Cayman Islands Exempted Company Overview
The Cayman Islands exempted company is a type of legal entity created in accordance with Part VII of the Companies Law (2004 Revision) of the Cayman Islands and is the most common form of company registered or incorporated in the Cayman Islands. The Cayman Islands exempted company is recognised as a separate legal entity. It is distinct from its owners, who are not liable for its debts. A Cayman Islands exempted company may be formed for any lawful purpose agreed to by the members of the company and approved by the Registrar of Companies, who has the authority to determine whether the proposed purpose is lawful or not.
A Cayman Islands exempted company does not have the power to issue shares to the public and, subject to a few exceptions, may not make an offer to the public to subscribe for its shares or debentures. Cayman Islands exempted companies may be incorporated with an unlimited liability or limited by shares or limited by a guarantee. The majority of exempted Cayman Islands companies are limited by shares. Upon incorporation, an exempted company that is limited by shares must have at least one shareholder , who – as a minimum – is required to pay for at least one share (of at least a par value of US$1). It is possible for a shareholder of an exempted company that is limited by shares to hold shares in the company in a fiduciary capacity on behalf of another person, provided that at all times the company is able to establish, through its records, the identity of the legal owner of each share. An exempted company that is limited by shares may issue shares that are redeemable at the option of the company or the holder, which may include shares that have the right to participate in the surplus assets of the company on winding up. There is no limit on the amount of authorised share capital that an exempted company may issue, though its shares must have a par value of at least US$1 or an equivalent amount in the currency of another country. Cayman Islands exempted companies limited by shares may also issue non-voting shares or shares that are subject to restrictions on their transfer. Shareholders of an exempted Cayman Islands company may hold multiple classes of shares.
Why Form a Cayman Islands Exempted Company?
One of the principal benefits of forming an exempted company in the Cayman Islands is that it can be owned by foreign national individuals and entities, regardless of their nationality. This ability to establish a company owned fully by non-Caymanians without the need for any individual Caymanians being involved in the ownership or directorship of a company provides a high level of business confidentiality. In this respect, unless otherwise provided for under the law, the Register of Companies does not have to publically disclose any information in relation to the shareholders or directors of an exempted company.
In terms of taxation, exempted companies are exempt from all forms of taxation other than stamp duty on certain types of documents and a modest annual government fee (in part dependent on share capital). The corporate tax rate of companies registered in other countries may be as high as 35% so the benefit of 0% taxation in the Cayman Islands can be significant.
An exempted company can have one or more classes of shares (including preferences), with different rights attached to each class. The treatment and effect of each class of shares issued can be outlined in the articles of association of a company and would normally be subject to the approval of the company in general meeting. The exemption of stamp duty on the issue and transfer of shares becomes a tax boon if the shareholder is situated in a jurisdiction imposing stamp duty or capital gains tax (CGT) on the transfer of shares.
How to Set up a Cayman Islands Exempted Company
While the exact steps to incorporate an exempted company may vary slightly depending on the service provider, the process is usually fairly similar.
Step 1:
The first step is to choose a name for the exempted company and to seek availability of that name via a name availability request. When an availability request is made, the name will be checked against the names of currently registered companies as well as reserved names. If a name is not available, suggestions are encouraged as part of the request.
Step 2:
The next step is to prepare the memorandum and articles of association of the company (the memorandum and articles). The memorandum and articles should be signed by one or more persons intending to form the company and should indicate the company’s share capital and the currency in which it is denominated (if other than Cayman dollars). The memorandum and articles must mandate that the company will be an exempted company under the Companies Law and specify the person nominated as resident officer.
Step 3:
Having prepared and executed the memorandum and articles, the parties must also complete an application to register the company with the Registrar of Companies (the Registrar) as well as a consent to act as a director and an application to be appointed a director unless the company will have a sole director (in which case the sole director may simply agree to take on his role in the company). Other forms that are required include a notice of situation of a registered office (the registered office must be situated in the Cayman Islands), a prescribed statement of compliance and, if the initial directors of the exempted company are not residents in the Cayman Islands, an application to the Central Policy Unit of the Financial Services Division of the Cabinet (the Central Policy Unit) for the duration of which the Central Policy Unit will appoint up to three persons residing in the Cayman Islands to act as directors, if so required.
Step 4:
The final step is to file all of the above mentioned forms and documents with the Registrar together with the prescribed registration fee and the company will be entered in the Companies Register. At this stage, the company must also apply for an exemption certificate from the Central Policy Unit and enclose a copy of the consent to act as a director, an application to be appointed a director, a certified copy of the consent of the resident officer to act as resident officer and a certified copy of the company’s certificate of incorporation.
