How can 18,000 companies claim to be conducting business out of Ugland House, a small five-storey building in Cayman? That's impossible, so something wrong must be happening there.
This is a misconception about the role of a company's registered office.
There is a misconception that a company’s registered office address and operating business address are the same. The reality is that companies using Ugland House as their registered office do not actually claim to operate their businesses from that location.
Registered office is not the site of business operations.
The registered office of a company is not the same as, nor is it interchangeable with, the location of its business operations. Jurisdictions in the United States and around the world have a similar basic corporate law requirement that a company must have a registered office in the jurisdiction in which it is incorporated. The registered office actually serves a very narrow function to act as a statutory agent where, for example, a company can be served with documents arising from litigation.
The Cayman Islands' registered office function is similar to Delaware.
The roles of the Cayman Islands and its registered office function are almost identical to the roles of Delaware and Delaware-based registered agents in the United States. According to the Division of Corporations of the State of Delaware: "The State of Delaware is a leading domicile for U.S. and international corporations. More than 850,000 business entities have made Delaware their legal home. More than 50% of all publicly-traded companies in the United States including 63% of the Fortune 500 have chosen Delaware as their legal home." More than 200,000 entities alone have an address at 1209 Orange Street, Wilmington, Delaware – over 10 times the number of registered entities at Ugland House in the Caymans.
Isn't tax evasion the reason for forming companies and conducting business transactions in the Cayman Islands? Don't investors in Cayman Islands entities seek to free themselves from any form of tax?
Tax neutrality, not tax evasion or avoidance.
Investors and their advisors choose the Cayman Islands for many prudent commercial and business reasons, one of which is tax neutrality, but not tax evasion. Investors are still responsible for taxes in their home country. Cayman Islands entities provide a tax neutral platform so that investors from multiple jurisdictions are not subject to additional layers of foreign taxation in addition to the investors' home country tax. This tax neutrality provides a level playing field for all investors.
US government agencies recognise and facilitate the use of Cayman Islands entities for international business transactions.
The global financial system needs legal entities to be formed in a stable jurisdiction on a tax-neutral basis (whether in the Cayman Islands or elsewhere) to facilitate international business transactions. In fact, US government agencies such as the Overseas Private Investment Corporation ("OPIC") and the Export-Import Bank ("Ex-Im"), along with the World Bank's International Financial Corporation are familiar with, invest in and utilize Cayman Islands entities for international transactions. In a July 2008 GAO report on the Cayman Islands, "Ex-Im Bank officials explained that they frequently created Cayman Islands entities to facilitate the purchase of US aircraft." Similarly, the GAO report notes that "OPIC officials stated that foreign investors...value the Cayman Islands' reputation for legal neutrality towards investors from different jurisdictions." They also recognise that their legal rights and security interests will be recognised under Cayman Islands law for the reasons specified in the next section. Furthermore, several Cayman Islands entities with Ugland House addresses were established to facilitate investment in the US Government's Troubled Asset Relief Program ("TARP") and Term Asset-Backed Securities Loan Facility ("TALF") schemes which helped bring liquidity to the global markets after the global financial crisis. We have assisted certain US and international governmental agencies in the establishment, or provision of legal advice on the use of, such entities.
The Cayman Islands is a facilitator for international investment, providing a commercial vehicle to bring together investors from around the world to participate in multinational business transactions.
The challenge for multinational companies, investment banks and fund managers is often how to create a business or investment fund structure which is able to accommodate investors from all over the world within the complex parameters of existing tax and securities laws that apply to the investors, the management team and the business or investment activities, in their multiple home jurisdictions. The Cayman Islands offer a tax neutral platform to achieve these objectives without foreign exchange controls and without significant restrictions on interest and dividend payments, while allowing the repayment of capital, or the ability to repurchase shares or redeem or repurchase debt. The US Government Accountability Office (GAO) noted in a July 2008 report that "the Caymans Islands' reputation as a stable, business-friendly regulatory environment attracts business."
Tax neutrality means no additional layers of foreign tax on top of the investor's home country tax.
The fact that there are no taxes in the Cayman Islands on certain transactions unfortunately often leads to a public misconception that investors in offshore companies are free from all forms of taxation. This is not the case at all. Investors based in onshore jurisdictions are likely to be taxed in their home countries on dividend, interest, and other income received from the offshore company and on any capital gains realized on the sale or redemption of shares in the offshore company.
Many onshore jurisdictions have also introduced tax rules that tax income and gains which are rolled up in the offshore vehicle as if they had been distributed. Additionally, the offshore company may itself be subject to withholding taxes imposed on income (such as dividends) or gains on its investments by tax authorities in the onshore jurisdictions in which the offshore company's businesses or investments are located, and these withholding taxes are frequently not creditable against taxes paid by the investor in the offshore vehicle on the same income or gains. For example, the U.S. makes a 30% withholding on certain dividends paid to Cayman investment funds.
