The Cayman Islands as an offshore low tax area

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The Cayman Islands as an offshore tax haven The Cayman Islands are an English-speaking Dependent Territory of the United Kingdom, located in the Caribbean between Cuba and Central America. Cayman is politically stable; under the 1972 constitution, the Governor represents the Queen and assigns portfolio responsibilities to five elected Ministers of Government. There are no taxes in the Cayman Islands: Government revenue comes from customs duties, stamp duty and annual fees levied on corporations. The population of 30,000 is of mixed British and Jamaican stock, with more than 70 nationalities present in the work-force. The economy is highly dependent on tourism, with financial services also important. There is no major pressure for constitutional change, although the forcible imposition by HMG of the EU Savings Tax Directive in 2004 ruffled feathers. Cayman is the largest offshore banking centre in the world with 350 banks and deposits worth more than US$1 trillion. It is the second largest captive insurance base after Bermuda, with assets worth $20 bn. The Cayman Islands trust sector is thought to manage more than $500 bn. Mutual funds are a growing sector, especially since the opening of the Cayman Islands Stock Exchange in 1997. The Caymanian dollar is fixed against the US dollar at CI$1.00 to US$1.20. There is no exchange control. Cayman is an expensive jurisdiction with an established commercial infrastructure in place and a flexible approach to regulation, within its strong desire to maintain respectability. The Cayman Islands have quite a good reputation in the Western hemisphere, but in Europe have tended to exemplify 'tax havens', largely perhaps as a media stereotype rather than as a matter of objective reality. The truth is that Cayman has tried hard with a large number of statutes to keep up with the international pressure for offshore centres to keep themselves clean, even accepting in 2001 the need to allow investigation of fiscal wrong-doing, at least when criminality is in evidence both internationally and in Cayman itself. The prevailing attitude in Cayman however is still to protect confidentiality in the absence of demonstrated criminality. Although the Cayman Islands was briefly included on the FATF list of jurisdictions with inadequate defences against money laundering, in 2001 the Cayman Islands was praised by the FATF for its substantial efforts to conform to forty recommendations set out by the FATF in a code of good practice governing money laundering, including the issuance of money laundering regulations and amendments to the Monetary Authority Law and the Proceeds of Criminal Conduct Law. Amendments have also been made to the Banks and Trust Companies Law and the Companies Management Law; and compulsory licensing for financial firms was introduced in late 2002. It remains to be seen what impact will be felt in the Cayman Islands from the Savings Tax Directive after it went 'live' in July, 2005.

Trust Law Cayman Islands trust law is based on the Trust Law 1967, itself very similar to the English Trustee Act 1925. However, there has been considerable subsequent legislation which has distanced Cayman trust law from its English origins. In particular, Cayman has chosen, unlike England, not to adopt the Hague Convention, perferring to maintain the flexibility to set its own path. The most important recent pieces of Cayman trust legislation are as follows: the Perpetuities Law 1985 introduced a perpetuity period of 150 years, plus a 'wait and see' rule whereby a disposition or power will only fail when it tries to bite outside the perpetuity period. the Trust (Foreign Element) Law 1987 strengthened the validity of Cayman trust law, established importation and exportation of trusts, provided for the non-enforcement of foreign judgements, and specifically excluded forced heirship provisions (all of this making Cayman trusts more attractive in civil law jurisdictions in particular); the Fraudulent Dispositions Law 1989 replaced the Statute of Elizabeth, and strengthened the defences of a Cayman trust against creditors, as long as the trust is not bankrupt in Cayman. There is a 6-year limitation period on creditors' claims. the Special Trust (Alternative Regime) Law 1997 introduced purpose trusts. the Trust Law 1996 introduced exemption of trusts, whereby in exchange for registration with the Registrar of Trusts they can obtain a 50-year undertaking from the Governor to the Trustees that the trust will not be subject to any future Cayman taxation. Trusts do not otherwise require to be registered in Cayman. The Banks and Trust Companies Law 1995 introduced licensing for companies providing trust services; the Law was amended in 2001 and 2003. Trust licenses are now as follows: Trust licences, covering the conduct of trust business within and outside of the Islands but subject to such conditions as may be imposed by the Authority Restricted Trust licences, covering the conduct of trust business with the restriction that the licensee shall not undertake trust business for persons other than those listed in any undertaking