Cayman Islands Financial Services

On June 10, the government of the United Kingdom gave approval to the fiscal sustainability plan of the Cayman Islands without conditions, allowing for the jurisdiction to increase its short-term borrowing. The approval was given despite the calls by the previous government for the introduction of direct taxation in the Cayman Islands.

When the newly-appointed Foreign and Commonwealth Office (FCO) Minister for the Overseas Territories, Henry Bellingham, met with Cayman Premier, McKeeva Bush, he said that the FCO is content with proposals introduced in order to resolve the Cayman’s fast-increasing borrowing despite the absence of new tax revenue streams.

After the meeting, the Cayman Islands government said in a statement that Bellingham had “welcomed the positive action taken to date and commended the Cayman Islands government on the measures proposed in their three year plan to restore public finances to a sustainable footing.”

Bellingham said in a statement that followed the meeting: “We had an excellent meeting today which we believe will be the start of a new and positive partnership between the UK and the Cayman Islands. We have agreed in principle that the Cayman Islands government can undertake additional borrowing next year.” He also suggested that the agreement will help the Cayman Islands deliver its 3-year plan in order to deal with the impact of the global slowdown.

The findings of an investigation into the effects of the global financial crisis on Cayman’s funds industry have been released by the Cayman Islands Monetary Authority (CIMA).

This report is based on statistics from more than 7 000 funds that were regulated in the Cayman Islands from 2008, which is when the crisis started.

Among the funds used for the statistics, most of the key indicators show notably weaker performance in 2008 than was reported in 2007. There was an 18% fall in subscriptions, a 42% increase in redemptions, an almost 3-fold dip in net income, and a 25% decrease in net assets.

According to the data revealed by the CIMA, some shifts could be attributed to the crisis. CIMA stated: “The proportion of funds with assets totalling USD 50 million or less rose to 52% in 2008, up from 43% in 2007. Although the largest proportion of assets continued to be allocated to master funds, the dollar value of assets allocated to that structure decreased by 24%. The instruments that saw the largest falls in asset allocation were: short bonds, which fell by 75%; long equities, which fell by 56%, and long bonds, which fell by 53%.” CIMA noted that “following on from trends seen in both 2007 and 2006, 2 investment strategies, Multi-Strategy (39%) and Long/Short Equity (22%), remained dominant in attracting the majority of assets, garnering USD 1 034 billion of the aggregate net assets.”

The funds industry was severely affected by the crisis, however, just 7% of funds suspended trading in 2008, which is up just marginally on that recorded in 2007 (5%), which the authority explained by the fund industry’s resilience in the jurisdiction.

Cindy Scotland, CIMA’s Managing Director, said that the authority goes on to publish statistical information on the funds industry with a view to improve transparency and extend global awareness of the structure and performance of the industry.

She said: “These are very valuable facts and figures. With the Cayman Islands estimated to have a major portion of the world’s hedge funds domiciled here, the information in the report provides a good gauge of what was happening in the global funds industry at the peak of the financial crisis.”

The performance of 7 325 funds, which is about 82% of regulated funds in Cayman, were aggregated in the report.

The Cayman Islands entered into a Tax Information Exchange Agreement (TIEA) with Germany.

A signing ceremony was held on May 27, 2010. The Cayman Islands’ Premier, McKeeva Bush and Germany’s Ambassador to Jamaica, Jurgen Engel, signed the agreement.

The TIEA will allow for the exchange of tax information between the tax authorities of the Cayman Islands and Germany upon request, in case there is evidence of the perpetration of fiscal crime, or in civil tax matters.

Mr Bush said that the jurisdiction’s long-standing commercial ties with Germany make the signing an important step. He also welcomed the opportunity to host Ambassador Engel, a distinguished member of its foreign service. According to Bush, “Not only have Germany’s leading financial institutions held operations in the Cayman Islands for decades, but our 2 governments have worked closely together for many years, most recently as part of our mutual participation in the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes’ Steering and Peer Review Groups.“ Bush said that the Cayman Islands have had a bilateral agreement with Germany in effect since 2005 as part of the implementation of the EU Savings Directive, under which interest income earned by German citizens in Cayman Islands accounts is reported.

The governments of the Cayman Islands and Japan have initialled a comprehensive double tax agreement (DTA) to allow for the exchange of tax information in civil and criminal tax matters.

According to a statement issued by the government of Japan, “The government of Japan welcomes this agreement which enables both tax authorities to carry out the effective exchange of information regarding tax matters in accordance with the international standard, and demonstrates the Cayman Islands’ commitments to combating international fiscal evasion and tax abuse, the importance of which has been reiterated in a series of international conferences”.

Prime Minister of the Cayman Islands, McKeeva Bush, welcomed the agreement and added that the jurisdiction is pleased to have reached this DTA, particularly given the exceptional commercial relationships between financial services sectors of both jurisdictions.

The double tax treaty still requires signing. It will come into force after both countries have undertaken their individual ratification processes.

On May 13, an Tax Information Exchange Agreement (TIEA) was signed between the Cayman Islands and Portugal. The document was signed by Cayman Island Premier, McKeeva Bush, and Sergio Vasques, the Portuguese Secretary of State of Tax Affairs.

The TIEA is based on the Organization for Economic Cooperation and Development (OECD) model agreement. The document allows the exchange of tax information between the tax authorities of the 2 jurisdictions on request in case there is evidence of the perpetration of a tax crime.

