Cayman Islands

Author: | Published: 23 May 2005
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The Cayman Islands are considered by many market participants to be the leading offshore jurisdiction for the establishment of SPVs in structured finance transactions. The key reasons for this are that the Cayman Islands are tax neutral, have a well developed legal system for structured finance transactions including a creditor friendly insolvency regime and non intrusive regulation, have low country risk and have established a reputation for having professional, responsive and cost efficient service providers, and also have a long established history as an offshore jurisdiction in the capital markets.

Is there a specific type of SPV?

An SPV is usually incorporated as an exempted limited liability company with a share capital. The term exempted reflects the exemption of the company from certain requirements of the Companies Law (2003 Revision) (the Companies Law) granted by virtue of an undertaking by the relevant company not to conduct business in the Cayman Islands and the availability to the company of an undertaking from the government not to impose any taxes on the company for a period of up to 30 years in the unlikely event of their introduction in the future.

Exempted companies may also take the form of limited duration companies or companies limited by guarantee which possess the relevant criteria to enable the SPV to be treated as a partnership in certain other jurisdictions (such as the US) for tax purposes, thus enabling the shareholders (where the SPV is not owned by a charitable trust) to benefit from the related tax transparency.

Unit trusts and limited partnerships are also used as alternative vehicles where participation in a unit trust or partnership is more attractive to investors for tax and/or regulatory reasons.

In addition, the Companies Law now permits an SPV to be registered as a segregated portfolio company. This corporate structure allows the company to create one or more segregated portfolios or cells to separate the assets and liabilities held within one portfolio from those held within another portfolio and/or to separate any assets and liabilities of the company that are not held within a segregated portfolio from those which are. Essentially this amounts to statutory ring-fencing and accordingly may be attractive for a multi-issue vehicle either as a statutory reinforcement of the usual contractual ring fencing or in circumstances where contractual ring fencing is ineffective.

What is the timing for setting up an SPV?

A new company can be incorporated on a same day basis. The certificate of incorporation and stamped constitutive documents evidencing the company and its incorporation will be received from the Registrar of Companies within 24 to 48 hours of filing, if requested on an express basis, for which a higher fee is payable, or within two to five business days, if not. The date of incorporation is, however, the date of filing. Due to the speed of incorporation, shelf companies are rarely used.

What is the cost of setting up an SPV?

The usual cost of setting up a standard SPV is approximately $2,000 to $2,500.

This cost includes the fee payable to the Cayman Islands government on incorporation, the cost of obtaining the tax exemption certificate, fixed incorporation fees, registered office fees for the remainder of the year of incorporation and ancillary disbursements such as stamp duty, register of directors filing fees and so on. This does not include fees for the provision of legal advice in connection with any structured finance transaction into which the SPV may enter. Such costs obviously vary on a transaction-by-transaction basis depending on its complexity.

What is the procedure for setting up an SPV?

Assuming that the SPV is being set up with a view to enter into a structured finance transaction as an orphan vehicle where the voting shares will be held by a licensed trust company under the terms of a charitable trust, then the normal procedure is for the arranger or onshore lawyer to contact Maples and Calder or another incorporator in the Cayman Islands with the request to incorporate. Subject to the usual know-your-customer and due diligence checks, the only information required to incorporate the SPV (assuming standard constitutive documents) is the name of the company. In due course shares of the SPV will be transfered to the local trust company which is going to act as share trustee, directors of the SPV provided by such trust company will be appointed and the necessary trust and adminstration documentation will be put in place prior to or simultaneously with, the entry into the relevant structured finance transaction. No regulatory approvals are required to set up an SPV.

Is the SPV subject to taxation?

No taxes are imposed in the Cayman Islands upon an SPV. There are no forms of corporation, income or capital taxation whatsoever whether direct (on the SPV or holders of securities issued by the SPV) or indirect (by way of withholding on payments made by the SPV).

As mentioned previously, an exempted company is entitled to receive an undertaking from the government that no law enacted in the Cayman Islands imposing any tax of any nature (other than stamp duty) shall apply to the company for a period of up to 20 years at the first instance, but usually renewable for a further 10 years upon expiry.

Minimal stamp duty may be payable on documents executed or brought into the Cayman Islands but typically a transaction would not require this.

Are there any exchange controls?