accompanying the application for the licence; Nominee (Trust) licences, covering trust business under a Trust licence to a licensee which is a wholly-owned subsidiary of another licensee and where the sole purpose of that subsidiary is to act as its nominee. Trust Licenses require a minimum net worth of US$400,000; Restricted Trust Licences and Nominee (Trust) Licences require a minimum net worth of only US$20,000. The parent of a Nominee Trust company must provide a guarantee of not less than US$200,000. Licensees do not need to be Cayman companies; but foreign licensees will probably have to provide a head office guarantee. All applications include considerable amounts of administrative and financial information. Companies holding any type of trust licence must have a place of business in the Islands, approved by CIMA, which will be its principal office in the Islands; and must have two individuals or a body corporate, approved by CIMA, resident or incorporated in the Islands, as its agent. Any trust licensee incorporated in the Cayman Islands must submit annual audited accounts to CIMA. Banking Law Cayman Islands banks need to be licensed under the Banks and Trust Companies Law 1995, as amended in 2001 and 2003. Banking licenses are Class A, Class B restricted or Class B unrestricted: Class A licenses permit full domestic and offshore banking; Unrestricted Class B Trust Licenses permit full offshore banking with an unlimited number of customers and require a minimum net worth of US$400,000; Restricted Class B licenses require a minimum net worth of only US$20,000, but a list must be provided to the Inspector of Financial Services of the clients with which the bank intends to do business, and the list cannot change without further notification to the Inspector. Licensees do not need to be Cayman companies; but foreign licensees will probably have to provide a head office guarantee. All applications include considerable amounts of administrative and financial information. Continuing supervision is exercised by the Monetary Authority. Quarterly returns and audited annual statements must be lodged. Share transfers, and changes to directors and officers must be authorised. Banks with unrestricted licenses are required to adhere to the Basle Convention Rules. Banking confidentiality is well-established in Cayman through the common law, and is also enshrined both in the Banks and Trust Companies Law 1995 and in the Confidential Relationships (Preservation) Law 1995. Banking staff and government officials face civil and criminal sanctions if information is disclosed without authorisation. A number of laws permit the enforcement of foreign judgements or the disclosure of information in response to a court order, but normally in the context of criminal activity and drug use or dealing. Despite mutual assistance treaties, the Cayman Islands will not normally co-operate with fiscal investigations, and does not normally respond to requests for assistance on fiscal matters. The Proceeds of Criminal Conduct Law, originally passed in 1999, was strengthened in 2000, and requires depositors to provide banks with due diligence documentation - a passport or driving license, proof of their physical address, and an outline of their banking activities. Reaction to the new requirements was mixed: in 2003, as a deadline for conformity with the new requirements drew nearer, Tim Godber, President of the Cayman Islands Bankers Association admitted that he was bemused by objections, saying: 'I really don't understand why people think the request is onerous. Account holders who might have obtained their funds illegally would be putting us at risk, so I think it only fair that we are allowed (to) ascertain for certain the identity of our account holders, and other important information about how they will use the account.' But local attorney-at law, Michael Alberga argued that: 'Privacy is the key to democracy, it's what separates democracy from other forms of government. Why should people who have lived and banked here all their lives have to provide more information about themselves?' Insurance Law Cayman Islands insurance companies are regulated by the Cayman Islands Monetary Authority (CIMA) under the Insurance Law 1979 as amended, most recently in 2004. The following types of license are available: A Class ‘A’ Insurer’s Licence permits a local or an external insurer to carry on insurance business generally in or from within the Islands; an external insurer having its principal or registered office in a place outside the Islands where the legislation for the regulation and supervision of insurers is acceptable to the Authority may be licensed as an approved external insurer under Class ‘A’. An Unrestricted Class ‘B’ Insurer’s License permits an exempted insurer to carry on insurance business other than domestic business from within the Islands. A Restricted Class ‘B’ Insurer’s Licence permits an exempted insurer only to accept insurance business other than domestic business from its member or members or such other persons as may be specifically approved by the Authority. Insurance Agent’s Licence; Insurance Broker’s Licence; Insurance Sub-Agent’s Licence; Insurance