

According to the Cayman authorities, the decision will support Cayman funds in meeting the stringent requirements laid down in the Directive for non-EU hedge funds targeting EU participants with their offerings.

The Cayman Islands Stock Exchange (CSX) opened in July 1997 under the Stock Exchange Company Law 1996, specifically targeted at mutual funds and specialised debt securities. 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.

In March 2013, announced the adoption of Deutsche Borse Group's Xetra Trading Platform, operated from Frankfurt, to enable the exchange to undertake full range trading for equities and other securities, including insurance-linked securities, listed on the CSX. Companies that wish to list on the CSX can now access a network of approximately 400 global participants who are currently authorized to trade on one or more Xetra markets. International Xetra participants can be passported through a simple process as CSX broker members and will be able to reuse their existing Xetra connection to enter trades into the CSX Xetra platform.

Subsequent to the adoption of Xetra, the CSX has revised its listing rules, with new rules introduced for specialist companies such as mineral companies, shipping companies, and investment funds. New rules have also been put in place to provide adequate transparency for the inclusion of retail investors, or those investing less than USD100,000 in listed companies.

Over 1,000 instruments are currently listed on the CSX.


Banking

The astonishing Cayman Islands banking industry had 221 banks under the supervision of the Banking Supervision Division at the end of September 2013, 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.

The majority of the Class B licenses are branches and subsidiaries of international banks from North America, Europe, and South America. Total international (cross-border positions in all currency and domestic positions in foreign currency) assets and liabilities were reported as USD1.503 trillion and USD1.524 trillion, respectively, in June 2013

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 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 93,000 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, and asset protection rather than tax avoidance as such is the driving force.


Insurance

The Cayman Islands insurance sector was until recently governed by the Insurance Law 1979 as amended. This legislation provided for two basic types of insurance licence: Class A insurance licences cover domestic insurance in Cayman itself; Class B licences cover Cayman or (registered) foreign companies conducting external business; restricted Class B licenses are for captives.

An updated insurance law in the Cayman Islands was passed by the legislative assembly in September 2012 and went into effect in December 2012. Known as the Cayman Islands Insurance Law 2010, the new legislation is designed to create a conducive regulatory environment to foster the development of the reinsurance sector and 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 insurer’s 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.

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.

In July 2012, the Cayman Islands financial regulator announced the launch of a consultation on a Bill to amend the Insurance Law to allow insurers formed as segregated portfolio companies (SPCs) to enjoy the same benefits as incorporated cell companies in other jurisdictions. Under the change, a new or existing insurance SPC would be able to incorporate one or more of its segregated portfolios (ie. cells) by establishing a 'portfolio insurance company' (PIC) under the cell. The PIC would then conduct the relevant insurance business, instead of the cell. However, while the PIC would be regulated by the Cayman Islands Monetary Authority, the PIC would not need to be separately licensed as an insurance company. Unlike a traditional segregated portfolio cell, the PIC would be a separate legal entity, i.e. an exempted company limited by shares. These proposals were approved by the legislative assembly in 2013.

Cayman is now the second-largest domicile for captive companies. There were a total of 755 Class “B”, “C” and “D” companies under the supervision of the Insurance Supervision Division as at September 30, 2013. Pure captives and Segregated Portfolio Companies represent the two main categories, with 413 and 137 companies respectively. 

The Cayman Islands is the leading jurisdiction for healthcare captives, representing 34% of all captives. As at September 30, 2013 medical malpractice liability continues to be the largest primary line of business with 254 companies, and workers’ compensation the second largest with 159 companies. The vast majority (90%) of the insurance companies licensed in the Cayman Islands insure risks in North America. The next most important geographical source is the Caribbean and Latin American region. 

2012 was described by CIMA, which regulates the insurance sector, as “a year of tremendous growth for the Cayman Islands,” in terms of its insurance industry, with 53 licences granted. 2013 continues to see steady growth in insurance licences, with a combined total of 28 licences granted during the first three quarters of 2013.  As of September 30, 2013 total premiums reported are at an all-time high of USD13.8bn and total assets reported are at USD85.6bn, compared to USD11.8bn (17% increase) and USD88bn (3% decrease), respectively, as at September 30, 2012. 

