Michael Alberga explains the corporate structures available to the offshore investor in the Cayman Islands, the most popular of which is the 'exempted company'.
The Cayman Islands, three small islands in the Caribbean, some 30 years ago appreciated that the development of a safe, reliable, attractive home for capital, where it could more productively deploy on a worldwide basis, would be beneficial to growth on a global basis. They created a free market economy from which the invisible power of capital could operate, guided by the visible hand of reasonable regulation. Today, the Cayman Islands is one of the world's largest financial centres. As of June 2007, international assets booked through banks in the Cayman Islands stood at US$1.8 trillion, with most of the world's major banking institutions being represented. There were approximately 8,000 mutual funds, commonly known as hedge funds, most of which were institutional with an asset value in 2006 of over US$138 trillion. Its insurance industry was home to over 900 insurance companies with premium income in the billions.
Part and parcel with the emergence of the Cayman Islands as a world-renowned financial centre was the development of a number of different methods by which capital could be housed and managed. The majority of the business conducted through Cayman on a worldwide basis utilises corporations known as companies in one form or another. Some investors utilise partnerships, trusts and hybrid structures; however, companies provide an internationally recognised vehicle.
The Cayman Islands statutory provisions together with the application of the British common law system have created an excellent legal framework pursuant to which business can be conducted. The availability of highly qualified and sophisticated professionals has helped to create a business environment which balances regulation and the needs of a free market.
The most popular company in the Cayman Islands is known as an Exempted Company. It is usually incorporated with a share capital and allows investors to limit their liability to the paid-up amount of their share capital. The shareholders have the power to appoint a board of directors to run and manage the day-to-day operations of a company. Corporate governance document is filed with the Registrar of Companies in the Cayman Islands and regulates a company's affairs. This type of company needs no governmental permission for incorporation or to carry on business in the Cayman Islands in furtherance of its international objectives. On application it obtains a guarantee from the Government of the Cayman Islands that it will not be taxed for 20 years from the date of its incorporation and an application to renew the guarantee may be made during the 20 years.
In addition to exempted companies, the Companies Law and other statutory provisions allow for a variety of corporate vehicles and structures. These include companies limited by guarantee companies which can operate as partnerships and limited partnerships, which provide limited liability protection for investors who hold partnership interests. One of the corporate structures which has been widely used is a segregated cell company. This particular structure allows a company to have different compartments which can be run and operated separately and provide protection from other parts of the structure should one section find itself in financial difficulty. These types of structures are convenient for hedge fund operations as one cell may have a portfolio of investments with different strategies to another cell. Investors in one cell do not bear the risks of investors in the next cell.
To incorporate a company, an individual may retain an attorney, accounting firm, bank or trust company or other licensed service provider. After the relevant information has been provided which includes references, identification material, source of funds certifications and business purpose, a service provider may cause the relevant documentation to be filed and the company formed. A company need only have one shareholder and that shareholder may appoint a director. More than one director is not required for private companies. The company is required to maintain a registered office in the Cayman Islands where its books and records are kept and important documents may be served.
Every year the company files returns with the Registrar of Companies and pays a fee to maintain its registration. Service providers who are licensed and regulated provide the registered office and file the necessary documentation. An authorised capital of US$50,000 is permitted with the initial fee payable to the Government. This may be increased by the payment of additional fees. One share may be issued and the capital may be stated in any currency.
Investment companies are normally used for joint venture businesses, to own property, both real and personal, for the ownership of boats, planes, intellectual property and for the management of private wealth. Companies may invest on a worldwide basis and the Cayman Islands has no restriction on the remittance of capital or income earned by investment vehicles to and from the Cayman Islands.
There are certain activities which are regulated in the Cayman Islands such as the ownership of a bank and the carrying on of banking business, the carrying on of trust business, insurance business, investment advisory business and the offering of shares to the public through investment vehicles such as mutual funds or hedge funds. Before these activities can be carried on, the appropriate applications must be made and licences obtained from the regulatory authority known as the Cayman Islands Monetary Authority (CIMA).
Provided business is carried on in a legitimate manner, the laws of the Cayman Islands do not permit confidential information belonging to the company or an individual to be provided to third parties without the consent of the management and/or the shareholders of the company. Although the Cayman Islands is a free market jurisdiction with no tax, it is advisable for companies who carry on business in other jurisdictions and for investors and shareholders to obtain competent advice on the relevant statutory provisions in their own country and in the country in which they intend to carry on business. Many countries have complex tax structures which are unfriendly to foreign investors and impose criminal penalties for breaches.
Cayman Islands companies are listed on many Stock Exchanges throughout the world and hold investments in many parts of the world. These companies are one of the top ten investors in China and it is anticipated that the Cayman Islands will provide a stable and safe environment from which nationals of China may invest in other markets around the world.
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.