The Cayman Islands is a jurisdiction recognised worldwide as an international financial centre of the highest calibre. Leading financial institutions, Fortune 500 companies and private and public businesses from across the globe have chosen the Cayman Islands as their jurisdiction of choice for many reasons, including the following:
As a British Overseas Territory, the Cayman Islands has a familiar and reliable legal system based on English common law, supplemented by a modern and commercial statutory framework. With a sophisticated and well developed court system, a history of stable government and a deep and well respected bench of jurists very familiar with complex commercial cases, the Cayman Islands provides a secure venue for high-stakes commercial litigation. The ultimate appellate court for Cayman Islands matters is the Judicial Committee of the Privy Council in London.
There are no restrictions on the types of investment funds that can be established in the Cayman Islands. The types most commonly established include:
Investment funds are classified as either open-ended (ie, voluntary redemptions/withdrawals permitted) or closed-ended (ie, voluntary redemptions/withdrawals not permitted).
The Cayman Islands offer a wide range of investment vehicles for the establishment of investment fund structures. These include:
The type of investment vehicle utilised for a fund structure depends on the needs of fund promoters and proposed investors. When deciding on what type of vehicle and structure to use, tax considerations typically factor into the analysis. Cultural factors are also often taken into account, as it is usually desirable to choose a vehicle or structure with which potential investors are already familiar and therefore comfortable investing in.
Typical structures include the following:
Open-ended funds are regulated pursuant to the Mutual Funds Act and closed-ended funds are regulated pursuant to the Private Funds Act.
The regulatory authority in the Cayman Islands is the Cayman Islands Monetary Authority (CIMA).
Mutual Funds Act (MFA)
A “mutual fund” is defined as an investment vehicle that issues “equity interests” allowing participation by a pool of investors in the profits or gains from such vehicle’s investments.
An “equity interest” means a share in a company, a unit in a unit trust, an interest in a partnership or any other representation of an interest that carries an entitlement to participate in profits or gains of such entity and which is redeemable or repurchasable at the option of the investor.
Therefore, to trigger the MFA, an investment vehicle will need to permit investors to withdraw/redeem at their option and there must be a pooling of investor funds.
There are broadly four categories of mutual funds under the MFA:
An additional sub-category is that of master funds. A master fund must have one or more regulated feeder funds (ie, one of the four categories listed above) either directly or through an intermediary entity established to invest in it.
Limited investor funds
A limited investor fund is a mutual fund with the following characteristics:
Limited investor funds are not required to have a prescribed minimum initial investment amount nor is there any requirement to have an offering document or file one with CIMA, but limited investor funds are required to register with CIMA by:
All limited investor funds must have their audited financial statements prepared or signed off by an approved Cayman Islands auditor and filed with CIMA within six months of their financial year end.
Registered funds
Registered funds are the most common form of mutual funds in the Cayman Islands. For a registered mutual fund, the initial minimum subscription per investor must be at least USD100,000 (or equivalent) or the equity interests must be listed on an approved stock exchange (including an over-the-counter market).
A registered mutual fund is not required to be licensed. Instead, it is only required to register with CIMA which involves the filing of its offering document and certain prescribed details relating to the offering of its equity interests with CIMA.
Fees are payable to CIMA on registration and annually thereafter.
All registered mutual funds must appoint an administrator and have their audited financial statements prepared or signed off by an approved Cayman Islands auditor and filed with CIMA within six months of their financial year end.
Administered funds
A mutual fund will be an administered mutual fund if its principal office in the Cayman Islands is provided by a Cayman Islands licensed mutual fund administrator. No minimum initial investment amount is prescribed. The registration process for an administered mutual fund is the same as that for a registered mutual fund, except that it must file with CIMA an additional form which is signed by the Cayman Islands’ licensed mutual fund administrator.
Licensed funds (also known as “retail funds”)
Licensed mutual funds are the rarest form of mutual funds regulated under the MFA.
Unless a mutual fund falls within one of the other categories described above, it must obtain a mutual fund licence, which involves a prior approval process requiring CIMA to be satisfied that the promoter is of sound reputation and that the administration of the fund will be undertaken by persons with sufficient expertise and who are fit and proper to act in their respective positions.
