Answer ... The Cayman Islands does not have a direct taxation regime as a matter of centuries-old fiscal policy.

Accordingly, no taxes are imposed under Cayman Islands law on the profits, income, gains or appreciations of Cayman Islands funds; and there is no withholding in respect of any dividend, distribution or interest payment by a Cayman Islands fund. Nominal stamp duties apply to documents executed or brought into the Cayman Islands. There are no exchange or currency controls in the Cayman Islands.

A Cayman Islands fund formed as an exempted company that desires additional comfort on this matter may obtain, from the government of the Cayman Islands, an undertaking certificate that, for a period of 20 years from the date of the certificate, no laws of the Cayman Islands imposing any tax on profits, income, gains or appreciation shall apply to the fund and that no tax in the nature of estate duty or inheritance tax shall be payable on the equity interests of the fund. An exempted limited partnership fund may obtain a similar undertaking for a period of 50 years. A unit trust fund may also obtain a similar undertaking for a period of 50 years, provided that it excludes investors resident or domiciled in the Cayman Islands (other than Cayman Islands exempted companies and non-resident companies).

Cayman Islands fund structures are generally subject to the Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standard (CRS) reporting regimes of the Cayman Islands, as discussed in questions 1.4 and 8.4.

Answer ... No taxes are imposed under Cayman Islands law on the profits, income, gains or appreciations of Cayman Islands fund managers or advisers, and there is no withholding in respect of any dividend, distribution or interest payment by a Cayman Islands fund manager or adviser, whether formed as a company or partnership. A fund manager or adviser formed as an exempted company, limited liability company or exempted limited partnership may obtain a tax exemption certificate for a period of 20, 50 and 50 years respectively – please see question 8.1. Cayman Islands based fund managers fall under the Cayman Islands FATCA and CRS tax information reporting regimes, although the registration and notification obligations are usually minimal.

Answer ... As indicated in question 8.1, no direct taxes are imposed by Cayman Islands law.

Answer ... As indicated in question 1.4, Cayman Islands funds are subject to FATCA and CRS as ‘financial institutions’ and so must:

• obtain a Global Intermediary Identification Number from the US Internal Revenue Service;
• register with the Tax Information Authority and appoint a principal point of contact and authorising person;
• collect investor identification and investment value data for annual filing with the Tax Information Authority; and
• establish written policies and procedures regarding CRS compliance.

The regimes operate on the basis that:

• obligations are established under Cayman Islands law;
• reporting obligations are owed to the Tax Information Authority; and
• the Cayman Islands does not receive reciprocal information from the United States or CRS participating jurisdictions.

Fund administrators are well accustomed to the practical application of FATCA and CRS. Fund offering materials are routinely designed to collect the necessary investor identification data, and the fund administrator’s accounting service will include the collation of relevant balance and distribution data.

The regimes provide for certain narrow exemptions, including an exemption for funds regulated under the Mutual Funds Act or Private Funds Act which are entirely held by other financial institutions.

The regimes also apply to fund managers and general partners; though where they hold no client assets – whether on balance sheet or in a client omnibus account – and provide services only to fund structures reporting under FATCA and CRS, then usually this amounts to a one-off obligation to notify the Tax Information Authority and no reporting obligations.

Answer ... With no direct taxation in the Cayman Islands, there are no domestic tax mitigation strategies as such.

We understand that exempted limited partnership structures (or companies that elect for treatment as a partnership under an onshore tax regime) are often used to obtain a tax-transparent outcome for onshore investors, whereby the partnership is effectively disregarded for tax accounting purposes. The transparent or disregarded entity approach is common with private equity funds which are routinely formed as exempted limited partnerships, and in a similar manner many hedge funds organised as master feeder arrangements use partnership vehicles for US taxable investors. Conversely, certain non-taxable investors often have a preference for the use of corporate blockers or feeder funds to avoid transparent treatment in order to simplify their administration and reporting and reduce applicable onshore tax.

The Cayman Islands has no double tax treaties relevant to investment fund business, although a double tax treaty with the jurisdiction of ultimate investment may be accessed by way of certain sophisticated structuring. Similarly, Cayman Islands funds will often use investment subsidiaries to achieve a tax-efficient outcome, for example, to access a double tax treaty or to effect an offshore sale of an underlying asset.