The Cayman Islands, located in the western Caribbean, have
become the preferred offshore jurisdiction of most of the
world's leading financial institutions for structuring
international financial transactions of all types.
There are over 3,200 regulated open-ended mutual funds
registered in the Cayman Islands. The Cayman Islands is also
domicile to many more hedge funds, private equity, venture
capital and other closed-ended funds, which do not need to be
registered. These funds can be structured as companies, limited
partnerships or unit trusts, all of which may have their shares
or units redeemed. Open-ended companies, unit trusts or
partnerships established to operate as investment or mutual
funds with more than fifteen investors are regulated. Such an
entity must either be specifically licensed as a mutual fund or
appoint a licensed mutual fund administrator to provide its
principal office, unless there is a minimum investment per
investor of $50,000 or its equity interests are quoted on a
recognized stock exchange in which case a straightforward
filing can be made. The Cayman Islands is particularly popular
among hedge and institutional fund promoters since registration
under the Mutual Funds Law can be effected in a short time
frame and there is no legislation which dictates investment
policies or portfolio requirements. Cayman entities are also
used for funds marketed to retail investors. Persons providing
mutual fund administration or management services are required
to obtain a licence under the Mutual Funds Law or the Companies
Management Law. Many of the banks and trust companies, together
with specialist mutual fund administrators, located in the
Cayman Islands offer a full range of management services to
Structured finance and capital markets
Cayman Islands companies, partnerships and trusts are used
for all types of on and off balance sheet capital markets and
structured finance transactions, including securitizations,
CBO, CLO and CDO transactions, note and bond issues, swaps and
derivative transactions, repackagings, commercial paper and
medium term note programmes. Cayman Islands issuers regularly
obtain triple AAA ratings from all the major rating agencies.
Local trust companies commonly hold the shares in special
purpose bankruptcy remote vehicles on the terms of charitable
trusts and provide independent boards of directors.
Companies, joint ventures, e-business and IPO entities
There are over 53,000 exempted and ordinary non-resident
companies registered in the Cayman Islands participating in all
manner of international cross border trade and business
including internet-related and e-business. The Cayman Islands
has recognized the development of e-commerce and implemented
the Electronics Transaction Law, 2000 (ETL). This legislation
is modeled after the United Nations Commission on International
Trade Law (UNCITRAL) Model Law and the draft UNCITRAL Uniform
Rules on Electronic Signatures. Under the ETL legal recognition
is given, for example, to electronic writing, retention of
documents in electronic form, electronic contracts (which rank
the same as paper based transactions) and electronic
signatures. The governor-in-council is empowered to enforce
regulations that protect the privacy of data.
The Cayman Islands is the one of world's largest banking
centres. 43 of the world's 50 leading banks are present in the
Islands. Bank subsidiaries and branches established in the
Cayman Islands may undertake all manner of banking activity
including commercial lending, capital raising and funding
activities, writing derivatives and medium-term note and
commercial paper programmes. Banks may not transact any banking
business without obtaining a licence under the Banks and Trust
Companies Law. An A licence permits unrestricted domestic and
offshore business; a B licence permits only offshore business.
The holder of a B licence may have an office in the Islands and
conduct business with other licensees and offshore companies
but, except in limited circumstances, may not do business with
residents of the Islands.
The Cayman Islands has become popular for the establishment
of insurance and captive insurance companies for writing
insurance, reinsurance, catastrophe bonds and other specialist
insurance and annuity products. There are more than 500 captive
and other insurance companies licensed in the Cayman Islands.
All persons carrying on or desiring to carry on insurance
(including reinsurance) business in or from within the Cayman
Islands must be licensed under the Insurance Law; in addition,
provision is made for the licensing of insurance agents and
brokers and those providing insurance and underwriting
expertise. Persons intending to engage in insurance business
from within the Cayman Islands but not to engage in domestic
business may obtain a Class B licence. A restricted Class B
licence is designed for the insurer formed essentially as a
single parent "captive" or as a "mutual" by a common interest
group to write insurance, other than domestic insurance, only
for its parent or members or such other persons as may be
approved by the Cayman Islands authorities. Class B insurers
may be formed as segregated portfolio companies and segregate
their assets and liabilities by individual portfolios of
Commercial aircraft financing
Cayman Islands entities are involved in numerous commercial
aircraft financing and operating lease transactions, acting as
either owners or lessors of aircraft operated around the world.
In addition aircraft and aircraft mortgages can be registered
pursuant to the Air Navigation (Overseas Territories) Order
1989 as amended.
