Structuring for success in the Cayman Islands

0
1104

The Cayman Islands’ reputation as a world-class financial centre is well known. It continues to be known as a leading jurisdiction in the offshore banking, investment funds, captive insurance and structured finance sectors and also appeals to clients seeking offshore aircraft and ship registration, or asset holding structures.

Marc Parrott
Marc Parrott

The Cayman Islands has long been one of the most prominent offshore jurisdictions through which to structure cross-border investment transactions. There are a number of key reasons for this including the stable political environment, the predictable and ethical court system (based upon the foundation of the widely regarded system of English law and with ultimate right of appeal to the Privy Council), the absence of taxes on income or capital gains, strict laws regarding confidentiality and the ability to obtain access to sophisticated regulators and service providers.

For structuring investments, the Cayman Islands offers a range of investment entities and structures that may be attractive for both Chinese investors looking to make outbound investments globally, and for international investors seeking to pool capital in order to make investments into China.

In the case of international investors seeking to pool capital in order to make investments into China, while the ultimate holding entity will likely be a Cayman Islands vehicle, it will often be the case that the Cayman Islands vehicle will invest into China via a special purpose company established in Hong Kong in order to take advantage of the comprehensive double tax avoidance agreement between China and Hong Kong.

Exempted companies

Incorporating a Cayman Islands exempted company is a simple, quick and cost-efficient process that, if necessary, can be implemented within 24 hours. Incorporating an exempted company allows an investor or group of investors to make the relevant investment through the exempted company (in which the investors become shareholders) and ensures, through the legal concept of limited liability, that any liability in relation to the underlying investment is limited at the exempted company level. Cayman Islands law provides that the exempted company will not be subject to any taxes on income or capital gains, any withholding taxes or any currency controls at the Cayman Islands level.

The exempted company need only have a minimum of one director, allowing decisions to be authorized and implemented quickly and efficiently. Where there is more than one director there is flexibility to hold meetings by telephone or to pass written resolutions, by having each director sign a copy of the proposed resolutions, rather than needing to hold formal board meetings. There is no requirement that the director be resident in the Cayman Islands.

There is also no requirement for an exempted company to file any financial statements with any regulatory agency in the Cayman Islands or to request audited accounts. This maintains confidentiality and also allows investors to determine what accounting standards, such as International Financial Reporting Standards or current Chinese accounting standards for example, should apply. If the investors want to sell the underlying investment that is held in the exempted company, the shares of the exempted company can be sold instead of the underlying investment. This is opens further possibilities for exiting an investment. There is no stamp duty on share transfers in the Cayman Islands and transferring the shares of the exempted company rather than the underlying investment itself may preclude certain taxes in the jurisdiction where the investment was made becoming applicable.

Exempted limited partnerships

Cayman Islands exempted limited partnerships (ELPs) are also commonly used to structure cross-border investment transactions.

The business of the ELP is conducted by its general partner for the benefit of the investors in the ELP (who become the limited partners). The limited partners in an ELP generally benefit from limited liability status so that any liability in relation to the underlying investment is limited at the ELP level. The arrangements as to the internal governance of an ELP are extremely flexible and are set out in the relevant limited partnership agreement governing the operation of the ELP.

Cayman Islands law provides that ELPs will not be subject to any taxes on income or capital gains, any withholding taxes or any currency controls at the Cayman Islands level. As for an exempted company, there is no requirement for an ELP to file any financial statements with any regulatory agency in the Cayman Islands or to have those accounts audited in accordance with any particular accounting standards.

Exempted trusts

In certain circumstances, it will be appropriate to structure the holding of investments through a trust structure. One common use of such trust structures is for investment funds structured as unit trusts, in which investors contribute capital to be managed by a manager and are issued units. Trusts are also popular for holding investments on behalf of a family group as part of their estate planning strategy.

Conclusion

In order to ensure that the Cayman Islands remains a leading financial centre, the Cayman Islands government remains committed to ensuring that the legal framework provides as much flexibility as possible to allow sophisticated investors to implement structures to achieve their commercial objectives without giving rise to unnecessary levels of compliance or disclosure.

Marc Parrott is a counsel in the Hong Kong office of Harney Westwood & Riegels. He can be contacted on +852 3195 7281 or by email at marc.parrott@harneys.com