All licensed mutual funds must have a registered office in the Cayman Islands or, in the case of a unit trust, have a locally licensed trustee.
A limited investor fund, a registered mutual fund or an administered mutual fund can voluntarily choose to be licensed.
Master funds
Any Cayman Islands investment vehicle which issues equity interests and has a feeder fund regulated by CIMA investing in it must register as a master fund. The registration requirements are less onerous and do not require a master fund to file an offering document.
Private Funds Act (PFA)
A “private fund” is defined as a company, unit trust or partnership that offers or issues or has issued investment interests, the purpose or effect of which is the pooling of investor funds with the aim of enabling investors to receive profit or gains from such entity’s acquisition, holding, management or disposal of investments, where: (a) the holders of investment interests do not have day-to-day control over the acquisition, holding, management or disposal of the investments and (b) the investments are managed as a whole by or on behalf of the operator of the private fund, directly or indirectly.
As the definition of “private fund” is so broad, the PFA includes a list of “non-fund arrangements” that would not be considered private funds and are therefore out of scope of the PFA.
A private fund must, amongst other things:
MFA
Registered funds, administered funds and licensed funds are required to file an offering document with CIMA. The MFA requires such offering document to describe the equity interests in all material respects and to contain such other information as is necessary to enable a prospective investor to make an informed decision as to whether or not to subscribe for such equity interests.
In addition, CIMA has issued a Rule on Contents of Offering Documents – Regulated Mutual Funds which sets out the information that must be included in offering documents issued by mutual funds. Such information includes details regarding:
PFA
The PFA does not require a private fund to prepare an offering document. However, CIMA does require, at a minimum, a summary of terms to be filed at the time of registration. Any offering document, marketing materials or summary of terms used by a private fund must comply with CIMA’s Rule on Contents of Marketing Material – Registered Private Funds. The information required under this Rule is similar to the information required under Rule on Contents of Offering Documents – Regulated Mutual Funds which is summarised above.
Any offering documents, marketing materials or summary of terms filed with CIMA are not publicly available.
The Cayman Islands levies no capital gains, income, profits, corporation or withholding taxes (whether on the investment fund or its investors or managers).
If the investment fund is incorporated as an exempted company it can obtain a renewable undertaking from the Cayman Islands Government that it will remain tax-free for up to 30 years and in the case of a limited liability company, exempted trust or exempted limited partnership the period is up to 50 years.
There are no restrictions on or special rules that apply to the origination of loans by Cayman Islands funds.
There are no restrictions on the types of assets in which a Cayman Islands fund may invest, including digital assets, consumer credit and other loan portfolios, cannabis/cannabis-related investments and litigation funding.
However, there are certain Cayman Islands laws that would need to be considered when structuring a Cayman Islands fund to ensure compliance in all respects. These include:
Digital Assets
A fund could potentially trigger the VASP Act requiring registration or licensing under such Act if it provides virtual asset services which fall outside traditional fund activities. “Virtual asset services” include the issuance of virtual assets, custody of virtual assets or the transfer/exchange of virtual assets, for or on behalf of others.
The VASP Act defines virtual assets as “a digital representation of value that can be digitally traded or transferred and can be used for payment or investment purposes but does not include a digital representation of fiat currencies”. This wide definition captures all cryptocurrencies, security tokens, utility tokens or other digital assets that are tradeable or transferable, with the exception of digital fiat currencies.
Cannabis
Under the Misuse of Drugs Act, it is an offence to have dealings in controlled drugs (including cannabis). The Cayman Islands has made advances in permitting the use of medical cannabis where prescribed by a medical doctor, but it remains an offence to cultivate, sell, distribute or possess cannabis for recreational and other purposes.
Under the Proceeds of Crime Act, a Cayman Islands entity risks committing an offence if it deals with or acquires the proceeds of criminal conduct (which would include dealings with cannabis that amount to an offence under the Misuse of Drugs Act). However, this may not be an offence under Cayman Islands law where dealings with the cannabis occurred outside the Cayman Islands and such dealings are not an offence under the laws of the country where the dealings occurred.