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.”

Cayman Premier McKeeva 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. Companies or businesses employing fewer than fifteen work permit holders may also submit a Business Staffing Plan. However, such a company must submit a Business Staffing Plan within six months of the date as of which they commence employing fifteen or more persons on work permits.

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.


Cayman And The Campaign For Transparency

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 OECD’s “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 OECD’s internationally agreed tax standard in August 2009. At the time of writing, the jurisdiction has signed 33 TIEAs, of which 26 are in force. A further 17 TIEAs are under negotiation.

Another watershed moment in the campaign for more corporate and tax transparency arrived in mid-2013 at the time of the G8 Summit hosted by the UK in June, when these issues were placed at the top of the participants’ agenda.

Ahead of the Summit, the Cayman Islands, along with a host of other offshore financial centres with constitutional links to Britain, confirmed that it is committed to working with other nations towards the full implementation of the revised FATF standards, and published an action plan listing the measures it intends to take to ensure full implementation of these standards.

The publication of the action plan followed an announcement by the Cayman Government that it was committed to joining the OECD/EU Convention on Mutual Administrative Assistance in Tax Matters, which it duly joined in November 2013. The Convention, effective in the Cayman Islands as of January 1, 2014, provides for all possible forms of administrative co-operation between states in the assessment and collection of taxes, in particular with a view to combating tax avoidance and evasion. This co-operation ranges from exchange of information, including automatic exchanges, to the recovery of foreign tax claims. It currently has more than 50 adherents. The jurisdiction has, however, opted out of certain aspects of the Convention, and will not handle matters related to requests for the recovery of foreign tax claims, or exchange of information regarding local taxes, and social security contributions. The convention does not allow countries to opt out of core elements regarding the exchange of tax information.

The Cayman Islands has also signed an intergovernmental agreement with the United States to exchange information with the US Treasury under the US Foreign Account Tax Compliance Act (FATCA). Additionally, the US and Cayman also signed a new tax information exchange agreement, to take the place of the original agreement signed in 2001.

The signing of the agreements was held in London on November 19, 2013, immediately after Cayman officials participated in the United Kingdom's Joint Ministerial Council of Overseas Territories. Welcoming the two new agreements, Cayman's Minister of Financial Services, Wayne Panton, pointed out that Cayman is the first Overseas Territory to sign a FATCA agreement with the US.

"Our participation in globally accepted transparency and tax information exchange initiatives speaks volumes of our financial services integrity," he said, "and that leads to the confidence and trust that investors continue to have in us."

Also in November 2013, the Cayman Islands became the first British overseas territory to sign an intergovernmental agreement with the UK on the automatic exchange of tax information, an accord based on the US FATCA IGA.

Although Cayman is frequently the object of verbal attacks politicians and certain sections of the media the world over who see the territory as the archetype of the “secretive” tax haven, it has consistently been given a clean bill of health from the OECD and others on the transparency score. Indeed, on November 25, 2013, the jurisdiction was confirmed as one of the vice chairs of the Peer Review Group of the OECD's Global Forum on Transparency and Exchange of Information for Tax Purposes, also retaining its position on the Steering Group.

"This confirmation recognizes the dedication and value that Cayman has brought to the Global Forum over these past few years," said Minister for Financial Services Wayne Panton. "While this will mean more responsibility, it demonstrates that our engagement, commitment and hard work are acknowledged."

Cayman was rated "largely compliant" following the Global Forum's peer review and rating process. The ratings were based on the forum's Phase 1 assessments of member countries' legal and regulatory frameworks, and Phase 2 assessments of their practical implementation of the global standard for tax information exchange.


Fiscal Governance

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 government’s 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 Caymans’ 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.


Conclusion

While its laws and regulations continue to come under the OECD’s the US’s and the EU’s microscope, the same pressures are being exerted on IOFCs the world over, not just the Cayman Islands. True, the government’s 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 government’s 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 hard to beat.




 

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