14.1 GENERAL OVERVIEW
The Cayman Islands is a group of three islands (Grand Cayman, Cayman Brac and Little Cayman) located in the Western Caribbean.
14.1.2 Time zone
All three islands use Eastern Standard Time all year long.
The Islands have a population of approximately 56,732 (December 2012 est.), most of which is concentrated on the island of Grand Cayman and comprises a mixture of Cayman nationals and expatriates.
The capital, George Town, is located on Grand Cayman and is the administrative, business and financial centre.
The official and spoken language is English.
The Cayman Islands is widely recognised as one of the world's leading offshore financial centres. The Cayman Islands' financial services industry encompasses banking, mutual funds, captive insurance, reinsurance, aircraft registration, vessel registration, companies, partnerships, trusts, structured finance and the Cayman Islands Stock Exchange (CSX). As of December 2013, over 95,000 companies were incorporated in the Cayman Islands. In addition, approximately 213 banks, 788 insurance companies and 11,379 funds were registered and/or licensed in the Cayman Islands. The CSX opened in 1997 and is recognised by the major market players as a "blue chip" listing environment that provides investors with the necessary degree of regulation and comfort they seek when making investment decisions.
14.1.7 Government and constitutional arrangements
The Cayman Islands is a British Overseas Territory and as such is the responsibility of the United Kingdom. The Islands enjoy a large measure of self-government under a constitution which gives executive and legislative power to the Governor, the Cabinet and the Legislative Assembly.
The Governor is appointed by the British Government and has overall responsibility for the administration of the Islands. Government policy is made by Cabinet consisting of the Governor, two official members (appointed by the Governor) and five ministers, who are elected members of the Legislative Assembly appointed by their fellow members. There are ministerial portfolios and government departments which are staffed by civil servants with each member of Cabinet having particular areas of responsibility.
The Cayman Islands does not form part of the European Union. However, the Cayman Islands, together with certain other British Overseas Territories, enjoys an association with the EU pursuant to which provision is made for favourable market access to the EU for overseas territory products, aid allocations and dialogue with the EU on areas of mutual interest.
The Cayman Islands is an associate member of the Caribbean Community (CARICOM).
14.1.8 Political and economic stability
The territory enjoys a stable government and there is no desire for independence from the UK, making the Cayman Islands a low sovereign risk jurisdiction. The Cayman Islands has a sovereign rating of Aa3 (and stable outlook) from Moody's Investors Service Inc.
There is a substantial invisible trade surplus with the outside world, largely as a result of tourism and the activities of the financial community. Unemployment is low and the standard of living is one of the highest in the Caribbean. The favourable economic situation of the Cayman Islands is reflected in its longstanding economic, social and political stability.
14.1.9 Business environment
Modern laws have made the Cayman Islands one of the world's leading offshore financial centres for banking, mutual funds, hedge funds, insurance companies, capital markets and structured finance transactions, project financings, company registrations, trusts and partnerships. All business conducted adheres to the highest financial trade and regulatory standards.
220.127.116.11 Currency and exchange control
The currency of the Cayman Islands is the Cayman dollar which is pegged to the United States dollar at a fixed rate of CI$1 = US$1.22. There are no currency exchange controls or legislation in the Cayman Islands.
18.104.22.168 Employment and immigration
Due to the position of the Cayman Islands as a leading international offshore financial centre, the Cayman Islands has attracted professionals such as attorneys, accountants, administrators, bankers, and insurance managers, from leading onshore institutions based in the major global financial centres. As a result, the business climate is comparable to that of cities like London and New York.
In order to live and work in the Cayman Islands without restriction a person must possess "Caymanian Status". Those who do not possess Caymanian Status require permission from the Immigration Department to enter the Islands and may not work without possessing a work permit (unless otherwise exempt). The grant of a work permit is discretionary and is normally granted only if no Caymanians or persons married to or descended from Caymanians, or persons legally residing in the Islands, are available, suitable, qualified and willing to undertake the employment in question.
22.214.171.124 Establishing a business in Cayman – requirements
The principal local conduct of business and regulatory laws which are likely to be relevant to persons wishing to carry on business in the Cayman Islands are as follows:
- Companies Law (2013 Revision) (the "Companies Law"): This law provides the framework for the incorporation of ordinary or exempted companies in the Cayman Islands. The Companies Law also requires the registration of all foreign companies which establish a place of business or commence carrying on business within the Cayman Islands.
- Local Companies (Control) Law (2007 Revision) (the "Local
Companies (Control) Law"): This requires that no company may
carry on business in the Islands unless it is 60% owned or
controlled by Caymanians or it is duly licensed under the Local
Companies (Control) Law. However, carrying on business in the
Islands does not include, amongst other things:
- doing business in the Islands with any person in furtherance only of the business of that company carried on exterior to the Islands; or
- buying or selling or otherwise dealing in shares, bonds, debentures, stock, obligations, mortgages or other securities issued or created by an exempted company, a foreign partnership or a resident corporation incorporated abroad; or
- effecting or concluding contracts in the Cayman Islands and exercising in the Cayman Islands all other powers, so far as may be necessary for the carrying on of the business of that company exterior to the Cayman Islands.