Litigation Funding
The Private Funding of Legal Services Act is a relatively new statute and came into force in May 2021. This Act introduced a statutory framework for conditional fee agreements, contingency fee agreements and litigation funding agreements. Such statutory framework would need to be considered for any Cayman Islands law governed fee/funding agreements to be entered into by a litigation funding fund.
It is common to use subsidiaries as holding vehicles to segregate assets and also as blockers for tax purposes.
There is no requirement for a Cayman Islands fund to have a Cayman Islands investment manager.
All Cayman Islands investment funds are required to maintain a registered office in the Cayman Islands.
Corporate funds are not required to have local directors, however, a fund structured using an exempted limited partnership is required to have at least one “qualifying” general partner that is a person or entity resident or incorporated or registered in the Cayman Islands. Therefore an exempted limited partnership must have a general partner that is either:
Cayman Islands funds are not required to maintain any business premises in the Cayman Islands (other than the registered office noted above), hire local employees or satisfy any other substance requirements.
Each individual director of a mutual fund regulated under the MFA must register with CIMA under the Directors Registration and Licensing Act and update their registration annually. Professional directors (a person appointed to 20 or more covered entities) and corporate directors (a body corporate appointed as a director for a covered entity) are required to be licensed under such Act. The Directors Registration and Licensing Act does not apply to:
Cayman Islands funds are not required to have any service providers located in the Cayman Islands except as follows:
Non-local service providers, including administrators, custodians and investment managers, will not be subject to regulation/registration requirements as long as they do not establish a place of business in the Cayman Islands and do not conduct business from or within the Cayman Islands.
Although no changes are currently anticipated, the Cayman Islands is committed to remaining the preeminent jurisdiction for offshore funds and to achieving the highest possible level of compliance with international requirements and market practice. Therefore, we expect Cayman Islands laws and regulations to keep evolving in response to such requirements and practices.
There is no requirement for a Cayman Islands fund to have a Cayman Islands investment manager and therefore investment managers for Cayman Islands funds are not usually located in the Cayman Islands.
Investment managers for Cayman Islands funds are based across the globe, including in North America, Europe, Asia and Latin America.
The Cayman Islands offer a wide range of vehicles for the establishment of investment managers, and while companies are the most popular, the type of vehicle utilised will very much depend on familiarity, preference and onshore tax considerations.
The principal Cayman Islands legislation applicable to alternative fund managers is the Securities Investment Business Act (SIBA). SIBA provides for the licensing and control of persons engaged in a securities investment business activity (which would typically include activity undertaken by investment managers) in or from the Cayman Islands.
SIBA regulates the dealing in, arranging, managing or advising on securities which are broadly defined and include shares, futures, options, swaps and contracts for differences. Anyone carrying on “securities investment business” must apply to CIMA for a license unless they can rely on an exemption.
Exemption from licensing is available if services are to be provided by a Cayman Islands investment manager solely to funds falling within the following categories of persons:
For the above listed exemptions, although a license is not required, there is a requirement to register with CIMA and update such registration annually. Cayman Islands funds managers are also required to comply with anti-money laundering obligations and, unless an exemption applies, also FATCA/CRS obligations under Cayman Islands law.
There are no current registration/licensing requirements for parties conducting securities investment business who are not Cayman Islands entities or who are not conducting securities investment business from an established place of business in the Cayman Islands.
Please see 2.5 Tax Regime for Funds.
There are no rules regarding permanent establishments or other taxable presences in the Cayman Islands. Please also see 2.5 Tax Regime for Funds.
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Please see 2.5 Tax Regime for Funds.
Managers can outsource investment functions or business operations.
CIMA has issued a Statement of Guidance setting out its minimum expectations on the outsourcing of material functions or activities and outsourcing arrangements for SIBA registered/licensed managers and certain other CIMA regulated entities. Some of the key provisions include the requirement to:
If a Cayman Islands alternative fund manager provides discretionary fund management services to an investment fund, economic substance requirements may apply pursuant to the International Tax Co-operation (Economic Substance) Act (ES Act).
