Following the abolition in 1985 of an annual head tax of CI$10 on all adult male residents up to 60 years, there are no direct taxes in the Cayman Islands. There is no income tax, company or corporation tax, inheritance tax, capital gains or gift tax.
There are no property taxes or rates, and no controls on the foreign ownership of property and land.
The government charges stamp duty of 6 per cent (in most areas, but 7.5 per cent in a few) on the value of real estate at sale, with reduced rates available for Caymanians. There is a 1 per cent fee payable on mortgages of less than CI$300,000, and 1 1/2 per cent on mortgages of CI$300,000 or higher.
Cayman Islands 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 1996 (revised in 2007), investment or mutual funds with more than 15 members must be individually licensed, or must be administered by licensed mutual fund administrators. Licenses are issued by the Governor in Executive Council (‘ExCo’) after scrutiny of the application by the Monetary Authority.
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.
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.
During the year to the end of June 2007, the number of active mutual funds regulated by CIMA grew to 8,972 funds from 7,845 funds. In 2008, the number of registered funds in the Cayman Islands broke the 10,000 barrier, but by the end of the year the number of registered funds had dipped to 9,780 (comprising 9,231 registered funds; 510 administered funds and 129 licensed funds) as the hedge fund industry fell victim to the volatile world financial markets.
See Law of Offshore for more details of the licensing and regulatory process and Offshore Legal and Tax Regimes for details of fees payable.
In the early years of the new millennium, the Cayman Islands became the jurisdiction of choice for the registration of hedge funds. A record number of new hedge funds was created in the Cayman Islands during the first six months of 2005, despite an overall slowdown in the inflow of capital to hedge funds. More than 80% of the world’s hedge funds are registered with the Cayman Islands Monetary Authority (CIMA), which reported that the first half of 2005 saw the total number of registered funds grow from 5,932 to 6,527.
The Cayman Islands Monetary Authority (CIMA) announced in mid-2006 that the islands’ hedge fund sector is continuing to boom, with an additional 665 funds having registered in the first five months of the year.
The SEC’s new rules for hedge fund registration in the US have done nothing to lessen the attractions of ‘offshore’ as an alternative domicile. Many US fund managers now choose to register their funds in Cayman, with actual management sub-contracted to US or UK firms.
The Cayman Islands Stock Exchange opened in July 1997 under the Stock Exchange Company Law 1996, specifically targeted at mutual funds and specialised debt securities (SPVs). 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. Listing takes as little as 1-2 weeks. See Law of Offshore for details of listing requirements.
By mid-2007, the CSX had more than 1,400 listings and a market capitalisation of more than $123bn.
The Securities Investment Business Law, 2001 (revised in 2004) aims 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 (CIMA) is directly responsible for the licensing, supervision and enforcement of such licences.
The Securities Investment Business Law, 2002 (Commencement) Order 2002 came into force from August 14th 2002. It obliged anyone carrying on SIB to examine their status under the Law and consider whether they should apply for one of the exemptions under the Law, or potentially be subject to its licensing requirements.
With effect from 4 March 2004, the UK’s Board of the Inland Revenue designated the Cayman Islands Stock Exchange as a ‘recognised stock exchange’ under section 841 of ICTA. The term ‘recognised stock exchange’ occurs throughout the Taxes Acts and in various tax regulations. For example it is used in the definition of a close company in section 415 ICTA 1988, and in the definition of investments which may be held in PEPs and ISAs. The term is often used in the phrase ‘listed on a recognised stock exchange’ or in similar or related expressions. Firms listed on the CSX will now be able to take advantage of the ‘quoted eurobond exemption’. As a result, interest paid on securities listed on the Cayman Islands Stock Exchange can now be paid without deduction of UK tax. Similarly, securities listed on the CSX are now regarded as ‘qualifying investments’, allowing them to be held directly in Personal Equity Plans (PEPs) and Individual Savings Accounts (ISAs).
In March, 2006, offshore law firm Walkers said that collateralized debt obligations (CDOs) were being created at a record pace in the Cayman Islands, with $125 bn of transactions in 2005.
Walkers said that more than 270 CDO transactions were established in the Cayman Islands in 2005; the number of CDOs issued in the Cayman Islands has grown more than 100% in the previous two years.
“The first Cayman CDO was issued in 1994, however current stability in the corporate marketplace combined with the lackluster performance of debt and equity markets worldwide is translating into a surge in demand for CDOs of all types,” Ian Ashman, a Partner in Walkers’ Structured Finance group, said. “This type of vehicle is being used in a wider range of transactions including high volume commercial real estate deals and middle market loans.”
One of the drivers for this growth was that CDOs were being used in more ways than ever before: as asset-backed securities, commercial- and residential-backed securities, balance sheet CDOs backed by pools of commercial loans, high-yield bonds, leveraged loans, and repackaged CDOs.
“There weren’t a lot of corporate credit roller coasters in 2005, so CDOs performed well, diversified, and became increasingly attractive to investors and bankers,” David Egglishaw, Managing Director of Walkers SPV, a licensed trust company wholly-owned by Walkers, said. “And this seems to be just the tip of the iceberg. The markets are much more transparent and liquid and we expect to see CDOs applied in increasingly innovative ways in 2006.”
