1.1 The Cayman Islands have long been recognised as a leading jurisdiction for the administration of investment funds. The regulatory and tax environment is highly favourable to fund administrators seeking to domicile their business in the Cayman.
1.2 Administrators in Cayman adopt a variety of business models. Some conduct the full suite of administration services from their Cayman offices, whilst others conduct certain tasks in Cayman and delegate other matters to affiliates located elsewhere. The operational and regulatory environment is sufficiently flexible to allow administrators to structure their service delivery in the most efficient manner to suit their business model.
1.3 This note summarises the regulations applicable to an administrator domiciled in Cayman for administrators wishing to establish a business in Cayman, and highlights the key Cayman issues that need to be addressed when setting up such a business.
1.4 The information set out in this note is a summary only and should not be regarded as specific legal advice applicable to any particular circumstances.
2. The Cayman Islands as a jurisdiction
2.1 The Cayman Islands are so well entrenched as the leading domicile for offshore investment funds, that it is easy to lose sight of the reasons for this success. The Appendix to this note provides a fuller explanation of what makes Cayman the leading offshore international financial centre, but some of the key attractions are as follows:
(a) Regulation: Cayman's regulatory system is effective, transparent and globally recognised as meeting or exceeding relevant international standards. Investors, fund managers, financial institutions and international regulatory authorities take comfort from funds and managers being regulated in Cayman, which in turn assists with launching, growing and operating such funds.
(b) Taxation: Cayman has no direct taxation on legal or natural persons. There is no income tax, corporation tax, capital gains tax, estate duty, inheritance tax, gift tax, withholding or land tax. Cayman funds therefore provide a neutral base in which to combine investors from a number of jurisdictions. For managers operating in Cayman, the absence of individual and corporation tax facilitates the attraction and retention of talent and increases revenues available to grow the business.
(c) Economic Stability: As a British Overseas Territory, Cayman offers the security and stability associated with the British Flag. The UK remains responsible for the Islands' external affairs and their legal system.
(d) Professional expertise: Cayman has a deep pool of talent and experience with substantial banks, administrators, law firms, corporate management firms, audit firms and IT companies supporting the financial services industry. The great majority of professionals working for such organisations have worked in some of the world's largest financial centres and as such bring with them superior knowledge, experience, and familiarity with complex issues within their respective fields.
(e) Infrastructure: The quality of the Cayman Islands' fundamental facilities and systems of transportation, communication and other local services provide a secure and reliable platform for international business and commerce.
2.2 The Cayman Islands Department of Commerce and Investment has been mandated to facilitate the establishment of investment management businesses. The Department will assist in liaising with different Government departments to minimise red-tape and expedite the process.
3 Licensing under the Mutual Funds Law (Revised)
Regulation of Mutual Fund administrators in the Cayman Islands
3.1 Under the Mutual Funds Law (Revised) (the Law), a mutual fund administrator is defined as a person who conducts mutual fund administration in or from Cayman. Providing mutual fund administration includes managing or administering a mutual fund, providing a principal office or providing an operator to the mutual fund.
Application for a mutual fund administration licence
3.2 Pursuant to the Law, mutual fund administrators require a licence to operate in Cayman. Mutual fund administrators can operate pursuant to a restricted or unrestricted licence. Restricted licences only permit the administrator to offer administration services to the mutual funds specified in the licence.
3.3 The method of application for both types of licence is essentially the same. The applicant must submit a completed application together with the applicable fee to the Cayman Islands Monetary Authority (CIMA). There is no specific form provided by CIMA for the application, however the Mutual Funds Administration Licence (Applications) Regulations 2001 prescribe the details which need to be included in an application.
3.4 Licence applications under the Law normally take approximately four to six weeks following receipt by CIMA of all applicable documents comprised in the application, which is to be approved by CIMA's Management Committee. In certain circumstances the process can, however, take longer.
