The Cayman Islands, once known as the Tortugas, are located approximately 125 miles south of Cuba and 125 miles west of Jamaica. There are three islands, the main being Grand Cayman Island, being approximately 75 square miles in area. The two smaller sisters of Cayman Brac and Little Cayman (totaling approximately 27 square miles of area) are located to the northeast of Grand Cayman and are only accessible by air. Virtually all financial activity occurs in the capital city of Georgetown on Grand Cayman.
The Caymans arguably enjoy the best weather in the world. Winter temperatures vary between 65° and 75° F with occasional light rainfall, and summer temperatures vary between 75° and 85° F with lots of sunshine. For whatever reason, the Caymans have not been regularly subjected to hurricanes as has most of the eastern Caribbean isles.
English is the spoken and official language, and an apt description would be that the Cayman Islands are very Americanized with a British flavor. Driving is on the British left, and virtually all Caymanians will offer you British politeness combined with American friendliness. The standard of living in the Caymans is by far the highest in the Caribbean (with median income exceeding US$50,000), and is one of the highest in the world. The Caymans are probably the only country which you will ever visit in this hemisphere where you will consider the U.S. to be relatively poor.
Communications are provided by Cable & Wireless and are, therefore, excellent. The Caymans are a very sophisticated venue, and boast the highest per capita rate of cellular telephones in the world. From the U.S., the Caymans are primarily served by American Airlines (Miami), Northwest Airlines (Memphis), and Cayman Airways (Houston and several Florida cities). There are also a variety of seasonal tourist carriers which serve the islands.
Cayman Islands Currency
The Caymans have no exchange controls, thus allowing for completely free movement of money into and out of the islands, as well as free convertibility of currencies. The Cayman Dollar is tied to the U.S. Dollar at CI$1.00 to US$1.20, and is also freely convertible.
Cayman Islands Government
The Caymans are a British dependency. Until 1962 the Caymans were administered by the then-British dependency of Jamaica, but when Jamaica elected independence the Caymans elected to remain a British colony. Frankly, for political stability, the Caymans are probably as stable as you can get -- probably even surpassing the U.S. in political stability.
The Caymans have a Constitution, which is made pursuant to the British West Indies Act of 1962, a statute of the British government. Cayman law is based on English law, and on the English common law model. The British Parliament has the right to legislate for the Caymans; however, acts of the British Parliament do not apply to the Caymans unless they expressly state that they do so. Great Britain is responsible for the islands’ defense, external affairs, and maintaining the general civil order.
The Caymans have a democratically-elected 12-member Legislative Assembly, which legislates in conjunction with the Governor (appointed by the Queen), who is appointed by the British government. The Caymans have a 7-member Executive Council, consisting of 4-members elected by the Legislative Assembly, and 3-members appointed by the Governor. The highest court of appeal is the Privy Council in London and its decisions are binding on the Caymanian courts. Decisions of the Cayman courts are reported in the Cayman Islands Law Reports.
Cayman Islands Real Estate
The Cayman Islands have no restrictions on the ownership of Cayman Island property by non-Caymanians, which makes the Caymans an attractive place to buy real estate. Additionally, the owner of Cayman property may maintain up to two units of rental property without having to first obtain any kind of work, trade or business permit or license -- so you can buy your dream home in the Caymans but lease it out until you are ready to live there.
Cayman Islands Business Environment
The Caymans have an excellent business environment, and this is evidenced by the sheer number of business entities formed there during the last five years. There are more than 30 licensed company managers to choose from, as well as a number of quality law firms, and these have been responsible for the formation of nearly 40,000 IBCs. The Caymans claim to be the world’s fifth-largest financial center after New York, London, Tokyo and Hong Kong, although in truth very little wealth is actually maintained in the Cayman Islands, although indisputably title to a great deal of weath is kept there.
Because the financial services industry is by far the largest of only two industries on the islands (the other being tourism), the Cayman government is very interested in the continued growth and sensible regulation of offshore business activities. There is close cooperation between the Cayman government and the private banks and other offshore service providers. The Cayman government is innovative in offshore services in a respectable sort of way, balancing freedom of commerce and the demand for new products and services against the need to properly regulate activity to keep crooks and scam artists out, and so tend to follow the "cutting-edge" jurisdictions of the Cook Islands and Nevis by a couple years in new legislation.
