1. Legal System
1.1 Legal System and Judicial Order
The Cayman Islands is a common law jurisdiction, which is based on the English model. It comprises statute law and binding case precedents. English and British Commonwealth case authorities are generally persuasive, but not binding, on the Cayman Islands courts.
Cayman Islands law is derived from several sources:
- primary legislation – ie, local statutes passed by the Legislative Assembly of the Cayman Islands or its predecessors, and approved by the Governor of the Cayman Islands; for example, the Companies Act (As Revised) of the Cayman Islands (the "Companies Act") and the Private Funds Act (As Revised) of the Cayman Islands;
- secondary legislation – ie, legislation enacted pursuant to local statutes; examples include the Companies Winding-Up Rules (2023 Consolidation) and the Private Funds Regulations (As Revised) of the Cayman Islands;
- statutes passed by the United Kingdom (UK) Parliament that have been expressly extended to the Cayman Islands;
- Orders of His Majesty's Privy Council that are applicable to the Cayman Islands; and
- any relevant remaining English and British Commonwealth common law and rules of equity established by settlement not having been replaced by local or UK statute.
The Grand Court of the Cayman Islands (the "Grand Court") is the superior court of record of Ärst instance for the Cayman Islands. The caseload of the Grand Court is divided into Äve divisions: Civil, Family, Admiralty, Financial Services and Criminal. Appeals from the Grand Court are to the Cayman Islands Court of Appeal (which usually sits three times annually). The Änal court of appeal is the Privy Council in England.
2. Restrictions on Foreign Investments
2.1 Approval of Foreign Investments Foreign Investments in the Cayman Islands
Local operating business
Approval from the Cayman Islands authorities may be required if foreign investors are investing in a Cayman Islands company that conducts local business (ie, with businesses and individuals located in the Cayman Islands) (a "Local Company"). This is necessary where it is contemplated that a foreign investor will hold greater than 40% voting or economic interest in a Local Company. The Local Companies (Control) Act (As Revised) of the Cayman Islands (LCCA) has protective provisions therein that provide that a Local Company must have 60% Caymanian shareholders and directors, who maintain 60% of the economic and voting control of the company. An application would have to be made to the Trade and Business Licensing Board (the "Board"), which has been established pursuant to the Trade and Business Licensing Act (As Revised) of the Cayman Islands (TBLA), to obtain a special licence under the LCCA or waiver of the provisions of the LCCA to have greater than 40% foreign ownership and control of the Local Company.
Entities registered or incorporated in the Cayman Islands conducting business outside the jurisdiction
There is no prohibition on foreign investors investing in Cayman Islands entities that do not fall within the category of a Local Company – ie, entities that are registered or incorporated in the Cayman Islands but are not doing business with businesses and individuals in the Cayman Islands.
Certain categories of entities, such as entities registered under the Mutual Funds Act (As Revised) of the Cayman Islands, may require minimum investment thresholds. However, while there may be minimum investment thresholds, there are no restrictions regarding foreign investors making an investment in a Cayman Islands mutual fund.
Property in the Cayman Islands
There are no restrictions on foreign investors purchasing property in the Cayman Islands.
2.2 Procedure and Sanctions in the Event of Non-Compliance
Local Operating Business
To the extent a Local Company is unable to procure the required 60% local participation to conduct local business, the Local Company will Ärst need to apply to the Board for an LCCA licence to carry on business in the Cayman Islands. The Local Company would have to submit an application to the Board, together with supporting due diligence documents and evidence that the Local Company did try to procure local participation. Copies of published advertisements in the Cayman Islands newspapers would suɉce for evidence that the Local Company did seek local participation. The Local Company would also have to disclose to the Board any responses received from Caymanians. For the purpose of considering that application to grant an LCCA licence, the Board would also have to consider, among other things, the existing local business in the Cayman Islands and the beneÄt to the Cayman Islands and Caymanians. The application process generally takes approximately three to six months. An LCCA licence may be issued for up to 12 years and may be subject to such terms and conditions that the Board may see Ät to specify in the licence. A Local Company that has an LCCA licence must Äle a return of the shareholdings of such Local Company as at 31 December with the Board in January annually, for so long as the licence is valid. Once the LCCA licence has expired it cannot be renewed.
Any Local Company with less than 60% local participation that does not hold an LCCA licence and is not otherwise exempted or licensed to operate in the Cayman Islands under another law, commits an oɈence and is liable (i) on summary conviction to a Äne of KYD200 (USD243.90) and (ii) on conviction on indictment to a Äne of KYD1,000 (USD1,219.51), in each case, for each day the oɈence continues.