- Trade and Business Licensing Law (2007 Revision) (the "Trade and Business Law"): The Trade and Business Law provides that every person who carries on, within the Cayman Islands, a trade or business specified in such law, must be annually licensed under the law, save where expressly excluded under other regulatory laws (eg the Banks and Trust Companies Law, Mutual Funds Law, etc.)
Unfortunately, there is no statutory definition of "carrying on business", except that, in relation to foreign companies, it is specifically provided that this includes the sale by or on behalf of a foreign company of its shares or debentures and, in relation to mutual funds, it is specifically provided in the Mutual Funds Law (2013 Revision) (the "Funds Law") that a mutual fund is carrying on or attempting to carry on business if:
- it is incorporated or established in the Islands; or
- regardless of its place of incorporation or establishment, it makes an invitation to the public in the Islands to subscribe for any of its equity interests.
However, English case law suggests that a business is carried on generally where there is some degree of physical presence, or where as a factual and legal matter business contracts are negotiated or concluded, and the activity is on a repeated basis. The vast majority of offshore finance transactions that use Cayman vehicles do not involve the carrying on of a business in Cayman.
Confidentiality arising in relation to legitimate financial transactions is protected in Cayman. The Confidential Relationships (Preservation) Law (2009 Revision) (the "Confidential Relationships (Preservation) Law"), as well as the regulatory laws including the Monetary Authority Law (2013 Revision) (the "Monetary Authority Law"), the Banks and Trust Companies Law (2013 Revision) (the "Banking Law"), and other similar legislation regulating the insurance, mutual fund and company management industries, impose criminal penalties on Government officials and professional persons who make unauthorised disclosure of information obtained in the course of their duties or professional work; and the common law rule of confidentiality in a bank's relationship with its clients also applies.1
The Confidential Relationships (Preservation) Law contains detailed provisions for disclosure of confidential information in appropriate circumstances, most notably if the information is required for the investigation or prosecution of serious offences in the United States,2 a Tax Information Exchange Agreement (TIEA), or where disclosure is permitted or required under the Proceeds of Crime Law, 2008 (the "Proceeds of Crime Law") or the Money Laundering Regulations (2013 Revision) (as amended) (the "Regulations").
14.1.10 Legal system
The substantive law of the Cayman Islands is based on locally enacted statutes3 and local common law with English common law authorities being persuasive but not binding before a Cayman court.
The court system in the Cayman Islands is a simple one and practice and procedure are based on English law. Minor criminal and civil cases are tried by a stipendiary magistrate sitting in the summary court. All serious crimes and most civil cases are tried by the Grand Court which is presided over by the Chief Justice and Grand Court judges permanently resident in the Islands. Appeals lie from the Grand Court to the Cayman Islands Court of Appeal, which sits in Grand Cayman and, from there, to the Judicial Committee of the Privy Council in England.
The Grand Court is a superior court of record, the business of which is divided amongst five separate divisions, namely: the Civil Division, the Family Division, the Admiralty Division, the Financial Services Division and the Criminal Division. In absence of local legislation or case law, the Grand Court will generally adopt positions that are consistent with English and British Commonwealth common law and equity.
The Cayman Islands was the first British Overseas Territory to have in place a mutual legal assistance treaty and local legislation which met the standards set by the United States and the United Kingdom and which also contained safeguards to protect legitimate privacy rights. Such treaties and local legislation are regarded as essential for Cayman's continuing acceptance as part of the international financial community.
There are no direct taxes on companies or individuals in the Cayman Islands. Government revenue is principally derived from import duties, tourist taxes, stamp duties, registration and licence fees. The regime has no aspect of "ring fencing" and applies equally to all individuals, partnerships, trusts and companies, whether resident or non-resident. The Organisation for Economic Co-operation and Development (OECD) does not regard this as a regime which differentiates between residents and other particular types of entities, and therefore, it is not considered a "harmful" tax practice. The OECD has placed the Cayman Islands on its "white list" of jurisdictions that substantially implement international tax standards.
126.96.36.199 Stamp duties
Stamp duty is effectively a tax upon certain documents and legal instruments. The charge to stamp duty arises if certain categories of document or instrument are executed in the Cayman Islands, or thereafter originals are brought into the Cayman Islands (such as for the purposes of enforcement).
The duty payable on the various types of instrument is prescribed by statute. For transactions involving the most common offshore finance vehicles, viz. exempted companies, limited partnerships and trusts, the stamp duty payable is often nominal.
188.8.131.52 Tax undertaking
Exempted companies, limited partnerships and trusts may obtain from the Cayman authorities an undertaking against the future imposition of taxation. This is so notwithstanding the current absence of taxation.
184.108.40.206 Transparency and international cooperation
The Cayman Islands has invoked numerous statutory measures to cooperate with and assist foreign governments, authorities and courts with the provision of information held in the Cayman Islands. Such laws override any statutory or common law duties of confidentiality that may otherwise exist.
220.127.116.11.1 Regulatory initiatives
Mutual legal assistance for criminal matters has been provided for through a number of statutes since the mid 1980s. The Cayman Islands is also a party to the Hague Convention 1970 on the taking of evidence abroad.