Cayman Islands companies are often involved in commercial
ship financing transactions. There is a Category 1 ship
registry in George Town for commercial and private shipping and
yachts. Parts of the Merchant Shipping Acts 1894 to1988 of the
UK have been extended to and apply in the Cayman Islands. It is
usually straightforward under Cayman Islands law for any ship
owner to establish the necessary ownership or chartering
structure to qualify for registration of a ship in the Cayman
Trustee and company management services
Licensed Cayman Islands companies provide a full range of
trust and company management services.
Structuring products in the Cayman Islands
Financial institutions choose the Cayman Islands for
structuring their investment and structured finance products
for many of the following reasons:
Low country risk
The Cayman Islands is a British Overseas Territory and
benefit from close ties with the UK. However, the Cayman
Islands Legislative Assembly is responsible for passing its own
laws and the British government would only intervene in
There are no taxes or foreign exchange controls to disrupt
cashflows through Cayman Islands vehicles. In fact, there is no
income tax, capital or wealth tax, capital gains tax,
inheritance tax or estate duty, gift tax, withholding tax,
undistributed profits tax, business tax, corporation tax,
payroll tax, immovable property tax, sales tax, turnover tax,
transfer tax (except where the transfer is chargeable to stamp
duty) and taxes on liquidation. Cayman entities can obtain a
tax undertaking from the Cayman Islands government that no
taxation introduced for a period of 20 years (or in certain
circumstances, for example, an issue of long dated or perpetual
bonds, up to 30 years or 50 years for an exempted limited
partnership or unit trust) will be applicable to the entity or
the holders of its securities.
Credible legal system
Cayman Islands law is based on English common law with the
addition of local statutes which have in many respects changed
and modernized the common law and are constantly being upgraded
to meet the demands of the finance industry. The courts system
in the Cayman Islands and its practice and procedures are based
on English law. Civil cases are tried by the Grand Court, which
is presided over by the Chief Justice, with Grand Court Judges
permanently resident in the Islands. Appeals lie from the Grand
Court to the Cayman Islands Court of Appeal, which sits in
Grand Cayman, and from there to the Judicial Committee of the
Privy Council in England. A Cayman Islands court will give
effect to contracts governed by foreign laws.
All the leading investment banks and fund promoters are
regular users of the Cayman Islands for structuring financial
products and investors are familiar with investing in Cayman
Islands entities. Cayman Islands legal opinions are regularly
accepted by the major institutions and rating agencies. Many of
the industry organizations such as the ISDA, and various
bankers associations all recognize that special purpose
companies (SPCs) established in the Cayman Islands are
acceptable counterparties in derivative transactions. Cayman
Islands legal opinions have been produced for various Bankers
Associations, ISDA, ISMA and other industry organizations
relating to swaps, credit support annexes, stock lending
agreements, repurchase agreements and others.
The Cayman Islands Monetary Authority (CIMA) is responsible
for the regulation of the financial industry and supervises
banks, trust companies, insurance companies, mutual funds and
company management. There is no specific transaction regulation
of debt issues or derivative transactions as such. CIMA
regulates open-ended mutual funds under the Mutual Funds Law,
which provides various licensing and registration options which
make the process as user friendly as possible. Registration can
be effected in a short time frame and there is no legislation
which dictates investment policies or portfolio requirements.
Unlike some other offshore jurisdictions, however, the Cayman
Islands does not insist on the use of local service providers
eg administrators, paying agents, custodians etc. There are no
restrictions on an SPC in the Cayman Islands lending, borrowing
or issuing debt securities (none of these activities, for
example, constitute banking business requiring the SPC to be
licensed as a bank). The Cayman Islands follows the approach of
most other jurisdictions, eg England and Wales, in not
regarding instruments such as credit linked bonds or credit
default swaps as insurance products which would require the
Cayman Islands company to obtain an insurance licence. For
licensed activities, CIMA applies international standards of
regulation, for example the principles applied for banking
supervision by the Basle Committee on Banking Supervision.
The Cayman Islands have service providers and professional
advisers which can provide a complete range of financial
services. The Cayman Islands Stock Exchange (CSX), which opened
in 1997, was admitted to the London Stock Exchange's list of
approved organizations and today lists mutual funds and debt
securities with a total market capitalization of approximately
$36 billion. The listing process is not onerous and provides
investors with the appropriate degree of regulation and
security when making investment decisions. The CSX lists
eurobonds, derivative warrants, depositary receipts,
asset-backed or other debt securities and securities issued by
mutual funds. The CSX also provides for secondary listings of
securities which are listed on other stock exchanges designated
as the issuers primary regulatory exchange.
Since Cayman entities can be formed on the day of filing and
there are no lengthy regulation or filing procedures, products
can very quickly be brought to market. The cost of forming and
maintaining Cayman entities is competitive and usually minimal
in the context of most transactions.
