Cayman Islands: Update: Cayman Islands Financial Account Reporting For Investment Funds

Last Updated: 23 December 2015
Article by Andrew Morehouse and Matt Taber

In our previous alert on this topic, we gave the background to the implementation of the Organisation for Economic Co-operation and Development (OECD) Common Reporting Standard for the exchange of tax information (CRS).  The Tax Information Authority (International Tax Compliance) (Common Reporting Standard) Regulations, 2015 (CRS Regulations) bring the CRS into Cayman Islands law with effect from 1 January 2016.

On 8 December 2015, the Cayman Islands Government issued an update that contains some important information for the managers, operators and administrators of Cayman Islands investment funds. This alert provides details of the update and some commentary on the impact for the Cayman Islands investment funds industry.

Highlights

The highlights from the update are: 

  • New Self-Certification forms have been developed and issued.
  • Confirmation of CRS Participating Jurisdictions and a timely reminder that the United States is not participating in CRS.
  • Confirmation of the definition of the limited Cayman Islands Non-Reporting Financial Institutions.
  • Clarity on the timing for phasing out UK FATCA.
  • Information on potential Guidance Notes.
  • Timing for the next phase of the CRS Regulations.

New Self-Certification forms and fund subscription documents

The publication of new Cayman Islands self-certification forms by the Cayman Department of Tax Co-Operation (DITC) will be welcomed by all in the Cayman Islands investment funds industry and demonstrates the Cayman Islands' market leading approach to CRS and automatic account information sharing generally.

Those of us who have been dealing with new fund launches and fund updates have been grappling with what changes had to be made to funds' subscription documentation in order to allow them to harvest the right information for CRS.  These new forms can be used as is or modified and included into the relevant subscription agreement and questionnaires. 

The Entity Self-Certification form is 19 pages long, but has been re-written so that US, UK and CRS classifications are split and it also provides a section for the details of Controlling Persons (defined in the CRS) to be added which differentiates it from forms issued by other global players in this area.

Many Cayman Islands funds already obtain IRS W8 and W9 forms, which provide the information a fund needs to classify and report under the Tax Information Authority (International Tax Compliance) (United States of America) Regulations (Revised) (US FATCA), and have updated their subscription documents in the last 18 months to address reporting under the Tax Information Authority (International Tax Compliance) (United Kingdom) Regulations (Revised) (UK FATCA). 

It is important to note that there is a positive obligation on a fund to classify a new investor account within 90 days of the subscription date.  If a fund (most likely acting through its administrator) is not able to classify an account within 90 days then it must report it to the DITC. As a result funds should be reviewing their subscription documents and procedures with their administrators and Cayman Islands legal counsel right now to ensure that the right information is requested at the subscription stage to avoid having to seek further certifications from investors.

Participating Jurisdictions for CRS

95 jurisdictions are included in the first list of 'Participating Jurisdictions' published by the DITC.  The Cayman Islands has adopted what is known as the 'wider approach' which requires Financial Institutions (FIs) to collect data relating to the country of residence and tax information number for all non-residents, not just those that are in 'Reportable Jurisdictions', so that when those of the Participating Jurisdictions who are not yet Reportable Jurisdictions become Reportable Jurisdictions, Cayman FIs will have the information available to allow them to make those reports. This will alleviate future compliance burdens.

This listing provides a reminder that the US is a non-participating CRS jurisdiction and this has an impact on the Cayman Islands investment fund industry discussed below.

US FATCA and 'Investment Entities located in a Non-Participating Jurisdiction managed by a Financial Institution'

An important point to note for investment funds and the managers and administrators of those funds is that one key impact of the US being a non-participating jurisdiction for CRS purposes is that, in general, US feeder funds into a Cayman Islands master fund fall within the definition of Passive NFEs.  The result is that the Cayman Islands master fund must obtain information on the Controlling Persons of the US feeder. 

This will almost certainly come as a surprise to many US based managers and will need careful analysis of US feeder fund documentation to determine who the Controlling Persons are. In some cases, this will be the natural person who controls the investment manager, managing member or general partner of the US feeder, but could be investors in US feeders.

Non-Reporting Financial Institutions

For the purposes of the investment funds industry, there are essentially no non-reporting financial institutions (as there were under US FATCA and UK FATCA).

The future of UK FATCA

The UK has now indicated that the UK intergovernmental agreement for Crown Dependencies and Overseas Territories (of which the Cayman Islands is one) will operate alongside the CRS for 2016 and will be phased out in 2017, so that only the CRS will remain in place (alongside US FATCA).

The reporting options on the Cayman AEOI Portal are going to be clarified by the DITC in due course.

The key message here is that Cayman Islands investment funds should not amend their current policies and procedures with regard to UK FATCA, but should simply adopt additional policies and procedures to address CRS compliance. 

Will there be new Guidance Notes?

Although the DITC will publish some limited practical guidance notes in relation to aspects of CRS which are specific to the Cayman Islands, the key sources of information on the CRS are contained on the OECD's automatic exchange portal. 

Is this it for now?

Sadly no! The DITC was extremely keen to have the initial CRS Regulations adopted and published as soon as possible, but the result of this is that drafting for compliance and enforcement of the CRS and the CRS Regulations was postponed. It is now anticipated that amended CRS Regulations will be issued in Q1 2016.

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.

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