Significantly, in 1996 the Caymans established the Monetary Authority, which is a separate body charged with the supervision of all regulated financial sectors.
Cayman Stock Exchange (CSX)
Following the lead of Bermuda, the Cayman Islands have established a Stock Exchange which primarily lists: (1) Cayman companies; (2) all types of investment funds, including mutual funds, closed-end funds, unit trusts, investment partnership funds, etc.; (3) debt securities, bonds and notes of international issuers; and (4) secondary listings of other equity securities.
The Cayman Islands Stock Exchange has qualified for recognition by the U.S. Securities & Exchange Commission, the U.K., Securities and Investments Board, and other major securities regulators. Since opening its stock exchange, the Caymans have seen the growth in ancillary service industries, such as accounting and securities firms and mutual fund administrators.
Additional Resources: Website of the Cayman Islands Stock Exchange at http://www.csx.com.ky/Default.htm
Cayman Islands Taxation
The Caymans are a true "no tax" jurisdiction, as there are no income taxes, no capital gains taxes, no estate or gift taxes, etc., for individuals, trusts or corporations. The Caymans will even give long-term "no tax" guarantees to trusts and corporations so that in the unlikely event that a direct tax is imposed that trust or corporation will be exempt for a number of years thereafter -- but no direct taxes are anticipated as this would directly harm the financial services industry.
The Cayman government raises revenue through a variety of indirect taxes, such as import duties, tourist fees, licensing fees and stamp duties, etc. For instance, there is a stamp duty of 7.5% on transfers of real property (but not, significantly, for "natural love and consideration" such as parents to children), and a 1% stamp duty on mortgages.
Mutual Legal Assistance Treaty
Detractors of the Cayman Islands often point to the 1990 Mutual Legal Assistance Treaty with the U.S. as "proof" that the Caymans are somehow less secret than other offshore jurisdictions. Admittedly, this is true if you are involved in drug smuggling or the laundering of drug profits, racketeering, embezzling or insider trading of securities, or the like. However, if are not involved in any such activity, the Treaty does not abrogate the very solid secrecy and confidentiality afforded by Cayman law.
The Cayman Islands have agreements for sharing information with certain other nations, including the United States, relating to tax evasion and securities offenses, etc.
Even if an offense which would invoke the Treaty is alleged, an order from a Cayman court is still a prerequisite to revealing any confidential information, such as bank records. The practical upshot of this is that the Treaty will not assist creditors at all unless the creditors can prove that you are engaged in one of these serious crimes, and it prevents creditors from getting your records simply by alleging a tax-related violation of U.S. law. Thus, for persons not engaged in illegal activity, the confidentiality and secrecy afforded by the Cayman Islands is as good as that of any other offshore jurisdiction.
Simultaneously, the existence of the Treaty makes the Cayman Islands a much more respectably jurisdiction for conducting legitimate business.
Cayman Islands Mutual Funds
The Caymans are one of the best offshore jurisdictions in which to establish a mutual fund, mostly because of an excellent regulatory structure combined with the absence of taxation, and a highly-competent private financial services sector. The Caymans have registered nearly 1,500 mutual funds, and have licensed more than 100 mutual fund administrators.
Cayman mutual funds may be established in the form of ordinary companies, unit trusts and limited partnerships, and may offer a wide variety of stock structures and classes, from open-ended and close-ended funds to multi-currency and hybrid funds. The Cayman regulations also allow for so-called "multi-funds" which are several sub-funds within a single fund. Cayman funds are traded on a variety of exchanges, including primarily the London exchange, as well as the Cayman Stock Exchange.
Cayman Mutual Funds are regulated by the Mutual Funds Law. This law does not restrict fund structure and operation, as do corresponding U.S. securities laws, but rather focuses upon the managers and administrators of the fund, and those persons who sell or promote it. There are no requirements for specific language in offering documents for funds, but the offering documents must contain sufficient information to allow a prospective fund investors to reasonably analyze whether the fund will make a suitable investment.
