One of the most attractive elements of the Cayman Islands, role as a premier tax neutral global financial hub is the cooperation between government and industry to support a modern legislative and regulatory regime and market innovation. One of the best examples of that cooperation has been the 2020 Private Funds Act, which enhanced oversight of funds while offering investors greater transparency and confidence. That public-private collaboration is among the key reasons funds are domiciled in the Cayman Islands and play a critical role in supporting infrastructure improvement, economic growth and expanded tax revenue around the world.
The Cayman Islands has created this government-industry cooperation and works actively to maintain it. It has enabled the kind of advances that have propelled the jurisdiction to global leadership in financial services – especially in Collective Investment Vehicles like private funds. By continuing to ensure Cayman’s legal and regulatory regime meet global standards while supporting sound investment and business practices in the funds sector, both the Cayman Islands Government and Cayman Islands financial services industry are preserving the foundation for the jurisdiction’s success and generating benefits for investors and countries around the world.
In 2020, the Cayman Islands Government introduced new legislation to modernise regulation of close-ended (“private”) funds. The initiative was developed through a consultative process that reflects the cooperation described above. Professionals from the funds industry as well as representatives from service providers like law, accounting and audit firms, funds administrators and allied industry associations, actively participated in the legislation’s development. The common objective was to strengthen the Cayman Islands’ role as the world’s leading jurisdiction for investment funds while improving important regulatory standards like anti-money laundering controls.
According the latest statistics by the Cayman Islands Monetary Authority (CIMA), more than 14,600 private funds are now registered for operations within the Cayman Islands. In addition to requiring private funds to register, they also now must adhere to a range of investor-friendly requirements, including: appropriate processes for the valuation of a fund’s assets; annual audits by a CIMA-approved auditor; and an approved method of holding custodial fund assets. Updates like these keep the Cayman Islands at the forefront of best practices, which has supported its emergence as the global leader in this industry.
The development of Cayman as a leading international financial centre has much in common with the development of other business clusters around the world, where good governance, robust legal institutions and a small number of world-class experts provide a basis for initial development, attracting investment. Over time, this positive foundation attracts additional talent and investment, creating a self-reinforcing engine of innovation and growth. But often, a couple of key differentiators can help one jurisdiction stand out.
Other prominent financial centres have several commonalities with Cayman: good governance, a solid legal system, global expertise, effective infrastructure, and proximity to capital and/or investment opportunities. However, these other jurisdictions generally lack Cayman’s specialised legislation and court system (or have different kinds of specialised legislation) – developed through the kind of government-industry cooperation exemplified by the Private Funds Act -- and none is truly tax neutral.
Tax neutrality is the concept that taxes should be structured in such a way that they do not distort investment decisions. Cayman has never imposed taxes on the income of individuals, companies, or capital. The absence of any direct taxes enables Cayman to be tax neutral in a straightforward, simple and transparent way. By contrast, other jurisdictions are at best able only to facilitate a facsimile of tax neutrality through the use of special structures and double taxation treaties; moreover, these special structures are highly limiting and come with additional costs.
A modern legislative and regulatory framework combined with a true tax neutral regime are key reasons Cayman is domicile to over 23,000 CIVs, including about 80 per cent of all international hedge funds. That global leadership produces critical benefits for individuals, investors and countries around the world.
An example is IFM GIF, a USD14 billion fund domiciled in Cayman that pools assets from Australia, the US and other jurisdictions. Twelve of IFM GIF’s twenty-seven assets, representing many billions of dollars of investments, are in the EU. Many of these investments quite literally facilitate trade, through the improvements they have made possible in port facilities, roads and airports. They also generate revenue for governments from tariffs and taxes like DCT Gdansk, Poland’s largest port, which is estimated to generate about USD2 billion per year in government revenue. IFM GIF’s investments also benefit the millions of individuals whose pension funds it invests, ensuring a more financially secure retirement.
By offering a cost-effective way to enable entities to avoid double taxation, while using Tax Information Exchange Agreements (TIEAs) and other agreements to share information on those entities with other tax authorities, Cayman facilitates greater levels of economic activity in the EU and elsewhere than would otherwise be the case – all without tax harm. This additional economic activity leads to increased government revenue through a wide range of taxes, helping facilitate the supply of public goods.
Trade and investment are engines of innovation and growth. Underpinning both are effective institutions: good governance (especially, political stability and the rule of law), a high-quality legal system that protects owners of assets, and effective and adaptive legislation and regulation. Cayman combines all of these attributes with others that make it a premier tax neutral global financial hub and the world’s leading jurisdiction for investment funds.
Source: Hedgeweek
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Disclaimer: this publication does not constitute legal or professional advice and should not be relied on as such.