Economic substance requirements are satisfied by an entity if:
The ES Act permits the outsourcing of activities to service providers in the Cayman Islands and such outsourcing could aid in satisfying some of the economic substance requirements. See also 3.7 Outsourcing of Investment Functions/Business Operations.
Economic substance requirements do not apply to:
The satisfaction of the economic substance requirements will be a question of fact. There is no one-size-fits-all approach and much depends on the size and scope of the business (both in the Cayman Islands and in other locations) and the expected gross income in the Cayman Islands.
Under Cayman Islands law, there are no regulatory or investor approvals required in connection with a merger, sale, restructuring or similar transaction involving a SIBA registered fund manager or its parent company. Notice of any such change has to be provided to CIMA within 21 days.
However, if the fund manager is licensed with CIMA, then CIMA’s prior approval is required for any transactions involving a change of control of the licensed fund manager.
Please see 2.12 Anticipated Changes.
Due to the reasons set out in 1.1 General Overview of Jurisdiction, the Cayman Islands is the leading jurisdiction for investment funds with around 29,000 regulated funds as at Q2 of 2023. Generally, there are no special requirements or restrictions with respect to investors investing into Cayman Islands funds and as a result Cayman Islands funds attract investors from around the world. However, due to various regulatory and disclosure requirements in the USA, US taxable investors are the least common for Cayman funds.
Side letters are permitted and are widely used by Cayman Islands funds. For a side letter to be valid and enforceable, the fund’s constitutional documents must allow it and the scope of the side letter must fall within the side letter disclosure provisions in the offering/constitutional documents and, for companies, must not modify existing shareholder rights enshrined in the fund’s constitutional documents.
CIMA’s Rules on the Contents of Offering Documents – Regulated Mutual Funds and the Contents of Marketing Material – Registered Private Funds require offering documents/marketing materials to include a statement confirming the power to enter into side letters that bind the fund and that contain any terms the effect of which provide an investor with more favourable treatment than other holders of the same class of interest enhancing that investor’s ability either:
Non-Cayman Islands Funds
A non-Cayman Islands fund is permitted to market without restrictions in the Cayman Islands provided the offering is limited generally to the following types of persons/entities:
If offering to persons/entities who are not Permitted Offerees, the non-Cayman Islands fund will be required to either:
Cayman Islands Funds
The investment vehicles (eg, exempted companies, exempted limited partnerships or limited liability companies) commonly used for structuring Cayman Islands funds are not permitted to undertake business with persons in the Cayman Islands except for the furtherance of the business of the fund carried on exterior to the Cayman Islands. Consequently, Cayman funds, unless they are listed on the Cayman stock exchange, are not permitted to offer interests to the “public in the Cayman Islands”. Permitted Offerees are not included in the definition of “public in the Cayman Islands” and such persons are permitted to invest in Cayman Islands funds.
Any firm marketing or advertising funds from or into the Cayman Islands, depending on the nature of the activities, might trigger SIBA. Please see 3.3 Regulatory Regime for Managers.
Although there are no required regulatory filings in respect of marketing, CIMA has issued a Marketing Policy applicable to licensed funds only. Such policy requires licensed funds to refrain from the use of aggressive marketing policies based exclusively or primarily on confidentiality, or secrecy in order to attract business. Licensed funds are also expected to demonstrate a high level of responsibility in the marketing of all of their services.
The use of placement agents is permitted and common for Cayman Islands funds.
Acting as a placement agent in or from the Cayman Islands will generally constitute “securities investment business” and will trigger SIBA requirements. Please see 3.3 Regulatory Regime for Managers.
There are no restrictions on or special rules that apply to compensation of a manager’s personnel for sales efforts.
Please see 2.5 Tax Regime for Funds.
The Cayman Islands do not have any double tax treaties. The Cayman Islands is tax neutral and therefore does not require tax treaties as there is no tax conflict and no risk of double taxation.