Cayman Islands Exempted Company Regulators and Compliance
Regulatory and Compliance Considerations
Similar to other offshore jurisdictions, Cayman Islands exempted companies are subject to a regulatory and compliance environment. The principal legislation governing the general legal framework of all exempted companies is the Companies Law (2016 Revision) (Companies Law), the Companies Winding up and Liquidation Law (2016 Revision) and the Companies Management Law, 2019 which provide a guide to certain regulatory requirements. Regulatory and compliance considerations include matters such as the following: In the context of an exempted company seeking a "listing" or "quotation" on an exchange, a "listing" would generally denote securities that have been initialed public offering of shares on a recognized exchange whereas a "quotation" would mean that securities of a company is mentioned on an exchange but not publicly traded. All companies must be registered with the Cayman Islands General Registry and every Cayman Islands exempted company is required to pay an annual fee which is currently US$854. This fee is due on the anniversary date of the company’s registration. There is also an annual fee of CI$1,000 which is payable to the Cayman Islands Monetary Authority (CIMA) for each registered person under the Cayman Islands Securities Investment Business Law (2011 Revision) (SIBL). For example, an exempted company in the business of managing or administering mutual funds must pay the annual fee of CI$1000 for each mutual fund it administers. Importantly, the SIBL contains limitations on size of exempted companies in order for them to use exemption from SIBL to provide certain services without requiring licensing. Officers of the CIMA are authorized to levy a monetary penalty of not less than US$1,000 and not more than US$50,000 for persons who are not registered or have dealer’s license and engage in business in contravention of SIBL. If such contravention continues for longer than 14 days, the penalty may be increased by US$500 for each day that the contravention continues. Exempted companies are subject to the anti-money laundering regime contained in the Money Laundering Prevention Law (2017 Revision) (ML Law) and related regulations. Moreover, in accordance with the National Pensions Law (2014 Revision), mandatory pensions must be made for all persons employed or working in the Cayman Islands. Exempted companies are required to maintain certain records and accounts, payment of fees related to audits in accordance with the Public Finance Management Act, 2005 and preparation of tax returns for exempted limited partnerships to the extent that income may be deemed to arise in the Cayman Islands, are also regulatory considerations for exempted companies.
Cayman Islands Exempted Company Common Uses
Exempted companies (also known as exempted limited companies) are frequently considered as a result of a particular need or use and advantages that can be derived from using an exempted company in that context. Below are some common uses of Cayman Islands exempted companies.
Investment funds
The most common and core use of a Cayman Islands exempted company is to act as an investment vehicle for private and institutional investors. This includes hedge funds, private equity funds and other closed-ended investment funds which require a Cayman Islands exempted company as the investment manager or general partner to manage the underlying fund or investment structure. Such structures are extremely tax efficient . The benefits of a Cayman Islands exempted company in such an environment include:
International trade
A Cayman Islands exempted company is often used as an international trading agent in circumstances where the trade will result in providing import/export services for goods. The benefits of using a Cayman Islands exempted company for international trading include:
Holding assets
An exempted company may be used to hold immoveable property or personal property. In some cases, a Cayman Islands exempted company may be used to hold the shares or units of another Cayman Islands exempted company. The benefits of using a Cayman Islands exempted company for holding these assets include:
In addition to the above, Cayman Islands exempted companies may be used in a wide variety of other contexts.
Cayman Islands Exempted Companies vs Other Offshore Companies
When we compare Cayman Islands exempted companies to other offshore company structures, we can see similarities and differences. It is important to understand the differences because they do have a significant bearing on some questions of cost and benefit.
The Cayman Islands and BVI are often compared with each other as they are both popular jurisdictions for international business. There are some significant differences. For example, the BVI does not consider "Entities" to be "legal persons". Therefore, BVI entities are not entitled under the double tax treaty between the UK and the Cayman Islands to claim benefits such as relief from UK withholding tax. Compared with Bermuda, the difference between the relative costs of the continuation of the separate legal entities in these jurisdictions is less significant. In practice, Delaware also has a significant share of the market for offshore companies but this is due more to historic reasons than to any other factor such as cost.
Cayman Islands Exempted Companies – Current and Future Trends
The offering of Cayman Islands exempted companies remains popular and is likely to continue growing given the relaxing of many listing rules in traditional markets and the increased regulation of financial services in Europe, the United States and elsewhere. Many private equity and hedge fund sponsors and managers take advantage of this deregulation and many institutional investors have already expanded their investment criteria to include a greater number of funds domiciled in the Cayman Islands. The Cayman Islands is also dealing with legislative changes relieving onerous regulations on private fund vehicles. With the introduction of the Companies (Amendment) Law 2010 last November , exempted limited partnerships and limited liability companies are no longer required to have an annual general meeting, which previously had to be convened in the Cayman Islands, nor are they required to appoint Cayman resident directors or officers. This is a boon to companies managed from overseas. Many expect the Cayman Islands to introduce further legislation relaxing management and existence requirements for exempted companies. In view of the growing trend to offer private fund vehicles in many off shores jurisdictions, including the BVI, Bermuda and the Channel Islands, the Cayman Islands will intensify competition in order to maintain its status as the premier offshore jurisdiction for alternative investments.