There are no foreign exchange controls in the Cayman Islands.

Are SPVs subject to regulation?

There are no restrictions or regulatory requirements applicable to an SPV lending, borrowing or issuing debt securities (none of these activities, for example, constitute banking business requiring the SPV to be licensed as a bank), except with certain insurance related products or where the SPV is conducting securities investment business (broadly defined along the same lines as regulated activities under the UK's Financial Services and Markets Act 2000 although with wider exemptions such that a structured finance SPV is unlikely to be required to be regulated with respect to the carrying on of securities investment business). Generally most credit derivative transactions are structured so that they do not fall within the definition of insurance business requiring regulation.

Do the Cayman Islands have in place internationally compliant systems for dealing with money laundering and tax evasion?

The Cayman Islands do have in place internationally compliant anti-money laundering legislation and have committed

through the OECD to enter into tax information exchange agreements on a bilateral basis with OECD members aimed at eliminating criminal tax evasion.

In addition, the Cayman Islands have recently committed to further assist international efforts aimed at eliminating tax evasion by committing to automatic exchange of information with EU member states by implementing similar measures to the EU Savings Directive.

Can securities issued by an SPV be listed locally on a stock exchange?

Yes, the Cayman Islands Stock Exchange (CSX) is one of the fastest growing international stock exchanges and is considered by many to be the leading offshore stock exchange. The CSX's listing rules have been designed specifically to facilitate the listing of asset-backed securities, eurobonds and depositary receipts. In US style collateralized bond obligations the preference shares in the SPVs have also been listed and the CSX has developed rules specifically to facilitate this and the listing of other equity products.

The CSX is an associate member of the International Organization of Securities Commissions (Iosco) and has recently been designated as a recognized stock exchange by the Board of the UK Inland Revenue. As a result debt securities listed on the CSX can satisfy the Quoted Eurobond exemption which allows payments by a

UK paying agent to be made gross without deduction of UK withholding tax. Securities listed on the CSX are also recognized as qualifying investments for PEP and ISA savings purposes and UK pension schemes can hold securities listed on the CSX.

More information on the CSX can be found at its website (www.csx.com.ky) which includes an electronic copy of the listing rules.

Are the Cayman Islands politically stable?

The Cayman Islands are a British Overseas Territory and as such are the responsibility of the British government in London. However, for all practical purposes they are governed under a constitution that gives executive and legislative power to a governor, an Executive Cabinet and a Legislative Assembly. The Cayman Islands therefore enjoy a large measure of self-government. The Cayman Islands enjoy stable government and there is no desire for independence from Britain. The Cayman Islands have a rating of Aa3 from Moody's.

Do the Cayman Islands have a well-developed legal system?

The substantive law of the Cayman Islands is based on English common law with the addition of local statutes that have in many respects modified and modernized the common law. The Cayman Islands have a sound legal and judicial system which is constantly being upgraded to meet the demands of the financial industry.

Do the Cayman Islands have a pool of experienced financial and legal professionals?

This is one of Cayman's biggest strengths. In legal, accounting and financial services, the Cayman Islands have a large and experienced pool of professionals, many of whom have been trained in and who have practised in the world's leading onshore financial centres.

About the authors

Alasdair Robertson

Maples and Calder

After graduating from Edinburgh University, Alasdair trained and then practiced at Clifford Chance in the debt and equity capital markets group in both London and Hong Kong before joining Maples and Calder Asia in Hong Kong. Alasdair relocated to the Cayman office of Maples and Calder in 2001.

 Alasdair specializes in the areas of corporate securities, in particular CDOs and other structured finance transactions as well as doing regulatory related work. He is a member of the Law Societies of England and Wales, Scotland and the Cayman Islands and is admitted as a solicitor in Hong Kong.

Telephone: (345) 814 5345
Email: alasdair.robertson@maplesandcalder.com

Rebecca Steller

Maples and Calder

Rebecca joined Linklaters after graduating from Oxford University. She worked in their London and New York offices, predominantly specializing in capital markets. She joined Maples and Calder in 1994 and became a partner in 1999.

Rebecca specializes in capital markets and structured finance transactions, banking and joint ventures. She is a member of the Cayman Islands Law Society. 

Telephone: (345) 814 5333
Email: rebecca.steller@maplesandcalder.com