2.3 Commitments Required From Foreign Investors
In respect of Local Companies, the Board does not condition their approval on commitments from foreign investors. However, subject to any general directions from the Cabinet of the Cayman Islands (which consists of the Premier of the Cayman Islands, the Deputy Premier of the Cayman Islands, Äve members of the Cayman Islands Legislative Assembly, appointed to serve as a Minister of the Cabinet, the Deputy Governor of the Cayman Islands and the Attorney General of the Cayman Islands), the Board may have regard to certain matters (such as the advantage/disadvantage which may result from the applicant Local Company carrying on business in the Cayman Islands) when deciding whether or not to grant a licence.
2.4 Right to Appeal
To the extent a Local Company is dissatisÄed with a decision made by the Board, such Local Company may, within 28 days of the communication of the decision (or such longer period as the Appeals Tribunal (which is a tribunal established under the TBLA) may allow), appeal against that decision to the Appeals Tribunal. Any notice of appeal must specify, among other things, the decision that is being appealed, the Board's reason for its decision and the grounds of the appeal. The Appeals Tribunal may then decide whether they will allow the appeal and Äx a time and date for a hearing.
The Appeals Tribunal's decision will be communicated to the appellant and the Board within 28 days of the hearing. A further appeal may be made to the Grand Court from a decision of the Appeals Tribunal on a point of law only.
3. Corporate Vehicles
3.1 Most Common Forms of Legal Entity
The Cayman Islands has several types of corporate vehicles or legal structures available for conducting business in or outside of the Cayman Islands. Common types of entities are outlined below.
Exempted Companies
Exempted companies are incorporated under the Companies Act and are the most common form of Cayman Islands vehicle used when carrying on business mainly outside of the Islands. They oɈer a Åexible and tax-eɉcient structure for companies to operate in the global market. The main constitutional documents of an exempted company are its memorandum and articles and association that set out the rules for the governance and operation of the company. The issued share capital of an exempted company can be entirely nominal (for example, a single share) and the liability of the shareholders is typically limited to any amounts unpaid on the shares. There are no restrictions on the number of directors or shareholders that an exempted company may have.
Ordinary Non-Resident and Ordinary Resident Companies
Ordinary companies are incorporated under the Companies Act but, unlike exempted companies, are subject to the LCCA and are required to comply with local licensing, reporting and disclosure obligations in the Cayman Islands.
Ordinary non-resident companies cannot engage in any business activities within the Cayman Islands. Ordinary resident companies may conduct business in the Cayman Islands. Ordinary resident and non-resident companies must Äle a list of shareholders annually with the Registrar of Companies. Ordinary resident companies must also Äle an annual list of shares held by Cayman Islands residents with the applicable Cayman Islands immigration board to comply with the LCCA requirement that 60% of shares of an ordinary resident company must have Cayman Islands ownership.
Overseas Companies
Overseas companies (usually referred to as foreign companies) have been incorporated in a jurisdiction other than the Cayman Islands and intend to carry on business in the Cayman Islands. Overseas companies are required to register with the Registrar of Companies pursuant to Part IX of the Companies Act, which is necessary to enable them to hold land or carry on business in the Cayman Islands, or to act as the general partner of a Cayman Islands exempted limited partnership (for which they are commonly used).
Segregated Portfolio Companies
A segregated portfolio company (SPC) is a form of exempted company incorporated under the Companies Act, which is permitted to create one or more segregated portfolios in order to segregate the assets and liabilities of the SPC held within or on behalf of a segregated portfolio from the assets and liabilities of the SPC held within or on behalf of any other segregated portfolio of the SPC. It may also segregate the assets and liabilities of the SPC which are not held within or on behalf of any segregated portfolio of the SPC (called the general assets of the SPC) from the relevant segregated portfolios of the SPC. The segregation of assets and liabilities within segregated portfolios does not create any new legal entity: the SPC is and remains a single legal entity and any segregated portfolio of, or within, an SPC does not constitute a legal entity separate from the SPC itself. This means, for example, that the SPC for the account of one of its segregated portfolios cannot hold shares issued by the SPC in respect of another of its segregated portfolios. They are commonly used for mutual funds and other investment vehicles seeking to segregate assets and liabilities.
Limited Liability Companies
A limited liability company (LLC) is formed and registered under the Limited Liability Companies Act (As Revised) of the Cayman Islands (the "LLC Act") and oɈers a Åexible legal structure like a Delaware LLC and combines characteristics of an exempted company and an exempted limited partnership (described below). They are corporate entities with separate legal personality and limited liability. They can be used for a variety of purposes, including as investment vehicles where there is a need to have separate legal personality and Åexibility, in particular regarding its operation and management, the rights and responsibilities of its members, and the proÄt sharing between the members.