Manager’s Licence; and Principal Representative (Insurance)’s Licence. No insurer’s licence other than a Restricted Class ‘B’ Licence will be granted to any person whose net worth- (a) in the case of an insurer effecting general business but not long term business, is less than one hundred thousand dollars; (b) in the case of an insurer effecting long term business but not general business, is less than two hundred thousand dollars; and (c) in the case of an insurer effecting long term business and general business, is less than three hundred thousand dollars. The licensing process begins once a company name has been approved; an application incorporating a business plan and details of beneficial ownership is made to CIMA. Capital may be provided either by shares or loans. Insurers must maintain full and proper records at a fully-staffed office in Cayman; alternatively, a local manager can be appointed to administer the business. The manager must also be licensed under the insurance law. It is usually necessary to appoint Cayman Islands auditors; audited annual accounts must be submitted to the Superintendent within six months of the end of the accounting period. There are many other detailed regulations; and CIMA has substantial powers to inspect and to apply sanctions when necessary. Mutual Fund Law Cayman Islands mutual funds are regulated under the Mutual Fund Law 1996, and as regards listing they fall under the Stock Exchange Company Law 1996. The Mutual Fund Law requires mutual funds to be licensed, or to be administered by a licensed mutual funds administrator. There are the following exemptions from the requirement to license: A fund listed on a recognised stock exchange; A fund with a minimum purchasable aggregate equity interest of CI$40,000; A fund with not more than 15 investors holding voting equity interests; A closed-end fund A mutual fund administrator must be licensed; he must have a registered office on Cayman, must be competent, and must have a net worth of at least CI$400,000. Mutual funds must be audited annually, and the financial statements must be filed with the Monetary Authority within six months of the end of an accounting period. There are no restrictions on the investment policy of funds in Cayman, whether listed or not. For listing on the Stock Exchange, certain other originating jurisdictions are 'approved': Bermuda, Canada, all EU member states, Guernsey, Hong Kong, Isle of Man, Japan, Jersey, Malaysia, Singapore, Switzerland, and the USA. For funds which have primary listings on recognised stock exchanges, a secondary listing may be acquired in Cayman quite simply; the services of a listing agent are not mandatory. Funds to be listed must appoint a custodian who is a separate legal entity from the fund, its operators or its administrators, but may be an associate of any of them. The fund must have an independent auditor. There are some shareholder disclosure requirements; and information is required about the fund's main broker and the regulatory regime applying, in particular for segregation of fund assets. In order to be listed, a fund must have at least 25% of listed securities in public hands, or restrict trading to professional investors. There are detailed rules specifying the contents of the Listing Document. Listing is possible both for open- and closed-end funds; funds may take various corporate forms, including: investment company, unit trust and partnership. In Cayman Island terms, the entities that may be used include the exempted company, the limited duration exempted company, the ordinary non-resident company, the exempted trust, and the exempted limited partnership. See Forms of Company for details of these entities. NB: The above is an abbreviated summary of some aspects of the Cayman Islands Stock Exchange listing regime, given for general information only. In September 2002, Cayman introduced a new law requiring licensing for any one conducting securities investment business except where an exemption is available. The Securities Investment Business Law, 2001 (the "Law") was passed in March 2002 and came into force in 2003. The aim of the Law is to regulate the business of securities investment in the Cayman Islands and provide an appropriate structure for the regulation of securities brokers, including market makers, arrangers, investment advisors and investment managers. The fundamental objective of the law is to define activity that requires a licence and then to ensure that such activity is undertaken by fit and proper persons in accordance with accepted supervisory standards of conduct for securities investment business. The Cayman Islands Monetary Authority is directly responsible for the licensing, supervision and enforcement of such licences. The definition of securities investment business ("SIB") includes managing the securities of another person in circumstances involving the exercise of a discretion and advising a person on securities if: the advice is given to that person in their capacity as an investor or as an agent for an investor; and the advice is on the merits of dealing in the security or of exercising a right conferred by a security to deal in securities. The