Lender and rating agency requirements
Often transaction structuring will be driven by lender or
rating agency requirements. Under Cayman Islands common law it
is only in certain specific cases (English case law is
persuasive in this context) that the separate corporate
personality of an SPC will be ignored so as to allow creditors
of an SPC to proceed against its shareholders or to allow
creditors of shareholders to proceed against the SPC. Most of
these cases involve fraud.
The establishment of bankruptcy remote vehicles in the
Cayman Islands is very well established and accepted by the
rating agencies. The typical structure has the following
- the charitable trust in the Cayman Islands is a well
recognized method of having an independent person own shares
in an SPC. The trust will be established by an independent
Cayman Islands trust company;
- the same local trust company will also usually provide
directors and officers to the SPC either exclusively or in
addition to individuals who are connected with other parties
in the structured finance transaction;
- Cayman Islands law recognizes limited recourse
arrangements and non-petition covenants provided their effect
under the governing law of the document in which they are
contained is to remove any residual claim against the
- Cayman Islands law requires directors to observe certain
fiduciary duties. In the context of a structured finance
transaction this typically translates into the directors
deciding independently that the structured finance
transaction is in the best commercial interests of the SPC
itself. In this way the directors can comfortably approve the
transaction on the basis that as the transaction is limited
recourse there is effectively little risk to the SPC and, if
the SPC makes a small profit, commonly $1,000, the SPC makes
a healthy return on its share capital (which is usually only
$1,000 or less); and
- Cayman Islands entities can include features that satisfy
the rating agency's requirements, such as restrictions on
objects and powers, debt limitations, independent director,
no merger or reorganization and separateness.
The Cayman Islands does not have any system of corporate
rehabilitation, such as the English "administration" procedure
or the US Chapter 11 proceedings under the Bankruptcy Code
whereby a debtor can effectively "freeze" the rights of
creditors, including, in certain cases, the creditors rights to
enforce security interests.
Under Cayman Islands law secured creditors may usually
enforce their security in a liquidation of an SPC.
Liquidators of a Cayman Islands company cannot disclaim
onerous contracts. The contractual rights of creditors continue
to exist following a liquidation.
The fraudulent preference rules require, as a minimum, that
any disposition must be made with a view to preferring one
creditor over another before that disposition can be attacked -
it is not sufficient simply that an asset or payment was made
in circumstances which resulted in one creditor losing out.
Netting and set off arrangements are recognized by express
statutory provisions and will be enforced both pre- and
post-insolvency (assuming they are effective as a contractual
matter under the governing law of the contract in which they
Contractual subordination is recognized by express statutory
provision (assuming it is effective as a contractual matter
under the governing law of the contract).
There is no general concept of substance over legal form -
this means that heavily subordinated debt, long term and
perpetual debt, for example, would continue to be treated as
debt and therefore benefit from the favourable treatment given
to creditors, rather than being treated as equity. Similarly,
participating debt will not be regarded as equity for Cayman
Islands purposes notwithstanding that it can have most of the
economic characteristics of equity.
The list of "preferred creditors" in the Cayman Islands is
limited and, in practice, in the case of an SPC, which will
have no employees in the Cayman Islands, relates only to unpaid
The Cayman Islands allows companies to move to or move from
the Cayman Islands without triggering a disposal of assets or
requiring a novation of liabilities – this is useful
in the event that the selected jurisdiction ceases to be viable
for taxation or securities regulation reasons.
The Cayman Islands has no general system of registration of
security interests to perfect or obtain priority (although
there are registration systems in place for ships and aircraft
registered in Cayman, limited partnership interests of Cayman
exempted limited partnerships and "personal chattels" under the
Bills of Sale law). Companies are required to keep an internal
register of mortgages and charges but failure to make the
appropriate entries does not, of itself, affect the creation of
the security interest or its perfection or priority. The law
which governs the creation of the security interest, its
perfection and the priority of the secured party depends upon
the application of Cayman Islands conflict of law rules which
in general terms look to the law governing the security
agreement and the law constituting the asset over which the
security has been taken or the law of the place where the asset
subject to the security interest is situated, depending upon
the nature of the asset.
The Cayman Islands has a wide range of flexible legal
entities for use in international transactions including
exempted companies, partnerships and trusts, all of which are
based on familiar legal concepts having the following notable
- Used for all types of offshore transactions.
- Corporate entity formed under the Companies Law with
separate legal personality owned by its shareholders, which
have limited liability, and managed by its directors.
- May be incorporated on same day of filing.
- Eligible for tax exemption for up to 30 years.
- Minimal continuing requirements and no need to prepare
audited accounts unless it is a regulated entity.
- Must maintain a registered office in the Cayman
- No annual directors' or shareholders meeting required to
be held in the Cayman Islands.