Exempted Limited Duration Companies
An exempted limited duration company (LDC) is a form of exempted company incorporated under the Companies Act. An LDC exists for a Äxed period (not exceeding 30 years) speciÄed in its memorandum of association and it must have at least two members. It is generally very uncommon to use an LDC; however, it could be used, for example, where a particular project or venture must be completed within a certain timeframe. Following the expiration of the Äxed period, the LDC will be deemed to have automatically commenced voluntary winding up and will dissolve, with its assets being distributed accordingly.
Exempted Limited Partnerships
An exempted limited partnership (ELP) is a partnership that is registered under the Exempted Limited Partnership Act (As Revised) of the Cayman Islands (the "ELP Act") and is the most common type of partnership structure in the Cayman Islands, which provides a Åexible vehicle for investors to pool capital and conduct investment activities outside of the Cayman Islands. It is frequently used as a private equity fund, hedge fund or feeder fund for international investors. The respective rights and obligations of the general partner and limited partners are set out in an ELP agreement. Limited partners beneÄt from limited liability with all management responsibility vesting in the general partner who is liable for the debts and liabilities of the ELP if the assets of the ELP are inadequate.
Limited Liability Partnerships
A limited liability partnership (LLP) is a partnership that is formed and registered under the Limited Liability Partnership Act (As Revised) of the Cayman Islands. It is the preferred structure used by professional Ärms to operate and organise their business in the Cayman Islands due to having a separate legal personality and aɈording limited liability status to all its partners. An LLP is not a body corporate and, in this respect, diɈers from a UK LLP which structurally is more akin to a corporate rather than partnership vehicle. The LLP, rather than the partners, is liable for such LLP's debts and losses. A partner may be liable for their own negligent acts or omissions where such partner has assumed an express duty of care and acted in breach of that duty (ie, in the context of providing professional services advice). An LLP must be established by at least two persons who may carry on a business in common for any lawful purpose. Any person, including natural persons, a body corporate or other partnerships, may be a partner in an LLP.
As there is no requirement for an LLP to undertake its business "with a view to proÄt", an LLP may be a helpful structuring option for not-forproÄt organisations and other social enterprises.
Foundation Companies and Companies Limited by Guarantee
A foundation company is incorporated under the Foundation Companies Act (As Revised) of the Cayman Islands (the "Foundation Companies Act") as a body corporate with a legal personality distinct from that of its members, beneÄciaries, directors, oɉcers, supervisors and founder. Accordingly, it has capacity to sue and be sued and to hold property. Uniquely, it is possible for a foundation company not to have any members, provided that its constitution so permits and it continues to have one or more supervisors. A foundation company may be formed for any lawful object, which need not be beneÄcial to other persons and must be limited by shares or by guarantee with or without share capital. It is a highly Åexible vehicle and can, if so desired, include features of a common law trust within a corporate framework. They are typically used for wealth management, estate planning, and asset protection. If used in a private wealth context foundation companies are often incorporated as companies limited by guarantee, which avoids the need for probate to be obtained where shares are issued and one or more shareholders die.
A company limited by guarantee is a Cayman company (exempt or ordinary) that, instead of having shareholders, has members. Typically, the liability of members of a company limited by guarantee is limited under its constitution to USD1. A Cayman company limited by guarantee has many of the same features as a Cayman company limited. It is a body corporate with a legal personality distinct from that of its members, directors and oɉcers. Accordingly, it has capacity to sue and be sued and to hold property. Companies limited by guarantee are rarely incorporated for purely commercial purposes, rather they are more typically used for non-proÄt/ club scenarios where there is no expectation of proÄts passing to the members.
Trusts (Including Unit Trusts)
In contrast to the vehicles described above, a trust does not have separate legal personality and so a trust itself cannot hold property in its own name. Rather, legal title to property held upon the terms of the trust is vested in the trustees of the trust and it is the trustees who enter into transactions in that capacity and who can sue and be sued. The primary legislation that sets out the framework for trusts in the Cayman Islands is the Trusts Act (2021 Revision) (the "Trusts Act"). The Trusts Act incorporates provisions that detail the conÅict of laws rules aɈecting Cayman Islands trusts (the "Trusts (Foreign Element") Provisions"). These provisions are particularly relevant in instances where a Cayman Islands trust has been established by a settlor domiciled outside of the Cayman Islands in a jurisdiction that does not permit testamentary freedom.
Trusts can be established for various objectives, such as wealth management, estate planning, philanthropic endeavours (Charitable Trusts) and employee incentivisation schemes, much like foundation companies.
