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The 101 on How to Form a Cayman Fund

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 ‘Small place, big money’ was the apt title of a 1995 analysis of the position of the Cayman Islands in the international financial system. The title rings even truer today, as the Cayman Islands continues to be the leading destination of choice for the global hedge fund industry.

Over 75% of the world’s offshore funds (and an estimated US$1.1 trillion of fund assets) reside in the small archipelago, and it’s easy to see why. Onshore banking can often be riddled with issues of high taxation, complex finance laws, and political and economic instability.  The Cayman Islands, not only provides a stable, tax-efficient business environment, but also a robust legislative and judicial system well-acquainted with legal and financial services.

If you are considering whether the Cayman Islands is the right home for your fund, we’ve outlined some important factors for you to think about, as well as provide you with an overview of the basic steps to get you started.

Why the Cayman Islands?

With a rich reputation of being a high-quality offshore center, here are some of the competitive advantages of a Cayman fund.

Flexibility

The Cayman Islands is known for having flexible statutory regimes, developed in collaboration with industry stakeholders. There are no exchange control regulations. That allows money and securities of any currency to be transferred freely to and from the Cayman Islands.

Tax Efficiency

The Cayman Islands is a tax neutral jurisdiction. They do not impose any personal, corporation, capital gains, profits or inheritance taxes to funds or to investors in such funds, regardless of their tax residence. On top of this, the Cayman Islands government does not levy any withholding tax on income earned in the Cayman and repatriated to a foreign jurisdiction. This allows profits to be distributed in the form of dividends and interest to foreign investors without being subject to withholding tax by the Cayman Islands.

To even further protect investors from adverse tax consequences from future amendments to tax laws; corporate entities may obtain a renewable undertaking from the Governor in Council that no tax be levied for a period of 20 years.

Stable Government and Reliable Legal System

The Cayman Islands has a history of a stable government, committed to promoting the financial services industry. As a British Overseas Territory, the UK remains responsible for external affairs and has passed on the English common law legislative system. This is of great importance as not only does it make the law familiar to countries such as the USA, Canada, and Australia but has fostered the growth of new financial innovations. Where civil law (France, Japan, Germany, etc.) generally stipulates what is permitted, common law generally identifies what is prohibited. This has allowed innovative corporate structures and financial instruments to develop quickly.

Central Time Location

The Cayman Islands has a central time location of GMT-5, making it ideal for organizations located in the USA, Asia, and Europe.

Speed

The speed at which a fund can be registered is another important advantage compared to other jurisdictions. Once you have all the necessary documents drafted and signed, a fund can be registered within one working day.

Professional Services

Investors can rely on high-quality expertise from a wealth of lawyers, accountants, fund managers, administrators, and other local service providers.

Compliance Culture

The Cayman Islands is compliant with anti-money laundering and anti-terrorist financing requirements of the Organisation of Economic Cooperation and Development (OECD). It is also included on the OECD’s “White List” and is a contracting state of a multitude of tax information exchange agreements.

What else to consider?

The Cayman Islands is certainly an attractive hub for offshore funds, but is it right for you?

Before you leap ahead and set up a Cayman Island fund, it’s important that you do your due diligence and seek professional advice regarding your legal and investor considerations.

One thing to consider is the type of investor you want to attract. US taxpayers tend to prefer investing in US funds. This enables them to easily access information on the financial activities of the fund to fulfill their tax reporting and tax paying obligations. In contrast, many non-US taxpayers are reluctant to invest in US funds as they do not want their financial affairs scrutinized by US authorities. Cayman funds can have great appeal for these foreign investors. You should also consult a professional tax service provider regarding the impact of taxation on income earned in the Cayman Islands on your home jurisdiction.

While the Cayman Islands itself does not impose any personal or corporation tax, this does not preclude investors from being subject to taxation from their own country of residence. It should also be noted that the Cayman Islands has a multitude of international tax information exchange agreements in operation.

How to start a Cayman Island fund?

Once you’ve decided that the Cayman Islands is the best jurisdiction for your offshore fund, it’s time to begin the process of forming. So, where do you start?

It is always best to seek guidance from a legal counsel with expertise in Cayman Island fund formation. This is to prevent costly missteps and the filing of incorrect or incomplete documents. Below we provide a basic overview of the initial steps and costs you may expect.

Step 1: Decide on an entity type and fund structure. 

Step 2: Determine the initial capital structure and appoint a minimum of one director.

Step 3: Engage a Legal Counsel to assist in drafting the fund’s constitutional documents.

Step 4: Prepare service provider agreements.

Step 5: Incorporate with the Registrar of Companies and register the fund with the CIMA, if applicable.

How we can help

Fund formation and structuring can be a tedious and complex matter. Enquire with us today and let our experienced team guide you through every step of setting up a Cayman Island Fund.