The definitive guide to living and working in the Cayman Islands
Dec 11, 2013
Cayman: A Global Financial Centre
|Last updated: 3rd September 2013
This section details why and how Cayman became a global financial centre and provides some background information on Cayman's financial services industry. We have written an overview of the banking, fund management, captive insurance and trust industries, companies, structured finance, currency and the Cayman Island's Stock Exchange.
The Cayman Islands financial services sector continues to grow steadily and Cayman remains the domicile of choice for offshore funds. The total number of funds registered with the Cayman Islands Monetary Authority reached 10,932 in the first quarter of 2013.
On the dark and moonless night of the 8th of February 1794, a navigational error resulted in ten British ships, including a Royal Navy vessel (HMS Convert), being wrecked on the treacherous coral reefs off East End, Grand Cayman. The local people saved everyone aboard the ships, including, so the story goes, a royal prince. When Britain's King George III heard of this act of gallantry, he is said to have decreed that the people of the Cayman Islands should forever be free from taxes and war conscription. There is no doubt that the Wreck of the Ten Sails actually took place but there is no documented evidence of the royal decree, however, this has not stopped the story becoming one of Cayman's favourite legends.
The real reason for the Cayman Islands being a tax-free jurisdiction is rather more prosaic. Until the mid 1960s, the population was less than 8,000 and most Caymanians made their living from subsistence farming, fishing, turtling, schooner building and making thatch-rope, while many of the men served as merchant seamen on ocean-going ships, usually flying the American or Liberian flag.
This basically meant that most of the residents in Cayman were living on meagre earnings, there were few companies and capital gains were virtually non-existent, so there was nothing worth taxing. But in 1952, an aircraft runway was constructed and the following year Barclays Bank opened a branch on Grand Cayman. In fact, Cayman's status as an international financial centre derives from the foresight of some early legal practitioners and a receptive Government who, in the mid 1960s, together drafted and enacted legislation to build on this modest beginning and take advantage of the absence of any form of direct taxation on individuals and corporations based on income or wealth.
In the following decades, more international banks were attracted to Cayman, together with law and accounting firms. When the Bahamas became independent from the UK in 1973, a number of expatriate workers from that jurisdiction were attracted to Cayman as a stable place to do business. It is notable that cooperation between the Government and the private sector has continued to this day. This, combined with a policy of welcoming expatriates with special skills to the Islands and a growing population of well-educated Caymanians, has kept Cayman in the forefront of the international financial industry.
At the time of going to press there is no income, inheritance, sales, corporation, capital gains, property or withholding taxes in the Cayman Islands.
Jurisdiction of Choice
The Cayman Islands is currently the world's sixth largest international banking centre in terms of both total liabilities and total assets held in financial institutions.
To be successful in this competitive industry requires political and economic stability, tax neutrality, a responsive legal system, a stable banking environment, a sound regulatory regime, absence of exchange controls and the presence of highly sophisticated service providers. All these factors, as well as Cayman's status as an overseas territory of the United Kingdom and its international cooperation regimes in the areas of tax information exchange, regulation and law enforcement, provide the necessary level of confidence to ensure a hospitable financial environment.
Cayman continues to attract service providers such as lawyers, accountants and administrators of the highest calibre, making the jurisdiction attractive to foreign investors. The wealth of international expertise available in Cayman is one of the key factors making Cayman a jurisdiction of choice. Clients have access to a wide array of services including banking, trusts, funds, company management, structured finance, vessel and aircraft registration, insurance and stock exchange listings.
It has been suggested unofficially, that a tax haven is somewhere that has little or no taxation, protects personal financial information through laws blocking the sharing of information and exhibits an obvious lack of transparency. Although the Cayman Islands are often referred to as a 'tax haven', this does not mean it is an uncooperative jurisdiction with regards to tax matters or other criminal matters. On the contrary, during 2009, the Cayman Islands were added to the 'white list' of countries (along with the UK and the USA) using internationally recognised tax standards in their laws (the 'white list' is issued by the Organization for Economic Cooperation and Development or OECD).