3.5 In order to obtain a licence, the administrator will need to satisfy CIMA:
(a) that it has sufficient experience to administer mutual funds;
(b) that the business will be administered by persons who are fit and proper persons to administer mutual funds;
(c) in the case of an application for an unrestricted licence; that it has a minimum net worth of US$500,000 (or equivalent in another currency);
(d) in respect of an application for an unrestricted licence, it has a principal office on the island and two individuals or a body corporate resident in Cayman to act as its agents; and
(e) in respect of an application for a restricted licence; that it has a registered office in Cayman.
Fees payable by the administrator
3.6 The administrator must pay the fees prescribed under the Mutual Funds (Fees) Regulations (Revised) in respect of the initial application for a licence and the following as an annual fee:
(a) for an unrestricted mutual fund administration licence to administer not more than 50 regulated mutual funds: US$30,000;
(b) for an unrestricted mutual fund administration licence to administer greater than 50 regulated funds: US$35,000; and
(c) for a restricted mutual fund administration licence: US$7,000.
3.7 The administrator must also pay US$4,250 on commencing to act as a principal office of a regulated mutual fund and as an ongoing annual fee and an additional US$313 per segregated portfolio (capped at a maximum of 25 portfolios, being US$7,825) if the mutual fund is a segregated portfolio company.
4 Corporate Governance
4.1 Formation of a Cayman company is a simple process which can be completed within a week.
4.2 A Cayman company must have a minimum of one shareholder, who may be an individual or a legal vehicle. There are no thin capitalisation restrictions in Cayman, and it is common for a company to issue only a small number of shares (e.g. 100 or 1,000). The shares can be denominated and paid for in any currency.
4.3 The shares of a licensed administrator cannot be issued or transferred without CIMA's approval. If the shares of the administrator are publicly traded then CIMA may waive this requirement subject to the condition that the administrator will notify CIMA as soon as reasonably practicable on a change of control or the acquisition by any person or group of persons of ten percent of the issued capital or the voting rights in the administrator or the parent company.
4.4 A licensed mutual fund administration company requires at least two directors. The Directors generally need to be approved by CIMA. The Directors are not required to have any specific qualifications but they must be "fit and proper" persons.
4.5 The company must maintain proper books of account giving a true and fair view of the state of the company's affairs. A licensed mutual fund administrator must have its accounts audited annually by an auditor approved by CIMA and file audited financial statements with CIMA. Such accounts are not publicly available.
4.6 Every company must also keep minutes of all resolutions and proceedings of its directors and shareholders.
4.7 The company must have a registered office in Cayman and make certain annual filings with the Registrar of Companies.
5 Anti-Money Laundering
5.1 Cayman has stringent regulations against anti-money laundering and terrorist financing that apply to all businesses. An applicant for a mutual fund administration licence must therefore be able to satisfy CIMA that it is able to meet the requirements of such regulations. If functions necessary to meet these requirements are to be delegated, CIMA needs to be satisfied as to the procedures and ability of such delegate(s) to carry out the required due-diligence work.
5.2 The Money Laundering Regulations require that relevant financial services providers have in place anti-money laundering policies, procedures and practices that enable them to comply with Cayman's anti-money laundering regime. Among other things, these Regulations require the administrator to maintain and to monitor record keeping in respect of: client identification, accounts files and business correspondence regarding its clients' transactions.
5.3 It is also necessary for the administrator to appoint a money laundering reporting officer and a money laundering compliance officer (who may be the same individual) and to prepare and to maintain an "anti-money laundering policies and procedures" manual for its staff.
6 Immigration and employment
Work permits for expatriate employees
6.1 Non-Caymanians require a work permit, and it is the employer's responsibility to apply for work permits for its employees. Permits are typically granted for one to three years. But, if the employer has a "staff business plan" (it is mandatory for a business with 15 or more work-permit holders to submit such a plan), it is typical for three- to five-year work permits to be issued for workers covered by such a plan.