All Cayman mutual funds must annually file audited financial statements with the Monetary Authority. The auditors are themselves well-regulated by the Cayman government, and must report to the Monetary Authority if in reviewing a fund they find any cause for concern.
Open-ended funds are actively regulated, and there are only three avenues by which an open-ended fund can qualify under Cayman law to accept investors. First, the fund can file an application with the monetary authority. Second, the fund can appoint a Mutual Fund Administrator to provide the principal office of the fund in the Caymans. Third, if the fund qualifies, it may register with the Monetary Authority as a Mutual Fund -- but the qualifications are steep: minimum initial investment of at least US$48,000, or shares in the fund must trade on some recognized stock exchange, and payment of an annual fee (currently US$600) in addition to other formation and licensing fees.
Cayman Islands Insurance
The offshore insurance industry is booming, and the Caymans are no exception. The Caymans currently host over 400 licensed insurance companies, although virtually none of these have real offices on the islands, and approximately 25 licensed insurance managers.
Cayman insurance companies are formed as typical corporations under the Companies Law, and then an application is made under the Insurance Law. At this point the Monetary Authority reviews proposed insurance program, adequacies of reserves, etc., and gives or rejects clearance to conduct the business of insurance.
As with mutual funds, audited annual statements are required for all Cayman insurance companies, and auditors are required to notify the Monetary Authority if they find any problems with the insurance company being audited.
Cayman Islands Banking and Trust Services
The Caymans are home to nearly 600 bank and trust companies licensed under the Banks and Trust Companies Law. And these are not mere paper banks, either. Of the world’s 50 largest banks, 47 hold Cayman banking licenses, and the combined assets held under all Cayman banking licenses currently exceeds 1/2 trillion U.S. dollars.
There are for all practical purposes three types of banking licenses which are issued:
Class A -- These licenses allow for retail business with the local Cayman populace, as well as offshore banking. These licenses are very expensive and difficult to obtain, and consequently only approximately 30 banks currently hold these licenses.
Class B and Restricted Class B -- These licenses allow for offshore banking, only, and are prohibited from doing business with the local Caymanians. The difference between a Class B and a Restricted Class B license is mostly determined by amount of capitalization.
Cayman banking laws are very flexible, and allow licensed banks to offer a wide variety of banking products. Cayman banks follow the "Know Your Client" principal, and typically require bank references, photocopy of passport, etc., although accounts may be opened by mail.
Cayman Islands Trusts
The Caymans have a thriving trust business -- there are more than 200 licensed trust companies, and professional trust protectors are available as well.
Cayman trust law is built upon the English model, principally the English Trustee Act of 1925 and the Variation of Trusts Act of 1958, with most of the typical provisions which are peculiar to the offshore jurisdictions. The principal statutes affecting Cayman trusts are the Trusts Law of 1996, the Perpetuities Law of 1995 and the Fraudulent Dispositions Law of 1989, although the Caymans are continually updating their trust statutes (and Purpose Trust legislation is in the works).
The Caymans abolished the Rule Against Perpetuities in 1995, but the Perpetuity period is 150 years for dispositions form those trusts created before 1995. Cayman trust law specifically recognizes choice-of-law clauses in trusts.
Cayman Islands Partnerships
There are essentially two classes of partnerships which may be formed under Cayman law: first, Partnerships and Limited Partnerships may be formed under the Partnership Law of 1983, which follows the similar English statute; or, second, Exempted Limited Partnerships may be formed under the Exempted Limited Partnership Law of 1991, which is based on the Delaware model.
Exempted Limited Partnerships (ELPs) are essentially a typical American limited partnership which have been placed in an offshore setting. A key feature is that formation of an ELP requires only that basic information on the general partner be provided; there is no requirement that any information on the limited partnerships be filed. This feature makes ELPs an ideal entity for conducting business abroad with anonymity.
Cayman Islands Corporations
The Caymans have very good corporate laws. That the world has recognized this fact is evidenced by the more than 36,000 companies which have are currently registered there.
Types of Companies
The Caymans offer essentially three types of companies:
Ordinary (Resident) companies -- These are typical companies, and can do business within the islands. Companies are initially categorized as "resident" and must apply for and obtain a "non-resident" or "exempted" designation from the Financial Secretary. This designation need not be applied for at time of incorporation, but may be made years later. An ordinary company is the only form of company which can own real estate in the Caymans without approval.