The Cayman Islands have been making large efforts to be transparent and to sign laws that benefit foreign governments in the sharing of information and this has paid dividends. In 2000, the Cayman Islands' Government signed up to the OECD's project to eliminate harmful tax practices and joined the Global Forum on Taxation. In 2001, as a demonstration of the OECD commitment, the Cayman Islands signed a tax information exchange agreement with the US which is in force for all civil and criminal matters. A few years later, the Cayman Islands agreed to implement the European Union Savings Directive, automatically reporting bilaterally to each of the 27 EU member states the interest income earned by EU citizens in Cayman Islands bank accounts. Since then the Cayman Islands' have also signed numerous tax information exchange agreements with G-20 and/or OECD countries modeled on the OECD standard for bilateral tax information exchange and continues to actively negotiate additional agreements. At the time of going to press, Cayman has entered into tax information exchange agreements with 31 countries. Furthermore, the Cayman Islands has pioneered a unilateral mechanism, which provides for precisely the same range of tax information exchange in relation to tax information matters without a bilateral treaty. The Cayman Islands has elected the US Treasury's Model I Intergovernmental Agreement in relation to the Foreign Account Tax Compliance Act to facilitate tax information exchange with the Internal Revenue Service of the USA.
On 15 April 2013, the OECD's Global Forum published Cayman's Phase 2 Peer Review report. This praised the Cayman Islands' "robust and transparent" legal and regulatory regime and confirmed that Cayman has addressed all the recommendations the OECD made in the Phase 1 Peer Review in 2010. It particularly commended Cayman's financial industry for its clear and efficient system for releasing information and noted the quality of Cayman's cooperation and the speed of its responses to exchange of information requests.
The willingness of the Cayman Islands to be an open and cooperative jurisdiction on tax information exchange demonstrates that the label 'tax haven' is somewhat outdated and simply unfair. The professional service providers based in the Cayman Islands prefer (in recognition of the efforts undertaken) that a modern term of being a 'tax neutral jurisdiction' be used.
These efforts on the part of the Cayman Islands have been rewarded by an increase in transactional flows; this is no doubt because of the institutional business which was attracted to the Cayman Islands as a result of its tax neutrality and its improved reputation internationally as a cooperative financial jurisdiction.
Regulated by the Cayman Islands Monetary Authority (CIMA), banking in the Cayman Islands is a major part of Cayman's financial sector, with 222 banks licensed and over US$1 trillion in international assets booked through the Islands as of 31 March 2013. The majority of these banks are branches, subsidiaries and affiliates of established international financial institutions conducting business in the international markets. More than 80% of those international assets represent inter-bank bookings between onshore banks and their branches, subsidiaries, affiliates and other Cayman Islands' licensed banks. A testament to the worldwide recognition of the quality of Cayman's financial industry is the fact that 40 of the world's top 50 banks hold licences in Cayman. The banking sector hires highly skilled professionals and is one of the most prominent employers on the Island. Cayman Islands banks are bound by strict anti-money laundering laws, which together with know-your-customer (KYC) regulations, are recognised as meeting or exceeding those of all major onshore jurisdictions.
The 222 banks licensed in Cayman are split into A and B classes, with the former licence permitting banks to carry out local and international business. There are currently 15 Class A licensed banks in the Cayman Islands, with seven of those carrying out retail services. The other banks hold Class B licences and are mainly restricted to offshore transactions with non-residents. Of the 222 banks licensed in Cayman, 61 are from Europe, 50 from the USA, 20 from the Caribbean and Central America, 24 from Asia and Australia, 18 from Canada and Mexico, 40 from South America and nine from the Middle East and Africa. To see a list of the banks licensed in the Cayman Islands visit www.cimoney.com.ky.
