Foreword

This document has been developed by Cayman Finance to share key information about the essential role of the Cayman Islands Financial Services Industry in the global economy, and particularly highlight how the Cayman Islands is well positioned to be an 'extender of value' and an important partner to Brazil at a time when Brazil is focused on strengthening its economy and attracting inward investment against a backdrop of evolving global trade relations and other important changes in the local and global economy.

The Cayman Islands is a premier global tax neutral financial hub that efficiently connects law abiding users and providers of investment capital and financing around the world and has a long-standing relationship with Brazil.

At a time when inward investment and global trade supporting a stronger economy are important cornerstones of Brazil's economic policy, the Cayman Islands is the world's most utilised global tax neutral financial hub for international investment, providing a proven, trusted, stable, tax neutral, and well-regulated environment designed to support global investment and trade.

As demonstrated in 2006 and 2009, through the signings of Memorandums of Understanding (MOU) with Brazil's central bank and securities and exchange commission, respectively, and in 2013 through the signing of a Tax Information Exchange Agreement (TIEA), the Cayman Islands has long been and continues to be well positioned as a 'global extender of value' for Brazil, its businesses, and its citizens – whether it be by providing competitive solutions for global trade, assisting in global/local investment and financing activities or providing infrastructure that is dynamic enough to support Brazil as the country enters a new era of global trade relations.

With this in mind, this document provides the basis for communicating the benefits that the Cayman Islands can provide to Brazil in its role as a global financial services centre.

Furthermore, it illustrates how the Cayman Islands is positioned to work in partnership with Brazil to support its economy, its businesses, and its citizens to maximise its potential in an evolving global economy.

The Cayman Islands, through its pivotal role in international investing and financing, supported by its robust and well-regulated financial services industry, can help Brazil as it focuses on strengthening its economy and global presence by providing unparalleled access to:

  • Foreign Direct Investment or "FDI" (essential to save or grow Brazilian businesses and jobs)
  • Inward infrastructure investing and financing
  • Liquidity for the Brazilian economy
  • Brazilian job growth
  • Increased Brazil tax base
  • Global diversified investments for Brazilian pensioners and endowments
  • Free flow of global trade, capital, investing, financing, and services.

Data from the International Monetary Fund indicates that the Cayman Islands already ranks in the top five for portfolio investment assets in and out of Brazil. In 2011, capital flows from global investors channelled through Cayman investment funds into Brazil totalled some US$17 billion. These flows are used for projects like major infrastructure and asset financing. Furthermore, in 2017, the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes estimated that in just one recent year, Cayman attracted at least US$4.1 trillion in banking assets, direct investment and portfolio investment.

Because of its global recognition and pro-business approach, the Cayman Islands is a leading domicile for alternative investment funds. The Cayman Islands Monetary Authority (CIMA) regulated approximately 11,000 open-ended alternative investment funds in 2018. Also domiciled on the Islands are closely held, open and closed-ended alternative investment funds. In fact, 70 percent of non-US domiciled alternative investment funds managed by US Securities and Exchange Commission-registered advisors are domiciled in the Cayman Islands. At the end of 2017, the value of total assets managed by Cayman Islands funds regulated by CIMA reached US$6.94 trillion and net assets were US$4.03 trillion.

Cayman is strategically well positioned to provide inward investing, financing, and liquidity into economies during times of need or uncertainty (just like after the 2008 global credit crisis), as might be expected with the evolutions in global trade relations.

The Cayman Islands investment fund industry provides solutions and vehicles to facilitate trade to and from Brazil that in turn create employment, expertise and tax revenues to Brazil. The Cayman Islands investment fund industry also provides an integral solution for Brazilian asset managers and family offices to efficiently access international markets. The Cayman Islands investment fund is the global collective investment vehicle of choice for investors in the USA, China, Japan, Latin America, the Middle East, as well as many other countries. It is used by international investors in those regions to aggregate overseas investment into countries around the world, including Brazil; to facilitate co-investment by Brazilian investors with others from around the globe; and to enable asset managers in Brazil to provide local (Brazilian) investment opportunities to international investors.

Collective investment funds are also known as "collective investment vehicles" (CIV) or "collective investment schemes" (CIS). In 2005, the OECD published a white paper on Governance of Collective Investment Schemes that explains CIS as follows, "The concept underlying CIS is simple. CIS are a form of institutional investment through which individuals pool their funds and hire professionals to manage their investments, with each investor entitled to a proportional share of the net benefits of ownership of the underlying assets. Whatever its legal form, a CIS generally consists of: (i) a pooling of resources to gain sufficient size for portfolio diversification and cost-efficient operation and (ii) professional portfolio management to execute an investment strategy."

For example, Cayman-based Private Equity funds are frequently used to facilitate foreign capital that is invested into infrastructure developments in hospitals, schools, roads, power plants, etc. which not only promote foreign investment into the country but also over time substantially increases the quality of life in Brazil. Additionally, as Brazil's government looks to enter into a number of reforms that will hopefully result in the country once again becoming an investment grade jurisdiction, foreign investment will become increasingly more comfortable investing into Brazilian businesses requiring foreign capital as well as providing debt financing to companies in difficulty. As a result employees are re-employed, new jobs are created and an increased tax base will be delivered to the country. Working hand in hand with Brazil as a partner, these tremendous benefits can be extended to the Brazilian economy through foreign investment stemming from the Cayman Islands.

Additionally, many service providers to Cayman Islands funds are based in cities within Brazil, which are global centres of excellence for the alternative investment management industry. The income of such service providers, including investment managers, is dependent upon the fees generated from managing global pools of capital which are assembled in the Cayman Islands. This income creates additional jobs and taxable revenue in Brazil and helps preserve Brazilian cities' positions as leading financial centres by giving Brazil-based managers the ability to manage global capital that might not otherwise be invested in Brazil.

The 'Alternative Investment Management Association' (AIMA), headquartered in the UK, has noted that the money invested in offshore funds like those in the Cayman Islands is not kept in an offshore bank but invested in financial markets around the world. It added that this activity helps to provide additional sources of financing to businesses and infrastructure projects in places like the UK, creating significant jobs and generating tax revenues for the government there. ['Transparent, Sophisticated, Tax Neutral: The Truth About Offshore Funds' – AIMA Report Nov 2017]

While Cayman adds no additional tax to financial services transactions in its jurisdiction, investors (individuals and businesses) are still subject to any taxes owed at home. This is ensured by Cayman meeting or exceeding all globally-accepted standards for transparency and cross border cooperation with tax authorities and law enforcement including through the Cayman Islands being an early adopter of the OECD Common Reporting Standard framework. This is in addition to the MOUs and TIEA that Cayman has entered into with Brazil.

The importance of Cayman's tax neutral status can be illustrated by considering what would happen where Cayman were to introduce direct corporate tax on profits, e.g. hedge funds. This would reduce returns to the Brazilian investors in those funds and, consequently, reduce the taxes that those investors would in turn be liable to pay at home in Brazil. Accordingly, Cayman's efficient tax neutral platform provides the optimum outcome for investors, investees, and home tax jurisdictions.

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Originally published November 2019

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.