At a signing ceremony, Bush stated: “It is my pleasure to sign a tax information exchange agreement this afternoon. We are particularly pleased to be signing this agreement on Cayman soil and are grateful to the Portuguese delegation for taking the time to visit our shores.” He also said: “Some of Portugal’s major financial institutions which have a presence in the Cayman Islands and are licensed by our regulator, the Cayman Islands Monetary Authority. We see this as a sign of confidence in our financial services industry and we hope that this agreement may help expand opportunities for more commercial activities between our 2 countries.”

When speaking at a recent conference, Anthony Travers, Cayman Finance Chairman, called for the further relaxation of the highly restrictive immigration and rollover policies of the jurisdiction with a view to encourage professionals to the Cayman Islands and to maximise its offering as a leading international financial centre in light of recent fee hikes.

Tracers recalled that in October 2009 higher fees, including for work permits, were introduced. He noted that the regime is unsustainable and emphasized that it would lead to more competitive offshore jurisdictions taking business from Cayman. As the government is increasingly seeking greater revenues from fewer transactions, he suggested that the jurisdiction’s offering should be of a higher standard. For instance, Travers urged the government to introduce additional reforms in order to provide prospective investors with the chance to set up physical operations in the Cayman Islands that would allow them to further maximise the benefits of investing in the jurisdiction with its low tax regime.

In the conclusion, Travers said that while the Cayman Islands has been in compliance with international standards on transparency and tax information, new scrutiny surrounding the lack of physical operations in the jurisdictions could be the next hurdle for it. By means of encouraging foreign companies to set up operations in Cayman, the jurisdiction could further show its compliance with the changing requirements being placed on offshore territories.

It will be necessary for United States’ citizens living and working in the Cayman Islands to familiarize themselves with a new legislation as it affects their tax obligations. The legal changes apply to everyone who lives in the Cayman Islands with US citizenship.

According to the Hiring Incentives to Restore Employment Act of 2010 (HIRE act) that was passed by the US Congress in March 2010, new reporting obligations are imposed on US taxpayers in connection with non-US accounts and investments. The legislation will affect US passport holders in Cayman. Also, in accordance with the new legislation, the US tax authority, the Internal Revenue Service, is provided with tools for finding and prosecution of US individuals hiding assets overseas.

Also, the ability of non-US investors to access US markets is limited by the new rules. The legislation limits the ability of non-US investors to access the US markets via derivatives, loan notes and other synthetic arrangements. It will affect the US taxpayers having homes, artwork, planes, yachts and other personal use property held in non-US trust structures.

According to a new report “Single Parent Captive Benchmarking: Capital and Collateral”, firms with captive insurance companies are examining a full range of opportunities for putting surplus capital to work within their organizations. This report was released by Marsh at the 2010 Annual Conference of the Risk and Insurance Management Society, Inc.

The new report investigates how owners of captive insurance companies in different jurisdictions are tapping into surplus funds and continue to comply with local regulations governing the capitalization of their captives. It focuses on activities in the past year of more than 750 businesses owning captive insurance companies.

According to Marsh, regardless of geography, intercompany transactions are still the most common use of captive investment assets. This is because captive owners try to find efficient methods to return excess funds to the parent company.

The report finds that captives tend to be capitalized in excess of the statutory minimums regardless of the location they are domiciled. To meet these requirements, offshore captives tend to have higher premium-to-capital ratios than those domiciled onshore in the US or the EU.

Gemmell said that in the Cayman Islands a large number of captives operate with only the minimum capital of USD 120 000, which reflects that many of these captives have retrospectively rated insurance programs.

On April 28, 2010, the Immigration (Amendment) Bill 2010 was passed by the Cayman Islands parliament. The new legislation allows 25-year residence to rich individuals who invest in businesses contributing to the prosperity of the jurisdiction, on certain conditions.

The Bill gives the possibility fot foreign individuals to apply for a Residential Certificate for Investment. This will cost KYD 20 000 (USD 24 000), and allows the investor, their spouse and any dependents the right to live in the Cayman Islands without a work permit on certain conditions.

Under the newly-introduced law, investors must:
- have a net worth of at least KYD 6 million;
- invest at least KYD 2.4 million in licensed businesses with workforces comprising of at least 50% Caymanians, contributing to the prosperity of the jurisdiction;
- pass checks on business competence, show financial records of their businesses’ stability, and show that they undertake a managerial role in their given area;
- possess a clean criminal record;
- be of sound health with adequate health insurance.

It should be noted that the Immigration Law previously contained provisions to allow residence to wealthy investors but were retracted as the Cayman Islands received little interest.

The government of the Cayman Islands has announced changes to the National Pensions Law to allow a temporary 1-year suspension period of pension contributions for Caymanians and a temporary 2-year suspension period for non-Caymanians.

The amendments are effective since April 26, 2010.

The newly-introduced changes will affect private sector employers, employees, and self-employed individuals.

According to Cayman Pensions Minister Rolston Anglin, “In the current economic climate, pension contributions place a considerable financial burden on employers, employees and self-employed persons.” He said that, as some businesses are facing closure, the relief might enable them to survive in these tough economic conditions.

Businesses must be in compliance with the National Pensions Law in order to participate in the suspension. Another participatory condition is that pension plan membership must be maintained, which means that all employers and employees, regardless of when they are employed, must be members of a registered pension plan.