6.2 The Cayman Islands have a skilled and educated workforce, but, as a small jurisdiction, there is a limited pool of qualified candidates for the more senior or technical roles. There are in place new directives regarding the issuance of work permits to the financial services sector in order to facilitate inward investment into the Cayman Islands. In practice, for a fund administration business, this means that junior administrative staff are often recruited from the local population in the Cayman Islands, while work permits are generally granted for roles requiring greater expertise.
6.3 The Cayman Islands have had a long-standing policy objective to grow and to train the Caymanian population to fill the positions occupied by expatriate workers. The work-permit process, therefore, includes a requirement to advertise locally for positions to be filled before expatriate workers can be employed. Caymanians and those legally resident in the Cayman Islands must be employed in priority to equally qualified expatriate applicants.
6.4 Work-permit fees vary depending on the type of application and the position applied for. The highest annual work permit fee, which would apply to (say) the CEO's position for a fund administration business, is currently US$33,750.
Terms of employment
6.5 The Labour Law (Revised) imposes a minimum set of standards with which all employment contracts must comply, as well as imposing certain other conditions on employers and employees. These minimum standards and conditions include customary provisions relating to remuneration, vacation, maternity leave, termination, severance pay, health and safety, and non-discrimination.
6.6 In general terms, though, employees in the Cayman Islands enjoy fewer protections and benefits than employees in jurisdictions such as Europe.
6.7 Under the Health Insurance Law (Revised),
every employer in the Cayman Islands is obliged to obtain for every
employee a standard health-insurance contract from an approved
insurer. The employer is responsible to pay the premium on
every employee policy but is able to deduct up to 50% of the
premium paid from the employee's remuneration.
6.8 Every employer must provide a pension plan or make contributions to a pension plan on behalf of each employee. An employer must contribute a minimum of 5% of an employee's earnings up to maximum annual pensionable earnings of US$73,171 i.e. a maximum of US $3,659 per annum. Employees are required to make matching contributions.
7 Business premises
7.1 Office space in Grand Cayman is generally of a high standard, and there is a range of options that are likely to be suitable for any new business. Ogier has strong relationships with a number of real estate brokers and is in a position to make introductions at the appropriate time.
7.2 Stamp duty is payable on any lease as follows:
(a) for a term over 10 years - 20% of average annual rent
(b) for a term over 5 years - 10% of average annual rent
(c) for a term under 5 years - 5% of average annual rent
In calculating the term, option periods are taken into account.
8 Quality of life
8.1 Cayman residents enjoy a tropical climate in a beautiful setting. The Cayman Islands are a friendly and sophisticated island state with strong cultural ties to the UK and the USA that offers a very high standard of living. There are three islands, with most commercial activity taking place on Grand Cayman. The population of Grand Cayman is approximately 55,000. New residents are enticed by the combination of a sophisticated business and social scene with an outdoor lifestyle that enables year-round participation in land and water based leisure activities.
8.2 There are numerous schools offering a choice of UK and US curriculums. Health standards are very high with three hospitals and a large number of medical and dental facilities. The housing market is stable and varied with no restrictions on ownership. For an informative overview of life in the Cayman Islands visit www.caymannewresident.com
Financial Services - The Cayman Advantage
The Cayman Islands is recognised as a top tier international financial centre with leadership and expertise in a number of areas. It offers a diverse pool of professional service providers (lawyers, administrators, auditors, managers and fiduciaries) in an environment of economic and political stability on a tax neutral platform with a developed infrastructure.
As the top international banking centre, the world's leading domicile for hedge funds, the second largest captive insurance centre and a world leader in structured finance, the jurisdiction stands as the only international financial centre (IFC) with a tax neutral environment to possess such breadth and depth in financial services. The Cayman Islands' financial services success is built upon core principles of proportional and appropriate regulation, adherence to the recognised relevant international standards, international cooperation and a robust and proactive legal system.
Financial services account for a substantial portion of Cayman's gross domestic product and the success of this sector is a contributor to Cayman's Aa3 sovereign credit rating (reaffirmed by Moody's in June 2015).
