The Cayman Islands
By Lowtax Editorial
09 October, 2015
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, as demonstrated by the jurisdiction's recent naming as the world's top specialized financial center for banking.
Introduction To The Cayman Finance Center
The Cayman Islands has the world's largest offshore banking sector, is second only to Bermuda as a captive insurance center, 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 percent on transfers of most real estate (9.5 percent 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 were almost 100,000 companies registered in the islands by the end of 2014.
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.
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 (see below for more information on the Cayman Islands' commitments to new international transparency standards).
The Companies Law 1961 is based on English law and is the main law governing companies in Cayman. 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 differences between a non-resident company and an exempted company are as follows:
- An exempted Caymans company does not have to use Ltd or Limited in its name;
- it may issue bearer shares in addition to registered shares, but they must be held by an authorized depositary;
- it has to hold one directors' meeting a year in Cayman (but may use proxies);
- it does not have to hold a shareholders' meeting in Cayman;
- it need not file a list of shareholders annually, and does not even have to keep such a list;
- it may obtain a Certificate of Tax Exemption (i.e. against any future Cayman taxation)
A revision to the Companies Law in 2007 removed the need for exempted companies to hold an annual meeting in the Cayman Islands.
An exempted company (or limited duration exempted company) is the normal form of choice for collective investment vehicles.
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 (see below).
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 centers 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 (2015 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 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. At the end of 2013, a total of 11,379 funds, including registered, administered, licensed and master funds, were regulated by the Cayman Islands Monetary Authority (CIMA), compared to 10,841 in 2012.
In March 2013, the Government legislated to allow CIMA 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.
In July 2015, it emerged that changes to financial services laws were being considered to establish an opt-in regime, compatible with the AIFMD that would enable funds and fund managers to obtain a "third country" passport.
The two pieces of legislation under consideration are the Mutual Funds (Amendment) Bill, 2015, and the Securities Investment Business (Amendment) Bill, 2015. The former makes provision for the regulation of Cayman investment funds that elect to be regulated by CIMA for AIFMD passport purposes. In the bill, a Cayman investment fund that makes such an election is referred to as a "regulated EU connected fund," a category available to both open-ended and closed-ended funds. The latter bill makes provision for the regulation of Cayman fund management entities that engage in certain EU connected activities, as specified in the bill; and elect to be regulated by CIMA for AIFMD passport purposes. In this bill, a Cayman fund management entity that makes such an election is referred to as an "EU Connected Manager," a category available to both current licensees under the Securities Investment Business Law and entities that are currently not required to be licensed under such law.
The Cayman Islands Stock Exchange (CSX) opened in July 1997 under the Stock Exchange Company Law 1996, specifically targeted at mutual funds and specialized 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 recognized jurisdiction, meaning the EU, the USA, Japan, Switzerland, Canada, and a number of other IOFCs.
In March 2013, the CSX 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.
The astonishing Cayman Islands banking industry had 196 banks under the supervision of the Banking Supervision Division at the end of June 2015, of which six 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.
As at June 2014, total international assets and liabilities (cross-border positions in all currency and domestic positions in foreign currency) were reported as USD1.399 and USD1.441 trillion, respectively (June 2013: USD1.503 and USD1.524 trillion, respectively). The jurisdiction continues to be ranked sixth internationally based on the value of cross-border assets, which stood at USD1.365 trillion in June 2014 (June 2013: USD1.503 trillion), and fifth in terms of cross-border liabilities which stood at USD1.347 trillion in Jun 2014 (June 2013: USD1.487 trillion) highlighting the role of the Cayman Islands as a financial intermediary.
Cayman banks must be licensed under the Banks and Trust Companies Law (2013 Revision) (formerly the Banks and Trust Companies Law 1995, as amended in 2001 and 2003). They are supervised by CIMA, which concentrates on banks for which Cayman is the home-country supervisor. CIMA recently extended its bank inspection program to on-shore subsidiaries of Cayman banks. A very wide range of services is offered: the almost 100,000 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.
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 license: 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.
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 licenses, instead providing for three new sub-classes of Class B license 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 license, or in contravention of the terms of the relevant license 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.
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 was approved by the legislative assembly in 2013.
Cayman is now the second-largest domicile for captive companies. There were a total of 723 Class B, C, and D companies under the supervision of the Insurance Supervision Division as at June 30, 2015. Pure captives and Segregated Portfolio Companies represent the two main categories, with 393 and 130 companies respectively.
The Cayman Islands is the leading jurisdiction for healthcare captives, representing 34 percent of all captives. As at June 30, 2015 medical malpractice liability continues to be the largest primary line of business with 246 companies, and workers' compensation the second largest with 151 companies. The vast majority (90 percent) 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.
As of June 30, 2015 total premiums were reported to be USD11.8bn and total assets USD54.4bn.
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 center of excellence for reinsurance."
Financial And Tax Transparency
The Monetary Authority Law (2013 Revision) gives CIMA legal responsibility, as part of its regulatory function, "to monitor compliance with the money laundering regulations." These regulations, which prescribe measures to be taken to prevent the use of the financial system for the purposes of money laundering, are in the form of the Proceeds of Crime Law, 2008, Money Laundering Regulations (2013 Revision).
The Proceeds of Crime Law, 2008, which came into force under in September 2008, strengthened the jurisdiction's AML framework by giving the Attorney General the power to restrain and recover the proceeds of criminal conduct on civil grounds. In addition, criminal conduct is now broader than under the previous law, and it extends beyond indictable offence to all offences.
The Basle Statement of Principles issued in December 1988 set out basic principles in relation to customer identification, compliance with legislation and regulation enforcement agencies and record keeping and systems.
The Cayman Islands has also accepted the Financial Action Task Force (FATF) Forty Recommendations on the Prevention of Money Laundering and Nine Special Recommendations on Countering Terrorist Financing, which are the international standards for effective anti-money laundering and counter terrorist financing regimes. In 2013, the Cayman Government 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 Cayman Islands has also agreed to adopt new standards in tax transparency and information exchange. The territory has signed an intergovernmental agreement with the United States to exchange financial account data under the US Foreign Account Tax Compliance Act, and agreed a similar deal for information exchange with the United Kingdom. The Cayman Islands also joined the OECD/EU Convention on Mutual Administrative Assistance in Tax Matters in 2013.
A great deal of additional information on the Cayman Islands' business advantages, legislative framework, available offshore structures and related information can be found on the Cayman Islands Knowledge Base of Lowtax.net.
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