Sound business reasons for use of Cayman entities.
What makes this tax-neutral platform in the Cayman Islands so attractive for international investors is that it is supported by a fully-developed business law, an English-based legal system, and a regulatory and professional infrastructure capable of implementing large and complex international business transactions.
These investors consider, for example:
- speed and simplicity of establishing Cayman Islands entities;
- relatively low cost of establishment, particularly in the context of typical transaction sizes;
- flexible and practical business statutes, for example corporate transactions essentially limited by solvency rather than traditional notions of "capital";
- Cayman Islands insolvency law, which is simple and effective and recognises and enforces security interests and creditors' rights, and hence of great comfort to lenders and investors (and again reducing costs);
- robust and healthy compliance culture;
- english-based legal system, established judiciary, absence of political or sovereign concerns and a final court of appeal in the form of the UK Privy Council in London;
- professional infrastructure and reputation. The Cayman Islands are well-known for their established and experienced financial services sector and their substantial capacity. That is a feature that grows on itself and having financial institutions, institutional investors, rating agencies and professional firms elsewhere used to and comfortable dealing with counterparts in the Cayman Islands may have become as big a reason as any for the use of Cayman Islands vehicles in many cases;
- recognition of corporate personality. The ability of multinationals to use separate group subsidiaries to maintain separate businesses and assets, often with their own ring fenced financing, can be a major contributor in the successful management of business and jurisdictional risks in cross-border transactions; and
- compliance with international anti-money laundering, anti-terrorist financing, anti-bribery, trade and finance sanctions, and other financial regulatory standards.
Is the Cayman Islands an offshore tax haven shrouded in secrecy that invites money laundering and tax abuse and discloses virtually no information on its financial transactions to the international community?
The Cayman Islands is compliant with predominantly all the Financial Action Task Force ("FATF"), anti-money laundering and combating of terrorist financing recommendations and currently rank in the top 10 jurisdictions globally (calculating "compliant" and "largely compliant" ratings) for overall compliance among over 150 other jurisdictions, ranking higher than countries such as the United Kingdom, Spain, Italy, Germany, Australia and many other FATF members. (Source: FATF and affiliated websites)
In certain areas such as retroactive client identification obligations, the regulation of trust companies, company formation and registered agents, the abolition of bearer shares and the regulation of, and imposition of anti-money laundering obligations on, hedge funds, and most other investment entities, the Cayman Islands are more advanced than most onshore jurisdictions.
Robust compliance culture, not secrecy, is the force behind the Cayman Islands' growth as an international finance centre.
Secrecy is not the driving motivator for reputable business coming to the Cayman Islands. The presence – not the absence – of a robust and healthy compliance culture of laws, regulations and international cooperation has contributed to the Cayman Islands' growth as an institutionally-focused, specialised financial centre.
The Cayman Islands has undertaken extensive efforts to promote transparency and information exchange.
To date the Cayman Islands has signed over 30 in-force bilateral Tax Information Exchange Agreements ("TIEAs").These agreements conform to the model developed, with US participation, by the OECD Global Forum on Taxation (of which the Cayman islands is a member), and are based on forms endorsed by both the G-8 and G-20 countries as reflecting "high standards of transparency and exchange of information for tax purposes."
The Cayman Islands is also a signatory to the Convention on Mutual Administrative Assistance ("MCAA") in tax matters and has signed intergovernmental agreements with the US and the UK, in compliance with which the Cayman Islands has implemented the US Foreign Account Tax Compliance Act ("FATCA") and the OECD's Common Reporting Standard ("CRS"). By being a signatory to the MCAA, the Cayman Islands can share tax related information with any of the other approximately 100 signatory jurisdictions, without needing to have a separate TIEA.
As a result, all Cayman Islands' financial institutions (as are very broadly defined under FATCA and CRS) are required (amongst other things) to conduct due diligence on their investors/ account holders to identify whether any such accounts are considered "Reportable Accounts". Information on such Reportable Accounts must be reported to the Tax Information Authority of the Cayman Islands ("TIA"). The TIA transmits the information reported to it to the overseas fiscal authority relevant to a Reportable Account (e.g. the IRS in the case of a US Reportable Account or HRMRC in the case of a UK Reportable Account) annually on an automatic basis.
More recently, the Cayman Islands has, together with 65 other jurisdictions, committed to participate in the country-by-country reporting component of the OECD Base Erosion and Profit Shifting initiative (BEPS), which aims to eliminate the risk of transfer pricing (and avoidance of tax in operational centres) by multi-national enterprises.
In July 2017, the Companies Law was amended to introduce a new requirement for in-scope Cayman Islands companies to maintain a register of beneficial ownership information with its licensed corporate service provider in the Cayman Islands. This beneficial ownership information must be filed with the competent authority and is then placed on a search platform which can be searched on proper request made to the competent authority by local regulators and UK authorities.
