CAYMAN ISLANDS Trends and Developments Contributed by: Simon Raftopoulos and Benjamin Woolf, Appleby
General Framework Owing to the robust but flexible nature of Cayman Islands law, Cayman Islands incorporated entities are commonly seen in all forms of international cross-bor- der business and finance transactions. The Cayman Islands is a principal offshore jurisdiction for private equity funds and hedge funds and is a market leader in the structured and asset-backed finance space. It is also a domicile of choice for registering and financ- ing ships and aircraft, as well as for international real estate finance, project finance and joint ventures and other structures for property, oil and gas, energy and other infrastructure projects. To accommodate this broad popularity, a full range of debt facilities is made available on deals. The type of facility used in any given transaction varies and is mostly driven by wider commercial and legal factors affecting the borrower and guarantor parties and their immediate business needs. As a matter of Cayman Islands law and regulation, there are no particular advantages or disadvantag- es between incurring indebtedness in the form of bank loans versus debt securities. In the vast major- ity of cases, with international finance transactions, Cayman Islands law is not the governing law of the underlying transaction documents, except in relation to certain security agreements. Cayman Islands law will however be relevant to the documents in rela- tion to the corporate requirements where a borrower, guarantor or debt security issuer is a Cayman Islands incorporated vehicle. As such, the initial structuring of those deals will typically be driven by “onshore” fac- tors connected with the general governing law of the documents (usually English or New York law). The most significant lending transactions continue to occur in the investment funds arena, in particular, Cay- man Islands domiciled private equity funds. The main types of security for funds (established as exempted limited partnerships, exempted companies and lim- ited liability companies), are security over capital calls and security over equity interests. There is currently no form of income, corporate or capital gains tax and no estate duty, inheritance tax or gift tax in the Cayman Islands. Accordingly, no taxes, fees or charges (other than in certain circumstances,
stamp duty) are payable either by direct assessment or withholding in the Cayman Islands pursuant to Cay- man Islands law. Regulation To the extent they are involved, under Cayman Islands law, all locally incorporated banks are gen- erally required to maintain a minimum net worth of KYD400,000 or its equivalent in other currencies (sub- ject to certain exceptions for smaller banking institu- tions). The Cayman Islands Monetary Authority (CIMA) has adopted the guidelines set by the Basel Commit- tee for Bank Regulation and Supervision Practices for capital adequacy requirements. The Basel Committee recommends a minimum risk asset ratio of 8%; how- ever, CIMA has applied a minimum risk asset ratio of 10%. Cayman Islands bank lending is largely limited to the domestic market. However, where an international bank is lending through a Cayman Islands branch, there are regulations that may limit the ability to extend credit to debtors organised in, or operating from, cer- tain jurisdictions. The Cayman Islands observes and applies all international sanctions extended to it by the United Kingdom and has robust anti-money laun- dering, anti-terrorist financing and anti-proliferation financing legislation. Accordingly, debtors may be exposed to criminal sanctions and fines if bank loan proceeds are used in connection with any such unlaw- ful activity. In restricted circumstances, it is possible for a financial service provider that is incorporated and operating in the Cayman Islands to apply to the Financial Secretary of the Cayman Islands, pursuant to UN Sanctions (Overseas Territories) Orders, for a licence to proceed with certain activities that would otherwise be prohibited. CIMA also serves as the regulator for investment funds, with over 13,000 regulated open-end funds and over 17,000 regulated closed-end funds. The ongoing regulatory obligations for private funds include: • To pay annual registration fees. • To file audited financial statements with CIMA within six months of the financial year end, togeth- er with a fund annual return.
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