With over 12,700 active mutual funds, the Cayman Islands is one of the world’s leading financial centres. As a tax neutral jurisdiction with a wealth of talent and specialists residing in the country, it offers a host of tangible benefits to fund managers and investors.
With a sophisticated legal system that is constantly evolving to maintain global standards, the Cayman Islands is a strong draw for many private funds and hedge funds. Funds and fund administrators are regulated by the Cayman Island Monetary Authority and recently enacted bills: The Private Funds Bill, 2020, and The Mutual Funds Law (Revised) have brought enhanced regulation to both open-ended and closed-ended funds established in the Cayman Islands.
Explore Fund Structures: The Cayman Islands Exempted Company | The Segregated Portfolio Company (SPC) | The Exempted Limited Partnership (ELP)
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The Cayman Islands Exempted Company
Fund vehicle description
Exempted companies are formed in accordance with the Companies Law of the Cayman Islands. An exempted company's business activities occur primarily outside of the Cayman Islands
The Investment Manager typically owns the voting, non-participation management shares of the Cayman Islands exempted company. Non-voting, participating shares are owned by the foreign or US tax-exempt investors.
Multiple share classes can be issued to adapt the fund to varying fee structures or other investors’ needs.
Key considerations
There are many advantages to setting up an exempted company in the Cayman Islands, including:
• Limited liability for shareholders. This company structure limits the shareholders' liability over the debts of the company. However, it’s important to note that the directors appointed to manage the company may be personally liable in the event of breach of duty.
• A preferred offshore funds vehicle. The Cayman Islands exempted company is most frequently used by offshore funds.
• Competitive taxation rates. The Cayman Islands’ tax policy is very attractive for potential investors.
Tax implications
When establishing an exempted company in the Cayman Islands, it’s important to understand the tax implications.
• Exempted companies in the Cayman Islands are not subject to any taxation. That includes direct taxation as well as corporate, withholding, income, profits and capital gains taxes.
• Investors that are residents in the Cayman Islands are not subject to any Cayman taxation.
• Investors who do not reside in the Cayman Islands are not subject to any Cayman taxation, but are responsible for any taxes in their home domicile.
The Segregated Portfolio Company (SPC)
Fund vehicle description
An SPC is an exempted company, organised under the Companies Law of the Cayman Islands, that seeks to segregate separate pools of assets and liabilities to specific shareholders or creditors.
SPCs follow the same share structure as an exempted company under the Companies Law.
Management shares, typically owned by the Investment Manager, as well as participating shares are both authorized and issued at the SPC level.
The SPC will re-designate the portions of its authorised participating share capital to the segregated portfolios.
Key considerations
The primary advantage to setting up a segregated portfolio company in the Cayman Islands is:
• Investor asset protection. An SPC protects the assets of one account from the liabilities of other accounts.
Tax implications
When establishing an SPC in the Cayman Islands, it’s important to understand the tax implications.
• SPCs in the Cayman Islands are not subject to any taxation. That includes direct taxation as well as corporate, withholding, income, profits and capital gains taxes.
• Investors that are residents in the Cayman Islands are not subject to any Cayman taxation.
• Investors who do not reside in the Cayman Islands are not subject to any Cayman taxation, but are responsible for any taxes in their home domicile.
The Exempted Limited Partnership (ELP)
Fund vehicle description
An exempted limited partnership (ELP) is formed by one or more GPs or LPs entering into an exempted limited partnership agreement (LPA).
ELPs are not entities with separate legal personality, and as such all contracts are entered into by the general partner (GP).
Key considerations
There are many advantages to setting up an ELP in the Cayman Islands, including:
• Contractual flexibility for investors. In the event the partnership become insolvent, the GP is liable for all the debts of the partnership.
• Tax transparency. This partnership structure acts as a pass-through entity for tax purposes, whereby the character of income is passed to the end investors. This makes it a particularly attractive structure for US investors.
Tax implications
When establishing an ELP in the Cayman Islands, it’s important to understand the tax implications.
• ELPs in the Cayman Islands are not subject to any direct taxation. There is also no income tax or capital gain tax for trust assets in the Cayman Islands.
• There is no withholding tax on distributions made to investors.
• Investors that are residents in the Cayman Islands are not subject to any Cayman taxation.
• Investors who do not reside in the Cayman Islands are not subject to any Cayman taxation, but are responsible for any taxes in their home domicile.