The Misuse of Drugs Law (2010 Revision) (the "Misuse of Drugs Law"), Terrorism Law (2011 Revision) (the "Terrorism Law") and the Proceeds of Crime Law also contain provisions for the sharing of information with authorities in relevant circumstances.
As a regulatory matter, the Cayman Islands Monetary Authority (CIMA) is empowered under the Monetary Authority Law to entertain requests for information from any recognised overseas regulatory authority exercising equivalent functions. If certain criteria are met, CIMA may direct a local financial service provider or connected person to disclose information they hold in response to the overseas regulatory authority's request. Separately, CIMA may enter into specific Memoranda of Understanding with recognised overseas regulatory authorities. For example, CIMA has entered into a specific Undertaking with the United States Securities and Exchange Commission and a Memorandum of Understanding with the Commodity Futures Trading Commission in relation to the exchange of information.
CIMA is also a member of the International Organisation of Securities Commissions (IOSCO). The Cayman Islands Government and CIMA have had ongoing dialogue with foreign national and international agencies to ensure that the Cayman Islands is viewed as cooperative and responsive in relation to requests for information on regulatory and criminal matters. Accordingly CIMA has become a signatory to the IOSCO Multilateral Memorandum of Understanding concerning Consultation and Cooperation and the Exchange of Information.
18.104.22.168.2 Tax information exchange
A TIEA between Cayman and the United States was signed in 2001 and provides for the provision of information in relation to criminal tax matters from the 2004 tax year and civil matters from the 2006 tax year and does not require a dual criminality test (ie that the matter constitutes a criminal offence in both the United States and the Cayman Islands). The Cayman/US TIEA was updated in 2013 in conjunction with the execution of the Cayman/ US Intergovernmental agreement in relation to the US Foreign Account Tax Compliance Act (FATCA).
The Cayman Islands first introduced the Tax Information Authority Law in 2005 (now the 2013 Revision) (the "Tax Information Law") to provide the enabling framework for the TIEAs to be implemented and to create the Tax Information Authority as the competent authority to handle foreign requests for information in accordance with the TIEAs. TIEAs entered into between Cayman and the foreign jurisdictions are scheduled under the Tax Information Law and conform to the model developed with the participation of the United States, and the OECD Global Forum on Taxation. Both the G-8 and G-20 countries have endorsed the model agreement as reflecting "high standards of transparency and exchange of information for tax purposes". The Cayman Islands has currently entered into 33 TIEAs with foreign jurisdictions, 26 of which are in force.
In 2005, the Cayman Islands introduced the Reporting of Savings Income Information (European Union) Law (2007 Revision) to implement the European Union Savings Directive exchange of information measures.
As noted above, on 29 November 2013, the Cayman Islands Government executed a Model 1(b) (ie non-reciprocal) inter-governmental agreement (IGA) and simultaneously entered a new TIEA with the US government, in order to provide a platform for Cayman Islands' financial institutions, including hedge funds, private equity funds, structured finance and aircraft finance vehicles, banks, trust companies and insurance vehicles, to report under, and comply with, FATCA. FATCA was enacted in the US in 2010 to combat offshore tax evasion by US taxpayers who hold their investments and other assets in foreign accounts and by agreeing to the IGA and TIEA the Cayman Islands has agreed to report certain information on such US accounts to the US Inland Revenue Service. In order for the IGA to come into force in the Cayman Islands, enabling legislation will need to be enacted to provide the legislative framework for the IGA and future IGAs.
A similar IGA was entered between the Cayman Islands Government and the UK Government on 5 November 2013 to introduce similar FATCA like reporting obligations for foreign accounts held by UK persons.
The FATCA IGA's are based on the principles of automatic exchange of information; ie an annual reporting of specific information through the Tax information Authority to the foreign fiscal authorities.
As noted above, the Cayman Islands has also signed TIEAs with various other jurisdictions and maintains a Double Tax Agreement with the United Kingdom. A typical TIEA only deals with the provision of information upon request, for tax purposes. A Double Tax Agreement also deals with other taxation matters, as well as having a component for the provision of tax information. The Cayman Islands is a member of the OECD Global Forum Steering Group, which assists with the implementation of OECD tax policy. The Cayman Islands has also passed the two phases of the OECD Peer Review process, confirming that the Cayman Islands legal and regulatory framework complies with international standards of transparency and information exchange.
The Cayman Islands will continue its participation in global tax and transparency initiatives, including high-level involvement on both the Steering and Peer Review groups of the Global Forum. In April 2013 the government requested to participate in the G5 pilot on multilateral automatic exchange of information (which 17 EU Member States have joined to date), and in June 2013 the government committed to the OECD Convention on Mutual Administrative Assistance in Tax Matters.
Originally published in World's Leading Financial and Trust Centres, Second Edition, June 2014, by Bloomsbury Professional Ltd.
1. Tournier v National Provincial and Union Bank of England  1 KB 461.
2. Mutual Legal Assistance (United States of America) Law (1999 Revision).
3. A few English Statutes have been extended to the Cayman Islands by Order in Council.
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.