Law applies to any person, company, foreign company or partnership that is resident in, incorporated in or registered in the Cayman Islands or which has established a place of business in the Cayman Islands and is carrying on SIB. For example, an investment adviser or investment manager that is a Cayman Islands entity or has a physical presence in the Cayman Islands and is conducting SIB from the Cayman Islands, will be covered by the Law. Such an entity will require to be licenced under the Law unless its activities are covered by one of the exemptions contained within the Law. The exemptions include: a group company that carries on SIB exclusively for one or more companies within the same group; and an entity that carries on SIB exclusively for a "sophisticated person" or a "high net worth person". A sophisticated person includes a person: regulated by the Monetary Authority (which would include a Cayman Islands regulated mutual fund); regulated by a recognised overseas regulatory authority; any of whose securities are listed on a recognised securities exchange; or who by virtue of knowledge and experience in financial and business matters is to be reasonably regarded as capable of evaluating the merits of a proposed transaction; and participates in a transaction with a value or in monetary amounts of at least US$1,000,000 in the case of each single transaction. a high net worth person means an individual whose net worth is at least US$1,000,000 or has total assets of not less than US$5,000,000. Entities falling within these exemptions will be required to file an annual declaration with the Cayman Islands Monetary Authority confirming that they fall within such an exemption and pay an annual fee of US$1,250. The declaration must be signed by a director or partner of the entity and electronic filing of the form will be accepted on the basis that original forms will be forwarded within one month. When submitting the form, the Monetary Authority must be advised who will be responsible for dealing with queries and the payment of annual fees. If none of the exemptions apply the SIB provider must apply to the Cayman Islands Monetary Authority for a licence otherwise it commits an offence and is liable on summary conviction to a fine and/or imprisonment. On August 14 2002, the Securities Investment Business Law, 2002 (Commencement) Order 2002 was approved by the Cayman Islands Executive Council. In practical terms this means that the application of the excluded person/registrant regime of the Law came into force from August 14th 2002. It obliges anyone carrying on SIB to examine their status under the Law and consider whether they should now apply for one of the exemptions under the Law, or potentially be subject to its licensing requirements. Two practical examples of the application of this regime are where: a restricted mutual funds administrator (which can provide services for up to 10 related funds) is carrying on SIB exclusively for a sophisticated person (which includes a regulated mutual fund). In these circumstances, that entity will be able to register under the Law's excluded person/registrant regime and will not be required to be licensed under the Mutual Funds Law. A promoter of a Cayman Islands fund wishes to establish a Cayman based investment manager. Previously this would have fallen under the definition of mutual fund administration under the Mutual Funds Law and required such an entity to be licensed under that law. With the proposed exemptions, provided that the manager only manages funds which are: in the same group of companies as the manager; or have a minimum subscription for an investor in the fund of US$100,000, then an exemption can be applied for. In November, 2003, CIMA introduced new mutual fund regulations in order to make funds domiciled in the jurisdiction more attractive to Japanese fund distributors. Legal experts explained that the changes were deemed necessary, as although the Japan Securities Dealer's Association had not objected to the distribution of Cayman-registered funds, the guidelines for the selection of foreign unit trusts were vague with regard to the required standards for foreign regulatory regimes, meaning that some Japanese fund distributors had opted not to take the risk. Although this was by no means a universal position, demonstrated by the fact that currently around 20 funds domiciled in the Cayman Islands are sold to the Japanese public, CIMA decided to introduce new regulations to soothe the fears of more wary distributors. From November 19, fund prospectuses for Japanese markets must reveal the rights and restrictions attached to securities, such as the terms of their issue and redemption, and the method of calculating redemption prices. Funds domiciled in the Cayman Islands and selling to the Japanese public must also be audited in accordance with the standards set out in the new rules. However, CIMA included a clause in the new regulations exempting existing Cayman funds registered in Japan from the obligation to adopt the more stringent rules if the fund manager does not see the need For more information, visit www.LowTax.net

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