Ordinary (Non-Resident) companies -- These are typical companies, which are not going to conduct business within the islands. An example of an ordinary non-resident company is one which is set up to hold title to a Cayman-registered ship.
Exempted companies (IBCs) -- A proposed director must declare that the operation of the company will be outside of the islands, and the company’s operations must truly be outside of the Caymans to maintain the exemption. As opposed to the exempted company laws of most offshore jurisdictions, a Cayman exempted company can hold Cayman real estate, but to do this an exception must be granted by the Financial Secretary. The Caymans uniquely give an exempted company a guarantee of tax-free status for a period of at least 20 years. Moreover, an exempted company may obtain other special treatment, such as its name does not have to end with Limited or Ltd., and it does not have to maintain a Register of Members within the islands. Further, an exempted company may also be formed as a Limited Duration Company (LDC), which are designed to qualify for partnership treatment under the US tax code.
Foreign Companies, Migration and Redomiciliation
Companies incorporated outside of the Caymans may registered in the Caymans as a "foreign company" under the Companies Law.
Companies incorporated outside of the Caymans may also migrate to the Caymans and redomicile themselves as an exempted company in the Caymans.
Companies may be incorporated with only a single member, except that a Limited Duration Company requires at least two members for formation. Incorporation is accomplished by the paying of incorportion fees, and filing a Memorandum of Association with the Cayman Registrar of Companies. The Memorandum of Association must state:
The company’s name;
The address of the company’s registered office;
The company’s objects and purposes;
The company’s stated share capital; and
A statement regarding the liability of shareholders and members.
Upon acceptance of the Memorandum of Association, the Registrar of Companies will issue a Certificate of Incorporation.
Cayman companies have all the rights and powers of a natural person, and may have unlimited objectives and purposes. Cayman corporations can be general and limited partners, as well as trustee, protector or beneficiary of a trust.
Pre-incorporation acts can be ratified and adopted by the corporation, which bind the corporation to the act.
In most cases, company names must end with either "Limited" or "Ltd." A limited duration company can elect to have its name end with "Limited Duration Company" or "LDC". A new company cannot be registered in the name of an existing company unless the existing company is being dissolved and consents in writing. The following words cannot typically be used in the company name without permission: Denoting relationship to British monarchy such as "Royal" or "Imperial"; denoting relationship to insurance or bank such as "Assurance" or "Insurance" or "Bank"; or denoting public relationship such as "Chamber of Commerce" or "Municipal" or "Co-Operative" etc.
Books and Records and Accountings
While Cayman companies must keep records of accounts and the company’s business, these records need not be maintained in the Islands, unless the company is a regulated company, such as an insurance company, bank, mutual fund, or the like. Such regulated companies must appoint auditors, and provide the Cayman government with audited financial statements (which the Cayman government actively scrutinizes to protect the Caymans’ reputation as a legitimate financial centre).
Each company’s books of accounts must be sufficiently detailed and accurate to give a fair view of the company’s business and transactions. However, expect for regulated companies as set forth above, there is no requirement that these books of account be made public or otherwise filed with the Cayman government.
Ordinary companies are required to fine an annual return during the January of each year, which return lists the company’s shareholders and the shares they hold. An exempted company need not do this: instead, it must file a declaration that the business which it conducts will be carried on outside of the islands.
All types of companies, whether carrying on business within the Caymans or not, must pay an annual fee to the Cayman government to keep the company active.
Registered Office and Seal
All Cayman companies, whether exempted or not, must maintain a registered office in the Caymans, and address changes of the registered office must be made known to the Registrar of Companies and made by resolution of the Board of Directors.
Cayman companies are not required to have a seal, although these are useful for purposes of opening bank accounts, etc. If a company does have a seal, the seal need not be kept in the Caymans.
Capitalization, Shares and Shareholders
Liability to shareholders in a Cayman company can either be limited by shares or, significantly, by guarantee. Liability which is limited by guarantee means, essentially, that a shareholder does not put up any money for shares but, rather, simply pledges that in the event the company fails he or she will pay X amount to the company’s creditors. This means that the company doesn’t issue any shares, which creates interesting possibilities for estate planning. Cayman law also allows for "hybrid" companies, which are limited both by shares and by guarantee.
