Key Takeaways
- • Jack Inglis, CEO of the Alternative Investment Management Association (AIMA), argues that Cayman Islands funds are used for structural reasons, not to evade tax or hide assets, as some policymakers and press assume.
- • Cayman funds are "tax neutral": the Cayman Islands does not impose a second layer of tax ("Layer 2") on the fund, though investors remain liable for taxes at Layer 1 and on underlying investments at Layer 3.
- • Cayman funds are transparent: investor identities are reported to tax authorities such as the IRS and HMRC under FATCA, and non-compliant funds risk penalties and loss of trading access with market counterparties.
- • Offshore alternative funds are designed for sophisticated investors and offer more flexibility in leverage, short selling and redemption restrictions than onshore retail-authorised funds.
- • The Cayman Islands is working with EU regulators to qualify Cayman funds for the AIFMD third-country marketing passport; ESMA advice and a Commission delegated act are still pending, and national private placement regimes remain available in the meantime.
Summary
AIMA CEO Jack Inglis explains in an article on the Legal 500 platform why a significant share of the world's alternative investment funds, including hedge funds and private equity funds, are domiciled in the Cayman Islands and other offshore jurisdictions. He argues that critics who assume the purpose is tax evasion or asset concealment overlook the structural benefits these vehicles provide to sophisticated investors such as pension funds, sovereign wealth funds, charities and not-for-profit organisations.
According to Inglis, collective investment vehicles give these investors professional management, diversification across alternative strategies, shared investment expenses and access to asset types that would be beyond their reach acting alone. He acknowledges that collective investment can introduce legal, regulatory and tax complications that investors seek to minimise.
The central tax argument rests on "tax neutrality." Inglis explains that a tax-neutral jurisdiction does not impose its own duplicative layer of tax on a fund formed there, which would otherwise risk double taxation of the same income and gains. He notes that tax-neutral fund categories also exist in the UK and US, and that investors in Cayman funds still pay tax in their own jurisdictions.
On transparency, Inglis says that identities of investors in Cayman and other offshore funds are now reported to international tax authorities including the IRS and HMRC. Under FATCA, as implemented through US and Cayman law, funds must register and provide this data, with penalties for non-compliance and practical exclusion from trading with market counterparties that must confirm FATCA compliance. He adds that funds are likely to expel investors who refuse to disclose sufficient identity information.
Inglis also describes the regulatory flexibility offshore funds offer sophisticated investors, including greater latitude to use leverage, take short positions and impose redemption restrictions, compared with onshore funds open to retail investors. He notes that Ireland and Luxembourg have comparable regimes for certain sophisticated investors, but that US sophisticated investors in particular expect Cayman vehicles.
On AIFMD, Inglis says Cayman authorities are working with EU regulators to secure eligibility for the third-country marketing passport. AIMA expects ESMA to issue positive advice and the European Commission to adopt a delegated act extending the passport, though the timing of that act is unknown. Managers can continue marketing Cayman funds under national private placement regimes, which will remain in effect for at least three years after the Commission's delegated act takes effect, unless withdrawn by individual Member States.
Inglis concludes by citing the Cayman Islands' English-based legal system, established judiciary, well-recognised corporate and trust structures, experienced financial services sector and emphasis on independent directors and administrators as reasons for its continued pre-eminence. The article is presented as a general guide, and the author notes that specialist advice should be sought for specific circumstances.
According to Inglis, collective investment vehicles give these investors professional management, diversification across alternative strategies, shared investment expenses and access to asset types that would be beyond their reach acting alone. He acknowledges that collective investment can introduce legal, regulatory and tax complications that investors seek to minimise.
The central tax argument rests on "tax neutrality." Inglis explains that a tax-neutral jurisdiction does not impose its own duplicative layer of tax on a fund formed there, which would otherwise risk double taxation of the same income and gains. He notes that tax-neutral fund categories also exist in the UK and US, and that investors in Cayman funds still pay tax in their own jurisdictions.
On transparency, Inglis says that identities of investors in Cayman and other offshore funds are now reported to international tax authorities including the IRS and HMRC. Under FATCA, as implemented through US and Cayman law, funds must register and provide this data, with penalties for non-compliance and practical exclusion from trading with market counterparties that must confirm FATCA compliance. He adds that funds are likely to expel investors who refuse to disclose sufficient identity information.
Inglis also describes the regulatory flexibility offshore funds offer sophisticated investors, including greater latitude to use leverage, take short positions and impose redemption restrictions, compared with onshore funds open to retail investors. He notes that Ireland and Luxembourg have comparable regimes for certain sophisticated investors, but that US sophisticated investors in particular expect Cayman vehicles.
On AIFMD, Inglis says Cayman authorities are working with EU regulators to secure eligibility for the third-country marketing passport. AIMA expects ESMA to issue positive advice and the European Commission to adopt a delegated act extending the passport, though the timing of that act is unknown. Managers can continue marketing Cayman funds under national private placement regimes, which will remain in effect for at least three years after the Commission's delegated act takes effect, unless withdrawn by individual Member States.
Inglis concludes by citing the Cayman Islands' English-based legal system, established judiciary, well-recognised corporate and trust structures, experienced financial services sector and emphasis on independent directors and administrators as reasons for its continued pre-eminence. The article is presented as a general guide, and the author notes that specialist advice should be sought for specific circumstances.
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