The Cayman Islands
By Lowtax Editorial
18 September, 2017
Named the world's number one specialized financial center by the Banker magazine, and the second-best financial center among all UK Overseas Territories and Crown Dependencies, the Cayman Islands is the subject of this Lowtax feature.
In geographical terms, the Cayman Islands are mere specks on the global map. With a total land area of 264 sq km, the jurisdiction is only one-and-a-half times the size of Washington, D.C. However, as described below, the Cayman Islands clearly punch above their weight on the world financial stage.
The three-island group, consisting of Grand Cayman, Cayman Brac, and Little Cayman, is situated in the Caribbean Sea, 240km south of Cuba, and 268km northwest of Jamaica. The majority of the population of approximately 58,000 lives on Grand Cayman, which is home to the jurisdiction's capital, George Town.
The official language of the Cayman Islands is English, which is spoken by 90 percent of the country's population.
Tourism is the backbone of the Cayman economy, accounting for about 70 percent of gross domestic product and three-quarters of foreign exchange earnings.
However, financial services can be said to be the economy's second pillar, with substantial banking, investment fund, insurance, and corporate services sectors and ancillary activities well established on the jurisdiction. These are explored in more depth below.
The economy has experienced moderate growth since recovering from the financial crisis, with GDP growth rates of between one and two percent witnessed in recent years.
In comparison to other nations in the Caribbean and Central America, the Cayman Islands is a wealthy jurisdiction. GDP at purchasing power parity was an estimated USD2.5bn in 2014, with GDP per capita at USD43,800 – higher than the European Union average.
The Legal Framework
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 them 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 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 2016, 96,248 companies were listed as active in the Cayman Islands, according to figures from the territory's company registry, the Cayman Islands General Registry. The vast majority of these (80,658) were established as Exempt companies.
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 June 2017, a total of 10,621 funds, including registered, administered, licensed and master funds, were regulated by CIMA. In addition, as of the same date, there were 103 mutual fund administrators.
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 2017, the Cayman Islands was recognized as the world's top specialized financial center for banking by the Financial Times's Banker magazine. This was the ninth 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 158 banks under the supervision of the Banking Supervision Division at the end of June 2017, of which 11 held Class A licenses permitting local and offshore business activity, while the remainder held 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 2016, total international assets and liabilities (cross-border positions in all currency and domestic positions in foreign currency) were reported as USD1.15 and USD1.21 trillion, respectively (June 2013: USD1.39 and USD1.44 trillion, respectively). The jurisdiction continues to be ranked sixth internationally based on the value of cross-border assets, which stood at USD1.13 trillion in June 2016 (June 2015: USD1.37 trillion), and fifth in terms of cross-border liabilities which stood at USD1.15 trillion in June 2016 (June 2015: USD1.8 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 companies registered in the jurisdiction 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 were a total of 836 insurance licensees under the supervision of the Insurance Supervision Division as at June 30, 2017, of which 106 and 730 related to domestic and international insurance markets respectively.
The Cayman Islands is the leading jurisdiction for healthcare captives, representing almost half of all such captives. As at June 30, 2017, Medical Malpractice Liability continues to be the largest primary line of business with approximately 32 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).
As of June 30, 2017 total premiums were reported to be USD12.4bn (USD11.8bn in 2015) and total assets USD62bn.
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.
In August 2017, the Government of the Cayman Islands welcomed recent recognition by the Global Forum on Transparency and Exchange of Information for Tax Purposes that it is "largely compliant" with evolving international tax information exchange standards.
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 (2016 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 (2017 Revision), and the Money Laundering Regulations (2015 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.
In April 2017, the Cayman Islands released the findings of its first anti-money laundering and countering the financing of terrorism risk assessment. This found that while the territory's efforts were well-coordinated and effective, more could be done to strengthen the local regime.
Publication of the National Money Laundering and Terrorist Financing Risk Assessment, prepared by the Cayman Attorney General's Chambers, is intended to inform continuing preparations for the upcoming Fourth Round Mutual Evaluation by the Caribbean Financial Action Task Force at the end of the year.
In light of the findings, the territory's Government has said it is committed to working collaboratively with industry to incorporate the findings of the National Risk Assessment into a comprehensive strategy. Its aims include further legislative enhancements, improved co-operation between local stakeholders, and increased awareness by the industry and general public of their anti-money laundering and countering the financing of terrorism responsibilities.
As can be seen by the above facts and figures, the Cayman Islands remains one of the most significant low-tax financial centers, and indeed is a financial center of standing on the world stage. A company registry boasting almost 100,000 active companies and substantial banking, investment fund and insurance sectors are a testament to the continued faith that foreign investors are showing in the Cayman finance sector.
Coupled with this, the Cayman Government has been working hard to enhance the country's reputation, both with investors and international standard setters, by cooperating with countries around the world in the sphere of law enforcement, and by strengthening information exchange provisions and anti-money laundering rules. In so doing, it has attained a level of compliance with these standards on a par with most large economies.
Taking all this into account therefore, the Cayman Islands finance center would be justified in looking to the future with a sense of confidence.
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