Cayman Islands: Investment Funds

INTRODUCTION

The Cayman Islands are becoming increasingly popular as a jurisdiction for the establishment of offshore investment funds. While these primarily involve institutional investors and take the form of private placements, a number of these funds are listed on stock exchanges in various parts of the world.

ADVANTAGES

No taxation

There is no taxation in the Cayman Islands in relation to income or capital gains, either of a unit trust or of a company, nor any taxation in relation to payment of dividends to unit or share holders or capital gains on redemption or sale of units or shares. In addition, the Cayman Islands Government will grant a guarantee of freedom from such taxation for up to 30 years in the case of an exempted company, and for up to 50 years in the case of an exempted trust.

No exchange controls

There are no Exchange Controls in the Cayman Islands and thus investments may be made and realised in investment funds without any governmental consent.

Investment worldwide

Provided the trustee is permitted to do so by its trust deed, or the company by its Memorandum of Association, investments of any type may be made anywhere in the world, subject always to the restrictions of local laws of any applicable jurisdiction.

No government approvals

Other than the requirement outlined below relating to managers, there are no governmental approvals or consents which need to be obtained, nor any statutory requirements to be complied with in relation to the issue of units or shares by a Cayman Islands' investment fund or the circulation of offering documentation, provided the offer is not made to the public of the Cayman Islands nor to persons resident or domiciled in the Cayman Islands.

TYPES OF INVESTMENT FUNDS

There are two basic types of investment funds; open ended funds and closed ended funds. Both types can be formed either as a company or a unit trust. The appropriate form of company is an exempted company (see our Memoranda on Cayman Islands' Companies). A unit trust is established by a trust deed (see our Memoranda on Cayman Islands Trusts).

Open ended funds

In an open ended investment fund, the fund is divided into a number of units or shares, each unit or share representing a proportion of the assets held by the fund. Units or shares may be issued and/or redeemed from time to time as required at their then net asset value.

Closed ended funds

Closed ended funds have a fixed capital and therefore the prices are determined by supply and demand. The units or shares may be issued at a premium or a discount to the net asset value but the capital remains the same and the shares of the fund do not expand or contract. Most funds are established as "open-ended" and this memorandum primarily concerns that type of fund.

STRUCTURE OF FUNDS

Unit Trusts

All assets of a trust are vested in trustees under a trust deed which divides the beneficial ownership of the Trust Fund into a number of shares (normally described as units) which are usually (but not necessarily) freely transferable and redeemable. The rights and obligations of the trustee and the unit holder, the terms of redemption and valuation rules are all set forth in the trust deed.

When registering a trust as an exempted trust, the following need to be considered:

1. Tax Undertaking Certificate

A trust which is registered as an exempted trust is entitled to apply for an undertaking that no law enacted in the Cayman Islands for a period of 50 years after the date of the undertaking which imposes any tax or duty on income or on capital assets, gains or appreciation, or any tax in the nature of estate duty or inheritance tax, will apply to the assets or income arising under that trust or to its trustee or beneficiaries.

2. Domicile of beneficiaries

In order to register a trust as exempted, the Registrar of Trusts has to be satisfied that the beneficiaries under the trust do not and are not likely to include any person (which for this purpose includes a company) at any time resident or domiciled in the Cayman Islands. A company incorporated in the Cayman Islands as an exempted or ordinary non-resident company is statutorily deemed not to be domiciled in the Cayman Islands. In our view, such a company would also not be considered resident in the Cayman Islands provided that it did not conduct business in the Cayman Islands, nor was its central management and control located in the Cayman Islands, and was not owned by Cayman Islands residents. Consequently it is perfectly possible for a Cayman Islands company to own units in an exempted trust. Once a trust is registered as exempted, it does not cease to be an exempted trust by reason of the fact that any beneficiary is at any time resident or domiciled in the Cayman Islands, but any beneficiary who is so resident or domiciled loses the benefit of the Tax Undertaking in respect of his interest.

3. Registrar

Once the Trust has been registered as exempted, the trustee must lodge with the Registrar all documents containing or recording the trusts, powers and provisions of the trust.

4. Timing

Application for registration should be made after execution of the trust deed. Once the Registration Certificate has been received, application should be made for the Tax Undertaking. There is however, no need to await the issue of the Tax Undertaking before commencing any placement or offering.

Corporate Funds

A Cayman Islands' company may issue shares which can, subject to certain restrictions, be redeemed. The rights and obligations of the shareholders, the terms of redemption and method of valuation are normally set forth in the company's Articles of Association.