The Cayman Islands provide CDOs with a tax neutral jurisdiction, a sophisticated financial infrastructure that includes major banks and accounting firms, and therefore the ability to achieve measurable savings which, in turn, are passed along to investors.
Cayman legal firms were indeed in great demand from the issuers of structured finance securities during the first six months of 2006, underlining the Cayman Island’s pre-eminence as a jurisdiction of choice for special purpose vehicles (SPVs) used in securitisation transactions.
According to UK data provider FactSet Global Filings, leading Cayman Islands law firms Maples and Calder and Walkers gave legal advice on 147 asset-backed securitisation (ABS) deals between January and June 2006.
Maples gave advice on a total of 111 deals and Walkers on a further 36 deals, while smaller contributions from Mourant du Feu & Jeune and Ogier pushed the total number higher still. This compares with the combined total of 92 from the three main Irish law firms of A&L Goodbody, Matheson Ormsby Prentice and McCann Fitzgerald.
The process of asset securitisation involves the sale of income-generating financial assets (such as loans, trade receivables and leases) by a company to a special purpose vehicle. The SPV, which might be a trust or a company, finances the purchase of these assets by the issue of bonds, which are secured by those assets.
Cayman law firms were also dominant in advising on collateralised deals during the first half of the year with Maples and Walkers advising on a combined 143 transactions compared, compared with 77 from the main Irish firms.
Cayman Islands Banking
Cayman banks must be licensed under the Banks and Trust Companies Law 1995 as amended in 2003. The astonishing Cayman Islands banking industry had 278 banks under the supervision of the Banking Supervision Division at the end of 2008, of which 18 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. For further details of licensing requirements and procedures and fees payable see Law of Offshore and Offshore Legal and Tax Regimes.
The assets of Cayman banks exceeded USD1.7 trillion in 2008. A very wide range of services is offered: the 80,000 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: asset protection rather than tax avoidance as such is the driving force, so that the stability of Cayman alongside stringent banking secrecy and its sophisticated investment environment are very attractive to wealthy individuals, particularly those from the US where Cayman has a very good reputation.
In 2005 the total number of banking and trust licences declined by 22 to 312, due mainly to consolidations worldwide, however the assets and liabilities of licensees increased. Total international assets booked through banks in the Cayman Islands stood at USD1,265bn at June 30 that year and liabilities totalled USD1,250 billion at the same date.
Cayman Islands’ banks are supervised by the Cayman Islands Monetary Authority (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.
Cayman signed a Memorandum of Understanding on cross-border banking supervision with Brazil in 1999, and intended to create a network of such agreements with all the countries whose banking supervisors evince interest in Cayman’s banking sector.
Following KPMG’s independent report to the UK Government on the regulatory regime in the Cayman Islands and other offshore financial centres in the autumn of 2000, CIMA made a ruling on private ‘shell’ banks that have no effective supervision because they are not units of established international banks, subject to stringent regulation in their home jurisdictions. Such mainly US banks had no physical presence in the Cayman Islands.
In 2000, the Cayman Islands introduced additional due diligence procedures for banks when they were required to comply with fresh Know Your Customer regulations. The original deadline of December 31, 2002 for the provision of information about customers to the authorities was extended, and the new rules came into force in March 2004.
The due diligence rules require both new and long-standing account holders in the jurisdiction to provide proof of identity and physical address, in addition to an explanation of their banking activities. The rules have provoked criticism from some quarters, particularly from those who have banked in the Caymans for many years, who argue that they are intrusive and unnecessary.
Cayman Islands Trust Management
Trust Management has been a major activity in the Cayman Islands for 30 years or more, and trust assets in Cayman now equal or exceed banking assets. Originally the trust was used primarily by wealthy individuals from the major common law countries, but it is now accepted as a major technique of asset protection in all parts of the world. Over the last 25 years the Cayman Islands, perhaps more than some other jurisdictions, have extended and adapted their trust laws to accommodate this wider market, which is not necessarily interested so much just in tax avoidance, but also in the efficient management of wealth in a more general sense. See Law of Offshore for a fuller treatment of trust law in Cayman.
There is a large and sophisticated community of professional advisers on trust matters in Cayman. Individuals can provide trust services in the Cayman Islands without registration, but companies offering trust services must be licensed under the Banks and Trust Companies Law 1995. Foreign or Cayman-resident companies may obtain licenses. These are issued by the Governor, after the Monetary Authority has accepted an application giving comprehensive information about the applicant.
A licensed trust company may be ‘restricted’ or ‘unrestricted’. ‘Restricted’ companies require less capital, but are more strictly controlled. See Law of Offshore and Offshore Legal and Tax Regimes for further details of the licensing regime for trusts, and fees payable.
Private trustee companies have recently become popular. In this arrangement, the trust itself remains uncluttered by control arrangements, which are exercised by the private trustee company, which in turn can be administered by a licensed trust company. This form is particularly suited to the larger type of family trusts with multiple beneficiaries and objects.