The Cayman Islands
By Lowtax Editorial
06 October, 2016
The Finance Sector
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. The jurisdiction has also emerged as one of the primary routes for financial flows into and out of the Chinese mainland.
The Cayman Islands was the highest-placed offshore financial center in the twentieth edition of the semi-annual Global Financial Centres Index, published in September 2016.
The main sectors of the territory's finance industry are explored in more detail below.
The Legal Framework
Obviously, the Cayman Islands are synonymous with low taxation (see below). However, the finance industry and global investors aren't just attracted by the lack of taxes alone. An important factor is that, in an often politically and economically turbulent region, the jurisdiction is stable, and has been for a number of decades.
Politically stability is probably helped by the fact that the Cayman Islands are a British Overseas Territory, and the islands' long association with the UK have bequeathed it a common law legal system of the sort often favored by international investors. The Government has also proven itself willing and able to adapt the legal framework to keep pace with new developments in international business and finance.
The Cayman finance sector is regulated by the Cayman Islands Monetary Authority (CIMA), which oversees the following areas of business: banking services; money services; cooperative and building societies; trusts; corporate services; insurance; investment funds; and securities investment.
CIMA is also responsible for: monitoring compliance with anti-money laundering regulations; the issue and redemption of the territory's currency, the Cayman Islands dollar (KYD, which is fixed against the US dollar at a rate of KYD1 to USD1.20); and assisting and cooperating with foreign regulatory authorities.
There is little to say about the Cayman Islands in terms of taxation, other than 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.
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 Companies Law (2013 Revision) 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 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, sometimes less.
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.
The Cayman Islands' competitiveness was recently enhanced by the introduction of a new limited liability company law. And according to the Cayman Islands Ministry of Financial Services, the new Cayman LLC is similar to a Delaware limited liability company.
Said Jude Scott, CEO of Cayman Finance, the island's financial services promotional agency: "It is a business vehicle with separate legal personality, like a Cayman Islands exempted company. However, it has certain features and flexibility akin to a Cayman Islands exempted limited partnership including, the nature of a member's interest in an LLC, the manner in which accounts are maintained, and with parties having substantial freedom of contract among themselves to determine the LLC's governance and other internal workings.
The General Registry also maintains a Register of Patents and Trade Marks, governed by the Patents and Trade Marks Law. 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.
At the end of the second quarter, 101,430 companies were listed as active in the Cayman Islands, three percent more than a year earlier and 2.6 percent more than at the end of 2015, according to figures from the territory's company registry, the Cayman Islands General Registry.
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, which is particularly well-suited to mutual fund listings (see below).
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 2015, a total of 10,940 funds, including registered, administered, licensed and master funds, were regulated by CIMA.
The Stock Exchange
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.
The CSX has used the Deutsche Börse XETRA trading platform since March 25, 2016, and provides a secondary listing facility and an offshore trading venue for securities listed and traded on other recognized exchanges, as well as offering domestic companies the ability to list and trade locally.
Unlike some jurisdictions, there are no exchange controls in the Cayman Islands and no minimum subscription level for Cayman-domiciled funds. There are also no restrictions on investment policy and principal investment objectives, and investment policies can be changed provided that the mechanism is disclosed in the listing document.
The CSX does not insist on any prescribed degree of investment diversification (e.g. it can list currency or commodity funds), and there is no requirement for majority board independence. in addition, listed entities are not required to report using International Accounting Standards/International Financial Reporting Standards, provided that an appropriate accounting standard is used.
As the CSX operates outside the European Union and the USA, the regulatory burden is less onerous than listing on other major stock exchanges.
The CSX became the first offshore stock exchange to be granted approved organization status by the London Stock Exchange (LSE) and securities listed on the CSX are eligible for trading in the LSE's international equity market and for quotation on the SEAQ (Stock Exchange Automatic Quotation) international trading system.
In 2015, the Cayman Islands was recognized as the world's top specialized financial center for banking by the Financial Times's Banker magazine. This is the seventh consecutive year that the Cayman Islands has maintained the top spot in the magazine's annual survey.
The Cayman Islands is also a major offshore banking center, with 176 banks under the supervision of the Banking Supervision Division at the end of June 2016, of which 11 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 2015, total international assets and liabilities (cross-border positions in all currency and domestic positions in foreign currency) were reported as USD1.39 and USD1.44 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 recently extended its bank inspection program to onshore subsidiaries of Cayman banks.
A very wide range of services is offered by Cayman banks. 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. Private banking is a major component of the industry, but asset protection rather than tax avoidance as such is the driving force.
The Cayman Islands are also mounting a major challenge to Bermuda as the jurisdiction of choice for the insurance industry.
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
As mentioned, 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.
There was a total of 862 insurance licensees under the supervision of the Insurance Supervision Division as at June 30, 2016, of which 120 and 742 related to domestic and international insurance markets respectively.
The Cayman Islands is the leading jurisdiction for healthcare captives, representing almost half of all captives. As at June 30, 2016, Medical Malpractice Liability continues to be the largest primary line of business with approximately 34 percent of companies (re)insuring MedMal. Workers' compensation was the second largest with approximately 21 percent of companies assuming this risk. The Cayman Islands international insurance industry is comprised mainly of companies insuring risks in North America (90 percent).
Cayman Islands' captive insurance sector also continues to grow, with 23 new licenses granted during the first six months of the year. This exceeded the number of licenses granted in the whole of 2015.
As of June 30, 2015 total premiums were reported to be USD13.6bn (USD11.8bn in 2015) and total assets USD58bn (USD54.4bn in 2015).
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.
Financial And Tax Transparency
The Cayman Islands goes to great lengths to emphasize its willingness to adhere to evolving benchmarks in international tax enforcement and transparency, and has agreed to adopt new standards for information exchange.
The territory has demonstrated this by signing an intergovernmental agreement with the United States to exchange financial account data under the US Foreign Account Tax Compliance Act, and 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 and has committed to automatically exchanging information under the new OECD Common Reporting Standard from 2017.
Along with Bermuda and the British Virgin Islands, the Cayman Islands also announced in April 2016 its intention to enter into deals with the UK to improve how it exchanges information on the beneficial ownership of companies.
Anti-Money Laundering Framework
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.
The Cayman Island's financial services industry, financial regulators, and the territory's Government are preparing for a mid-2017 review of the territory's anti-money laundering regime by the Caribbean FATF.
Ahead of the long-planned inspection, a number of new pieces of legislation have been passed or proposed to strengthen the territory's defenses against money laundering and terrorist financing.
Some say that the days of international offshore financial centers aka tax havens like the Cayman Islands are numbered given the global transparency agenda, which seems to advance with each passing year. However, the impressive scale of the finance industry in the Cayman would tend to suggest otherwise. Indeed, it could be argued that its willingness to keep pace with new international transparency and regulatory standards is attracting new investors keen to avoid less-reputable jurisdictions, rather than driving business away. This isn't to say that the environment isn't without its challenges for jurisdictions like the Cayman Islands, both now and in the future. But for its part, the Cayman Islands look in a good position to ride out any tough years, and even thrive well into the 21st century
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