Where liability is limited by shares, there is no minimum capitalization requirement (except, of course, bank, mutual funds, insurance companies, etc., have a much higher required minimum share capital). Shares can be issued with a par value of as little as one US$1.00, or with no par value. There typically are no stamp or similar duties for transferring shares.
Cayman companies may also be formed with unlimited liability, which means that if the corporation is sued for X amount, all the shareholders will be jointly and severally liable for X amount. Such corporations actually have practical uses, such as where one is wanting to create liability as a shield against creditors.
Bearer shares may be issued, but they must be fully paid up. Shares may have a par value, or they may have no par value. The register of shareholders (a/k/a "members") of a Cayman exempted company is not open to public inspection, and only the names of directors and officers (which may be nominees) may be filed with the Registrar of Companies.
Each Cayman company must have at least one shareholder, which may be a corporation or a real person (including a trustee), and can be of any nationality. However, a company which carries on "local" business in the islands must have ownership of at least 60% by Cayman citizens.
The shareholders of a Cayman company are allowed to loan funds to the company to capitalize it, or may even guarantee a bank loan for this purpose, but a specific resolution by the company to do this is necessary.
Cayman companies may have its shares denominated in any currency, or in a combination of currencies. Shares may also be denominated in fractions. Different share classes may be issued, with different rights for each class. Increases in registered capital may be accomplished by ordinary resolution at the general meeting of shareholders, and a reduction of share capital down to the amount of issued capital by a special resolution (2/3 majority) of shareholders. However, a reduction of authorized capital below issued capital requires approval by the Grand Court of Cayman.
Officers and Directors
A Cayman company must have at least one director, and there is no maximum limit on the number of directors a company may have. Directors can be of any nationality, and directors of exempt companies are not required to reside in the Caymans. All companies must maintain a register of officers and directors, and must notify the Registrar of Companies of all changes to this register, but the register is not made public and not even shareholders have the right to inspect the register unless that power is granted
Every exempted company is required to hold one meeting per year in Grand Cayman, although this is typically held by nominees, proxy, etc.
Corporations may own Cayman real estate so long as their Articles of Association do not allow the issuance of bearer shares. Corporations formed outside the Caymans can own Cayman real estate if they first register under the Cayman Companies Law.
Cayman companies are typically dissolved by liquidation. Voluntary liquidation is accomplished by the passing by the shareholders of a resolution of dissolution, or else by the happening of some event or passage of time as set forth in the company’s Articles of Incorporation. Companies are also dissolved by being struck from the register of as a defunct company, for failing to pay its annual fees, etc. Companies may also be liquidated by an order of a Cayman court. Cayman companies may also be automatically dissolved when they migrate from the Caymans to some other jurisdiction.
Upon dissolution, the liquidators (often the former directors) complete the winding-up process, payment of creditors, etc. When a company is struck from the register of companies, the assets of the company escheat to the Cayman government.
TAX WARNING FOR U.S. CITIZENS
U.S. citizens are taxed on their taxable income from wherever it is derived, anywhere in the world. U.S. citizens are also taxed on investments indirectly made through foreign trusts and foreign corporations, including offshore trusts and IBCs. Thus, the fact that an offshore jurisdiction may have low or no taxes does not mean that if a U.S. citizen does business there that he or she will enjoy only low or no taxes on the personal income made. There are simply NO personal income tax advantages, at all, for U.S. citizens to use offshore structures, and anyone who tells you differently is probably telling you a falsehood. Any discussion we make of an offshore jurisdiction's tax laws should be construed only according to the foregoing warning.
BEWARE OF OFFSHORE SERVICE PROVIDERS: There are some offshore service providers who will make wild claims about saving you personal income taxes, so as to convince you to set up an offshore structure. Most of these people don't know the first thing about U.S. tax law, and their representations to you will not help you, at all, if you are caught with an unreported trust, corporation, or bank account. All they really want is your money, and even if you commit tax evasion they are not subject to U.S. law, and so couldn't care less.