Cayman permits the establishment of noncharitable purposes trusts created pursuant to the Cayman Islands Special Trusts (Alternative Regime) Act 1997 (known as STAR Trusts), the purposes of which may be to beneÄt or carry out, as the case may be, a mixture of persons and purposes so long as they are lawful and not contrary to public policy.
It is also possible to establish a trust for use as an investment vehicle. Such a structure would usually take the form of a unit trust under which the investors (the unitholders) contribute assets to the trustee to be managed and invested in accordance with the terms set out in the trust deed and any accompanying contractual documents.
3.2 Incorporation Process
It is necessary to engage a licensed corporate services provider to assist with the incorporation process.
Exempted/Ordinary Resident/Ordinary NonResident Companies/Other Companies
To incorporate a company, the corporate services provider will prepare and Äle the memorandum and articles of association with the Registrar of Companies, together with the appropriate Äling fees. In the case of exempted companies only, a statement is also required to be Äled, conÄrming that the company's operations will be conducted mainly outside of the Cayman Islands. The initial subscriber shareholder will typically be an aɉliate of the corporate services provider and the subscriber will transfer the subscriber share to the shareholder of record after incorporation or shall be automatically repurchased by the company following the issuance of any further shares. Once the Registrar of Companies has processed the incorporation documents, the company will be deemed to have been incorporated and a CertiÄcate of Incorporation will be issued.
Exempted Limited Partnerships
To register a Cayman Islands partnership as an ELP, the corporate services provider, on behalf of its general partner, must submit to the Registrar of Exempted Limited Partnerships in the Cayman Islands a statement setting out certain prescribed information and pay the appropriate Äling fees. A CertiÄcate of Registration issued by the Registrar of ELP is conclusive evidence that the requirements of the ELP Act have been complied with in respect of the formation and registration of an exempted limited partnership.
Limited Liability Companies
To form and register an LLC, a registration statement must be submitted by the corporate services provider to the Registrar of Limited Liability Companies in the Cayman Islands which sets out basic information regarding the limited liability company and the appropriate Äling fees. A CertiÄcate of Registration issued by the Registrar of Limited Liability Companies is conclusive evidence that the requirements of the LLC Act have been complied with in respect of the formation and registration of an LLC.
Timing
The registration and issue of a CertiÄcate of Incorporation (exempted/resident/non-resident companies) or CertiÄcate of Registration (ELPs, LLC) generally takes three to Äve business days but can be expedited by paying an express fee to provide the certiÄcate within one business day.
3.3 Ongoing Reporting and Disclosure Obligations
General – Companies Act
Companies in the Cayman Islands are subject to certain disclosure and reporting obligations depending on the type of vehicle and the activities undertaken. The Companies Act governs the formation, operation and dissolution of exempted companies.
Exempted companies must have a registered oɉce in the Cayman Islands with a licensed and regulated corporate services provider and are required to Äle certain documents and information with the Registrar of Companies.
Exempted companies must notify the Register of Companies of the following:
- changes to the company name;
- increase or reduction in the authorised share capital;
- changes of directors and oɉcers;
- changes in the registered oɉce;
- amendments to the memorandum and articles of association of the company; and
- changes to the beneÄcial ownership register (if any) of the company.
Notices of all special resolutions referenced in the Companies Act that are passed by one or more shareholder(s) of the company must also be Äled with the Registrar of Companies within a prescribed timeframe – ie, within 15 days from the eɈective date of the special resolution.
Annual Requirements
An annual return (in the case of exempted companies) or an annual list of members and summary of certain speciÄed items relating to share capital (in the case of ordinary companies) must be submitted to the Registrar of Companies in January of the year following incorporation and in each January thereafter, and the appropriate annual fee paid.
Financial Statements
All companies must keep proper books of account, including, where applicable, material underlying documentation including contracts and invoices. The books of account must be such as are necessary to give a true and fair view of the state of the company's aɈairs and explain its transactions. The books of account must be retained for a minimum of Äve years from the date they are prepared. A company that knowingly and wilfully contravenes these requirements will be subject to a penalty of USD6,100. The books of account need not necessarily be kept at the registered oɉce, but a company must provide to its registered oɉce, annually or with such other frequency and within such time as may be prescribed, information regarding its books of account. If a company fails to comply with this requirement without a reasonable excuse, it shall incur a penalty of USD610 and a further penalty of USD122 for every day during which such non-compliance continues. If the company is not a bank, trust company, building society, money services business, credit union, insurance company, corporate manager, mutual fund administrator or regulated fund, its accounts need not be audited as a matter of Cayman Islands law.
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Originally published by Chambers And Partners.
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.