The prominence of hedge funds (or 'mutual funds' as defined in the Mutual Funds Law) in the Cayman Islands and the growing investment interest in them by institutional and sophisticated and/or high net worth investors has steadily increased in recent years. Since the enactment of the Mutual Funds Law in 1993, the Cayman Islands funds industry has grown from small beginnings to become the jurisdiction of choice for new fund authorisations by investment managers, representing over US$1 trillion in net assets. Even in these uncertain times, the Cayman Islands funds industry remains robust not only in terms of new fund formations but also in net assets held by those funds. At the end of the first quarter of 2013, there were 10,932 funds registered with CIMA (10,841 registered at the end of 2012 and 9,258 registered at the end of 2011). This significant steady increase demonstrates the continued confidence in the Cayman Islands hedge funds industry by managers, even during difficult market conditions.
Approximately 26% of Cayman funds are impacted by the European Union's Alternative Investment Fund Managers Directive ("AIFMD"). AIFMD requires that EU and non EU fund managers satisfy specific requirements in marketing or managing alternative investment funds in the EU and is due to come into force on 22 July 2013. The Cayman Islands has recently passed the Monetary Authority (Amendment) Law, 2013 in order to facilitate the signing of relevant cooperation agreements between CIMA and EU regulators. On 30th May 2013, the same day that the European Securities and Markets Authority announced that it had approved the co-operation arrangements between all 27 EU securities regulators and authorities from Croatia, Iceland, Liechtenstein and Norway, CIMA confirmed its intention to sign Memoranda of Understanding (MoU) with those same regulators/authorities. The signing of such MoUs is an important step in preserving the Cayman Islands' competitive position as the leading jurisdiction for investment funds.
The success of the Cayman Islands is not due to one factor alone but a number including its reputation, freedom of investment decisions for hedge fund managers, tax-free status, highly regarded legal system and the availability of professional service providers. The mutual fund industry is an important part of the Cayman Island's economy, employing hundreds of people directly. These advantages will ensure that the Cayman Islands will continue to lead the way as the jurisdiction of choice for hedge funds despite the worldwide economic crisis.
Insurance Legislative Changes
The enactment of the Insurance Law 2010 (the "Insurance Law") was a result of public and private sector collaboration in an effort to improve the regulation of insurance business in the Cayman Islands, enhance protection for domestic consumers and open new frontiers of business development. The main provisions of the Insurance Law include two new categories of insurer licences - Class C (Special Purpose Vehicles) and Class D (Reinsurers). It also includes whistle-blowing provisions, enhanced domestic policyholder protections and provides for increased penalties and regulatory powers by CIMA.
In March 2013, Cayman introduced incorporated cell legislation for segregated portfolio insurers by the enactment of the Insurance (Amendment) Law. Although the Insurance Amendment Law is not yet in effect, it confers several advantages over the existing law such as allowing a portfolio insurance company the flexibility to transition to a stand-alone captive unlike an unincorporated cell.
The year 2012 proved to be a strong year for new licence applications, with 53 new licences issued. The Cayman Islands remains the second largest offshore centre for captive insurance with a total of 741 companies licensed and is the number one jurisdiction for healthcare captives.
With 253 companies, medical malpractice liability represents 34% of captive licenses as at 31 March 2013 and makes up the largest line of business within the insurance sector. The second largest line of business is workers compensation, which accounts for 156 companies. Premiums for licensed captives have increased from last year to US$11.83 billion with total assets at US$88 billion. The most popular region of origin for Cayman captives is North America, with 90% originating there.
Although the Reinsurance industry is relatively small in the Cayman Islands when compared to Bermuda, it does have a significant presence and with the amendments to the Insurance Law has substantial potential for further growth. This was recently evidenced by a reinsurance subsidiary of a large New York based private equity firm taking advantage of the new Insurance Law to migrate from a Class B captive licence to a Class D open-market licence. By drawing a distinction between reinsurance and captive insurance and by offering effective regulation and competitiveness, the Cayman Islands is in a strong position to attract substantial reinsurance business either through new enterprises establishing themselves here or those re-domiciling from elsewhere.