- Minimum of only one director and one shareholder required
and no nationality requirements.
- No prescribed minimum issued or paid-up capital.
- Share capital may be divided into such classes f shares,
with different rights as to voting, participation in profits
and/or return of capital, as authorized by its articles of
- The Companies Law in the Cayman Islands provides
significant flexibility in allowing SPCs to issue shares,
redeem or repurchase shares and to pay dividends (for
example, an SPC can pay dividends out of any premium
subscribed for its shares), subject in most cases to an
overriding solvency test. Distributable profits may be
calculated on a much wider basis than conventional business
profits may be calculated eg for GAAP purposes.
- A partnership can be formed under the Partnership Law but
the partnership as such has no corporate identity or separate
- A corporation or an individual may be a partner.
- Any ordinary or limited partnership should preferably be
created by written agreement or by deed. In the case of an
ordinary partnership no filing or registration is
Exempted limited partnerships (ELPs)
- ELPs are often used for investment, private equity and
venture capital funds and CDO transactions.
- Exempted limited partnerships are partnerships registered
under the Exempted Limited Partnership Law as a partnership
of one or more partners whose liability for the obligations
of the firm is unlimited (the general partners) together with
one or more partners whose liability is limited in amount
(the limited partners).
- Only general partners may take part in the management of
the affairs of the ELP.
- To establish an exempted limited partnership a general
partner must file a signed statement with the Registrar of
Limited Partnerships containing certain basic details, which
is open to public inspection.
- At least one of the general partners must be a Cayman
registered entity or a registered foreign company.
- The general partner must maintain at the registered
office a register of limited partnership interests and of
mortgages thereof, both of which are public documents.
- Property may be held in the name of, and loans may be
made to, the partnership.
- A limited partner may, with the consent of the general
partner, transfer or mortgage his interest.
- A limited partner may receive a return of his
contribution subject to the partnership being solvent.
- An exempted limited partnership may obtain a 50 year
undertaking against the future imposition of taxation.
- Used for traditional trust funds, unit trust funds and
structured finance transactions.
- A trust is a fiduciary relationship with respect to
property, imposing on the trustee an obligation to deal with
the trust property for the benefit of specified persons and
as such has no corporate identity or separate legal
- The trust law of the Cayman Islands is derived from the
English law of trusts but is subject to somewhat different
statutory modifications as referred to below.
- The Fraudulent Dispositions Law strengthens the integrity
of a Cayman Islands trust and, in the absence of a Cayman
Islands bankruptcy of the settlor, may protect it against
successful attack by future creditors of the settlor.
- The Perpetuities Law abolished the old common law rule
which invalidated any disposition unless it vested within a
period of lives-in-being plus 21 years and introduced a new
perpetuity period of 150 years. The Perpetuities Law also
introduced a new "wait and see" rule whereby a disposition
(or power) will only fail if it falls outside the new
- Under the Special Trusts (Alternative Regime) Law (STAR),
pure purpose and mixed purpose/private trusts are now
permitted. Under STAR, a third party enforcer must be
appointed. Charitable purpose and private trusts may have
- The Trusts Law provides for the registration of exempted
trusts. All the trust documents must be delivered to the
Registrar of Trusts, who issues a certificate of
registration. A trustee of an exempted trust may obtain a
50-year undertaking against the future imposition of taxation
in respect of trust property or income.
Anti-money laundering legislation
As part of the global fight against money laundering, the
Cayman Islands has adopted comprehensive anti-money laundering
legislation. The Proceeds of Criminal Conduct Law creates a
number of offences - money-laundering, assisting in
money-laundering, receiving the proceeds of another's criminal
conduct, failure to report a suspicious transaction and
tipping-off. New Regulations issued under the Proceeds of
Criminal Conduct Law have also imposed mandatory "know your
client", record keeping and internal control and reporting
"Harmful tax competition" initiative
In response to the OECD's "harmful tax competition"
initiative, the Cayman Islands government gave an "Advance
Commitment" to the OECD and therefore did not appear on the
OECD official list of "tax havens" which was published in June
2000. It was established that no change would be made to the
zero tax regime in the Cayman Islands. The OECD has confirmed
that the Cayman Islands system of no "direct taxes" is not in
itself considered "harmful" and the Cayman Islands government
is committed to its continuation.
The Cayman Islands government undertook in its commitment to
the OECD that exchange of information for criminal tax matters
shall become effective for the first tax year after December 31
2003, with exchange of information for civil and administrative
tax matters to become effective for the first tax year after
December 31 2005. It is not anticipated that these changes will
significantly affect the international market for Cayman
Islands financial services.
Maples and Calder
PO Box 309
South Church Street
Tel: +1 345 949 8066
Fax: +1 345 949 8080