1. Share Capital

Typically, an investment fund (sometimes known as a mutual fund) would have a small number of management shares, held by or on behalf of the promoters, the remainder of the shares being unclassified shares which may be issued either as redeemable shares or as nominal shares (the latter being issued only for the purpose of redemptions - see below). Redeemable shares are normally of a minimal par value and issued at a fairly substantial premium, also to facilitate redemptions. A company's share capital may be denominated in more than one currency.

2. Redemption of shares

The requirements are:

1. the company's Articles of Association must authorise the issue of shares which are redeemable at the option of the holder. They are sometimes also redeemable at the option of the company;
2. the shares must be issued as redeemable shares;
3. in order to be redeemed, a share must be fully paid; and
4. shares may not be redeemed if, as a result of the redemption, there would no longer be any other member of the company holding shares.

TRUSTEES/CUSTODIANS/MANAGERS

For a unit trust to operate two entities are normally required: a trustee, usually a Cayman Islands' licensed trust company, and a manager. Similarly, in the case of a corporate structure, it is common (although not required) for the company to appoint a custodian and a manager.

Functions

The functions of trustees/custodians are to:

1. act as custodian of all the securities and cash of the fund;

2. collect dividends and other payments due in respect of the fund's securities;

3. act as registrar, transfer agent in relation to the issue, transfer, redemption of certificates for all units or shares issued by the fund and maintain the appropriate registers; and

4. make dividend and redemption payments.

Appointing a trustee/custodian

There are a number of excellent trust companies licensed to carry on trust business in the Cayman Islands and it is recommended that one of these be appointed as trustee or custodian when an investment fund is being established. However in certain exceptional circumstances it may be desirable for a client to establish his own trust company and obtain a licence under the Banks & Trust Companies Law (as amended (see our Memorandum on Banks and Trust Companies).

Extent of responsibilities

The functions of the management company, and restrictions on its operation depend upon the circumstances in each case. For example the manager may be involved in the marketing of the fund, the sale and redemption of units and providing investment service. Alternatively, the management company may have no fiduciary duties in relation to the operation of the fund. The degree and nature of the activity performed by the manager and where the manager is either incorporated or carries on business will affect whether the manager (in addition to the trustee) is required to be licensed under the Banks & Trust Companies Law or the Companies Management Law (as amended). The Cayman Islands Government presently take the position that a manager performing full management functions of a Cayman Islands' unit trust and being either incorporated in the Cayman Islands or carrying on business in the Islands as a foreign company has to be the holder of a Restricted Trust Licence. (See our Memorandum on Banks & Trust Companies). Similarly if a management company incorporated in the Cayman Islands is appointed to manage the assets of a corporate investment fund, it may be required to obtain a licence under the Companies Management Law. We should be pleased to advise further on this if required.

Removal of custodian/manager

fund's documentation normally provides certain safeguards whereby each of the trustee/custodian or manager is able to remove the other for certain specified causes, and the holders usually have the power to remove the custodian or manager.

APPLICABLE TAX AND SECURITY LAWS

We are unable to provide legal advice in relation to the offering of shares or units of a Cayman Islands investment fund in foreign jurisdictions or to residents of foreign countries and in some cases, (such as the United States), citizens of foreign countries. We therefore strongly advise clients to obtain applicable specialist advice as to the manner in which a proposed fund is structured or proposed to be marketed for the applicable jurisdictions.

FEES AND DISBURSEMENTS

Legal fees

The legal fees for professional services for all work to establish a unit trust or corporate fund inclusive of drafting appropriate documentation: according to circumstances, depending on the time spent and the complexity of the transaction. We would be pleased to provide an estimate on request giving full particulars of the proposal.

Disbursements

As to disbursements upon establishment of either a corporate fund or a unit trust and annual fees relative thereto we refer you to the applicable part of these memoranda that gives details thereof.

Charges

Typical charges on an investment fund are set out below by way of example:

1. Initial charges: these are usually charged on a percentage basis of the original amount invested on a sliding scale decreasing as the investment increases.

2. Annual management fees: these are usually expressed as a percentage of the net asset value of the fund calculated daily or monthly and payable monthly or quarterly in arrears.

3. Incentive fees: incentive fees may be charged either in addition to or instead of management charges, according to the performance of the fund under the direction of the manager.

4. Operating expenses of the fund: these include legal, accounting, trustee/custodian/manager fees.

5. Redemption or transfer charges: these are usually minimal to cover the administrative costs of effecting redemption.

AVAILABLE SERVICES

We would be pleased to discuss with clients the facilities and services that can be provided by Walkers or provide introductions to selected trust companies and accountancy firms.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.