The Cayman Islands is signatory to the multilateral competent authority agreement to implement the Organisation for Economic Cooperation and Development (OECD) Standard for Automatic Exchange of Financial Account Information – Common Reporting Standard (the CRS) and an inter-governmental agreement with the United States to improve international tax compliance and to implement the Foreign Account Tax Compliance Act (the US IGA). The Cayman Islands has enacted laws and regulations to give effect to the CRS and the US IGA (AEOI Laws) and published guidance notes on the application of the AEOI Laws in the Cayman Islands.
The AEOI Laws have established a financial account information reporting regime in the Cayman Islands. All Cayman Islands entities classified as reporting financial institutions under the AEOI Laws must comply with registration, due diligence and annual reporting obligations, including among other things the requirements to:
The TIA transmits reported information annually to the relevant overseas authorities.
Most Cayman Islands funds will be classified as reporting financial institutions for the purposes of the AEOI Laws and will be required to comply with the registration, due diligence and annual reporting obligations under the Cayman Islands AEOI regime. Cayman Islands funds are permitted to delegate some or all of their responsibilities under the AEOI Laws to third party service providers.
Cayman Islands funds are subject to the Cayman Islands Proceeds of Crime Act, the Misuse of Drugs Act, the Terrorism Act, the Proliferation Financing (Prohibition) Act, the Anti-Money Laundering Regulations and the Guidance Notes on the Prevention and Detection of Money Laundering, Terrorist Financing and Proliferation Financing in the Cayman Islands issued by CIMA and targeted financial sanctions (collectively, the Cayman AML Regulations).
To ensure compliance with Cayman AML Regulations, Cayman Islands funds are required to adopt and maintain appropriate policies and procedures and will require investors to verify their identity, the identity of their beneficial owners/controllers (where applicable), their address and source of funds.
Cayman Islands funds are also required to appoint individuals in the position of money laundering reporting officer, deputy money laundering reporting officer and anti-money laundering compliance officer.
Where permitted, and subject to certain conditions, Cayman Islands funds may rely on a suitable person for the maintenance of its anti-money laundering, anti-terrorism and anti-proliferation financing policies and procedures or otherwise delegate such functions to a suitable person.
CIMA has a discretionary power to impose substantial administrative fines upon a fund in connection with any breaches of prescribed provisions of the Anti-Money Laundering Regulations, and upon any operator or officer of the fund who either consented to or connived in the breach, or to whose neglect the breach is proved to be attributable.
Investors in funds increasingly require and demand data privacy. As obligations to collect personal data increase with new international data sharing regimes, fund managers need to pay close attention to data protection issues. These international obligations, together with cybersecurity concerns and innovative technology deployments are making the regulation of personal data more complex than ever before.
The Data Protection Act (DPA) regulates the processing of all personal data in the Cayman Islands. Drafted around a set of internationally recognised privacy principles, the DPA provides a framework of rights and duties designed to give individuals greater control over their personal data. Importantly, the DPA supports a growing expectation from international businesses and their clients that organisations operating in offshore jurisdictions have in place comprehensive data protection compliance requirements backed up by robust data privacy legislation.
Personal data is defined widely to include any data relating to a living individual. The average fund generates and retains a huge amount of personal data. Fund managers may hold proprietary research and investment strategies, high value email and contact lists and net worth information for individuals. Under the DPA all personal data held by the fund must be processed fairly and lawfully and used for a legitimate purpose that has been notified to the data subject in advance. Personal data holdings should not be excessive in relation to the purposes for which they are collected and should be securely purged once those purposes have been fulfilled. If personal data is processed for any new purposes, this processing can only be undertaken if fresh consent is obtained. Data subjects must also be informed of any countries or territories outside the Cayman Islands to which their personal data may be transferred. Recommended best practice is for this information to be set out in a separate privacy notice which can be provided with the offering document and subscription documents.
Contractual provisions should be put in place between the fund (as the data controller) and the third party service provider (as data processor) to ensure that any personal data is processed only for authorised purposes, that all data is stored and transmitted securely and that disaster recovery practices are in place in the event of a data breach. Use of subcontractors by the service provider should be prohibited without the prior approval of the fund.
Please see 2.12 Anticipated Changes.
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Grand Cayman KY1-1104
Cayman Islands
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