The anticipated benefits to be offered to attract business and personnel to Cayman's shores, include "Special Economic Zone Treatment" of reinsurance businesses and their staff. This will mean exemptions from many immigration restrictions and may include guaranteed exclusion from any direct taxation for a substantial period. The Islands are well placed to take advantage of this opportunity.
The number of Class A insurance companies operating in the Cayman Islands remained unchanged as at March 2013. Their combined total underwriting income was approximately CI$279 million as of December 2011, with a combined net income of CI$110 million for the same period.
The Cayman Islands are well regarded for instituting a modern and flexible trust regime. The laws and framework governing the establishment and administration of trusts are respected worldwide.
As of 31 March 2013 there were 142 active trust licences, of which 52 were full trust licences, 67 were restricted trust licences and 23 were nominee (trust) licences.
Companies & Partnerships
Cayman's Companies Registry (the "Registy") shows a total of 93,712 active companies registered as of 31 December 2012. Company incorporations are a thriving part of Cayman's financial services. Governed by the Companies Law, the Registry also registers limited partnerships and segregated portfolio companies. There are many highly qualified professional firms licensed to provide company services in the Cayman Islands and the provision of these services is a regulated activity requiring either a Trust licence or a licence under the Companies Management Law. In addition to incorporation and management of ordinary and exempted companies, and the establishment of limited and exempted limited partnerships, these firms provide services such as registered offices, directors, officers and nominee shareholders as well as the maintenance of corporate records, accounts and financial statements.
Several of Cayman's law firms specialise in capital markets and structured finance transactions for international clients. The Cayman Islands have become one of the world's leading providers of Special Purpose Vehicles (SPVs) for structured finance transactions. The majority of these SPVs purchase groups of loans issued by main street US and European banks and re-sell them as a form of investment to institutional investors.
The main attraction of the Cayman Islands for these SPVs is that Cayman is truly 'tax neutral', so that purchasers of the debt issued by the SPVs can participate regardless of their location, in the knowledge that they will only have a tax liability in their home jurisdiction.
Independent Directors in Cayman
A growing sector of the Cayman Islands financial services industry is the provision of independent directors. During the recent financial crisis it became apparent that independent directors from the Cayman Islands were indispensable when hedge funds were faced with making difficult decisions. In particular, they ensured that all decisions were made in accordance with the fund documents and that all shareholders were treated fairly. This has not been lost on the institutional investors who are, for the most part, making it one of their investment requirements that there is an independent board of directors. This is also borne out by the 2012 Cayman Islands funds statistics, which show that the vast majority of all new hedge funds have at least a majority of independent directors on their boards.
Business Conferences in Cayman
Cayman hosts a plethora of notable business and industry conferences throughout the year. One of Cayman's premier business and networking conferences is Fidelity's Annual Cayman Business Outlook Conference. The conference attracts a broad cross-section of the professional and business community and recognised guest speakers cover local and global events, pertinent financial and political topics and technological advances. Other conferences held in 2013 included the Cayman Captive Forum, the 9th Annual Anti-Money Laundering, Compliance and Financial Crime Conference, and GAIM Ops Cayman which is the largest hedge fund operational due diligence, compliance and risk management event.
Cayman Finance was formed in 2003 to represent Cayman's financial services sectors as one of the most successful international financial centres in which to do business. With a robust reputation for stability and transparency, and a sophisticated infrastructure, the industry is further supported by an impressive list of professionals offering a broad range of services including: investment funds, banking, trusts, insurance, corporate services, directorships and more.
Through cooperation with the Cayman Islands Ministry for Financial Services and engagement with domestic and international leaders, regulators, organisations and the media, Cayman Finance is the trusted voice for the industry, endorsing its integrity and encouraging its sustainable growth. For more information call (345) 623 6700 or email: email@example.com.