1.1 The Cayman Islands Monetary Authority (CIMA) is the financial services regulator, responsible for prudential and anti-money laundering regulation of licensees and registrants. CIMA is a full member of the International Organization of Securities Commissions (IOSCO), the Offshore Group of Banking Supervisors (OGBS), the Offshore Group of Insurance Supervisors (OGIS) and the Offshore Group of Collective Investment Scheme Supervisors, as well as a member of the Organisation for Economic Cooperation and Development's (OECD) Level Playing Field sub-committee.
1.2 CIMA adopts and applies the Basel core principles (for banking), International Association of Insurance Supervisors (IAIS) principles (for insurance), IOSCO principles (for securities and investment) and OECD principles for corporate governance.
2 Anti-Money Laundering (AML) and Combating of Terrorist Financing (CTF)
2.1 The Cayman Islands have been a member of the 27-nation Caribbean Financial Action Task Force (CFATF) since its inception in 1992. Members of Cooperating and Supporting Nations of the CFATF include the United States, Canada, the United Kingdom, France, Mexico, Spain and the Netherlands.
2.2 The CFATF is an Associate Member of the inter-governmental AML/CFT body, the Financial Action Task Force (FATF) and conducts regular peer assessments of its members based on the FATF 40+9 Recommendations, as well as 19 CFATF Recommendations.
2.3 The Cayman Islands were reviewed by the CFATF in late 2007. The resulting report recognised that the compliance culture in Cayman was well established and highly commendable. Follow up reports were produced in 2009, early 2010 and November 2010, all of which highlighted the Cayman Islands as a compliant and cooperative jurisdiction.
2.4 The General Accountability Office (GAO) report in July 2008 on behalf of the U.S. Government determined that the Cayman is one of the U.S. Department of Justice's "best partners" as a result of its excellent record of cooperation.
2.5 AML/CFT procedures are mandatory for all licensees, registrants and entities conducting relevant financial business. Unlike other jurisdictions, this also applies to corporate service providers and trust companies.
3 Transparency for Revenue Authorities
3.1 The Cayman Islands currently has 35 bilateral tax information exchange agreements in place (for example with EU member states, the UK, the USA etc.), with a further 15 currently being negotiated, and many more expected. Cayman also features on the OECD's "white list" of jurisdictions that have substantially implemented the internationally accepted exchange of tax information standards.
3.2 The Tax Information Authority also administers bilateral agreements with the 28 EU member states in relation to the automatic reporting of savings income information, in effect since 2005. The Cayman Islands does not operate a withholding tax. This automatic reporting arises under the EU Savings Directive established a multi-national information exchange with the sole purpose of curbing tax evasion and tax avoidance by EU residents. It focuses on the savings income paid to individuals (and certain residual entities) resident in the EU by a paying agent resident in a country other than the one in which the individual is resident for tax purposes. Although not part of the EU, Cayman voluntarily chose to participate and has in place a proactive reporting mechanism in respect of all 28 EU states.
4 International Regulatory Cooperation
CIMA has a statutory obligation and wide associated powers to cooperate with international counterparts. CIMA is also a party to the IOSCO Multilateral Memorandum of Understanding Concerning Consultation, Cooperation and the Exchange of Information. Accordingly, international regulators should not be concerned by a regulated investment fund or a licensed investment manager being domiciled in Cayman as agreed gateways now exist for all IOSCO members to obtain appropriate information. In addition, CIMA has entered into specific information sharing bilateral memoranda of understanding with fifteen other major regulators, including the US Securities and Exchange Commission and the UK Financial Services Authority.
5 Recognised Stock Exchange
The Cayman Islands Stock Exchange (CSX) was granted approved organisation status by the London Stock Exchange in July 1999, the first offshore stock exchange to achieve this. Also, HM Revenue & Customs in the UK has designated the CSX as a "Recognised Stock Exchange" under Section 1005 of the Income Tax Act 2007 which provides some key tax efficiency advantages. The CSX has approximately 2,000 fund listings to date and 1,000 debt listings to date. Listing on the CSX provides enhanced profile and access to institutional capital.
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.