In 2010, the OECD Peer Review Global Forum on Transparency and Exchange of Information recognized the Cayman Islands as a "well- developed legal and regulatory framework" that promotes access to information by ensuring its legal authorities are "invested with broad powers to gather relevant information."
The Financial Stability Board (FSB) has also confirmed its designation of the Cayman Islands as a jurisdiction which demonstrates sufficiently strong adherence to international standards on cooperation and information exchange.
Strong adherence to international anti-money laundering and anti-terrorist financing standards.
The Cayman Islands are currently one of the highest rated offshore jurisdictions for complying with international standards concerning anti-money laundering and combating terrorist financing and currently rank in the top 10 jurisdictions globally (for largely compliant and compliant ratings) out of over 150 onshore and offshore jurisdictions reviewed under the FATF mutual evaluations. The Cayman Islands is about to undergo its fourth mutual evaluation against the FATF Recommendations.
IMF review attests to effectiveness of the Cayman Islands financial regulatory system.
The Cayman Islands is regularly reviewed for prudential regulatory standards by the International Monetary Fund ("IMF") and World Bank. In 2009, the IMF conducted an on-site assessment of the regulatory and anti-money laundering regime in the Cayman Islands, and concluded that the Cayman Islands had "an increasingly effective system of regulation" and that "the overall compliance culture within Cayman is very strong, including the compliance culture relating to anti-money laundering obligations".
The Cayman Islands is recognised as a leading international financial centre, securing top ratings.
In September 2013, UK Prime Minister, David Cameron, issued the following statement in the House of Commons: "I do not think it is fair any longer to refer to any of the overseas territories or Crown dependencies as tax havens. They have taken action to make sure that they have fair and open tax systems.” This was in response to a question on OT/CD signups to the Multilateral Tax Convention.
The OECD Secretary-General's Report to the G20 Leaders, issued in early September 2013 showed ratings for 98 jurisdictions, based on nine criteria, giving a green, amber, or red rating for each. 'Green' denoted the highest rating.
The Cayman Islands was rated green across all nine categories. Brazil and the US had two ambers, Russia had seven, and Canada, Germany, Spain, and the UK each had one.
In its latest report, Moody’s outlines that the Cayman Islands carries a rating of Aa3. This high rating reflects a number of important considerations satisfied by the Cayman Islands. These include:
- a very high per capita Gross Domestic Product (GDP) – of which the latest figure is US$59,980.95 for 2016
- a Debt-to-GDP ratio of 18.7% at the end of 2015, which is a comparatively low debt burden viewed against other rated jurisdictions;
- a high score for governance indicators along with its political connection to the United Kingdom; and
- a very low susceptibility to Event Risk.
The Cayman Islands has a well-established, strong record of cooperation with the US and international regulators.
The Cayman Islands Government has taken many proactive steps to enhance its cooperation with both US and international regulators to adopt "best practice" international standards and to strengthen its regulatory structure against money laundering, terrorism, crime and tax fraud.
The government has cooperated with the Organisation for Economic Cooperation and Development ("OECD"), the FATF, the IMF and the governments of many onshore jurisdictions (including the US and the UK).
The Cayman Islands Monetary Authority ("CIMA") is also a full member of the International Organization of Securities Commissions ("IOSCO") and the Offshore Group of Banking Supervisors and has executed numerous Memoranda of Understanding and Undertakings with equivalent regulatory agencies in foreign jurisdictions, including the US Treasury, the US Federal Reserve, the US Securities and Exchange Commission ("SEC") and Commodity Futures Trading Commission ("CFTC"). (See Cayman and the Regulators)
CIMA has responded to the call for good governance with the introduction of a Statement of Guidance on Corporate Governance for Licensees and separately for Regulated Mutual Funds. Equally, the private sector in the Cayman Islands has responded to the call for independent directors, to the point where almost 80% of new funds tracked have independent directors.
The Cayman Islands Government
- has also enacted:
- Anti-Corruption legislation to combat bribery of or by both foreign and local government officials;
- The Securities Investment Business Law to regulate investment managers and advisors;
- Tax information sharing legislation to implement the EUSD, TIEAs, FATCA, CRS and (shortly) BEPS;
- Data protection legislation in alignment with current European standards;
- Whistleblowing legislation to encourage the sharing of information in circumstances where laws and public policy may have been contravened; and
- Amendments to the Mutual Funds Law to increase the minimum investment to US$100,000 into investment funds registered under section 4(3) of the Mutual Funds Law and to regulate certain Master Funds, and
- has cooperated with EU regulators to assist with the implementation of the EU Directive on Alternative Investment Fund Managers ("AIFM");
The Cayman Islands were one of the first jurisdictions to give an advanced commitment to the OECD in connection with its "harmful tax" initiative and as a result were not included on the OECD's list of harmful tax havens.