Cayman Islands Stock Exchange (CSX)
CSX, which is a well established and internationally recognised stock exchange, is a member of the Intermarket Surveillance Group, an affiliate member of the International Securities Commission (IOSCO) and has been granted recognised status by the UK HMRC, which enables UK resident investors to receive interest and dividend payments without the deduction of withholding tax. It provides a specialised and well-regulated listing and trading facility for mutual funds, hedge funds, structured debt securities, Eurobonds, Shariah compliant products, preferred shares, depository receipts, derivative warrants and local and international equity.
On 25th March 2013, the CSX went live on the Deutsche Boerse XETRA® trading platform. In an effort to encourage potential investors, the CSX will not be charging any trading fees until March 2015. To attract fund listings from other jurisdictions, non Cayman listing agents may now be appointed.
Cayman Islands Department of Commerce and Investment (DCI)
The DCI encourages and supports local and foreign business development in the Cayman Islands. It provides business planning advice to Caymanian entrepreneurs and provides investment market data and facilitation services to overseas investors wishing to establish a business here. The DCI also oversees the Cayman Islands Film Commission (CIFC) and processes applications for trade and business licences.
The legal tender of the Cayman Islands is the Cayman Islands Currency (denoted CI$) and the sole issuing authority is the Cayman Islands Monetary Authority (CIMA). However, the United States Dollar, with a fixed rate of exchange, is widely used in local finance and commerce.
The Cayman Islands Aircraft Registry provides a system for those persons or companies wishing to register aircraft in Cayman. Based on UK legislation, the Civil Aviation Authority of the Cayman Islands ("CAACI") is responsible for safety oversight and the economic regulation of the aviation industry throughout the Cayman Islands in order to ensure compliance with the recommended practices of the International Civil Aviation Organisation.
Any person or company wishing to register an aircraft in the Cayman Islands must meet the exacting standards of the CAACI. As a result of the implementation of the CAACI's high standards and collaborative efforts by law firms and governmental authorities, the Cayman Islands Aircraft Registry has been internationally recognised and respected throughout the aviation industry. For those wishing to get involved with aircraft finance, the Cayman Islands has mortgage regulations (Mortgaging of Aircraft Regulations 1979) that establishes a statutory register for the registration of security interests over aircrafts (or component parts).
Registration fees are contingent upon the weight of the aircraft. Fees for registering an aircraft mortgage vary according to the sum secured by the mortgage and are capped at CI$5,000 (US$6,097.56).
The Cayman Islands has a seafaring history that goes back more than a century. This tradition is preserved by the Maritime Authority of the Cayman Islands (MACI), which has oversight of the Cayman Registry. The MACI maintains its headquarters in Grand Cayman and is a first-class international organisation with a world-wide reputation for excellence and efficiency in global shipping. The Registry is staffed by a worldwide team of shipping professionals with many years of experience in the world of international shipping.
As a Category One British Registry, the Cayman Registry is qualified to register vessels of all sizes and classes, from yachts to supertankers. In the super yacht range, the Cayman Islands are the world's leading offshore luxury yacht registry. Cayman also has several law firms that specialise in ship registration, a modern maritime legislation based on UK common law providing first rate mortgage protection provisions for mortgagees and vessel owners alike, a range of registration options including full, interim, provisional, under construction and demise charters. Last but not least, registering your vessel in the Cayman Islands grants you protection and assistance from the UK Royal Navy regardless of location and full British Consular services for all Cayman flagged vessels.
Cayman Islands Government Financial Services Industry Portal
Cayman Islands Monetary Authority
Cayman Islands Stock Exchange
Cayman Islands Department of Commerce & Investment
Cayman Islands Chamber of Commerce
Cayman Islands Compliance Association
Society of Trust & Estate Practitioners (STEP)
Cayman Islands Fund Administrators Association
Cayman Islands Real Estate Brokers Association
Cayman Islands Society of Financial Analysts
Cayman Islands Society of Professional Accountants
Caymanian Bar Association
Insurance Managers Association of Cayman
Economics & Statistics Office
Cayman Islands Immigration
Copyright 2013 The Resident Magazine 2013. All rights reserved.
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