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Cayman Islands

Andrew Miller and Grant Stein

Walkers

9 October 2006

History and Background The Cayman Islands consist of three islands located 475 miles south of Miami and 180 miles west of Montego Bay, Jamaica. The capital of the Islands is George Town, which is located on Grand Cayman, the largest of the Islands.The Islands are a British Overseas Territory and have a Governor appointed by the British Government. The Islands have their own Legislative Assembly and are largely self-governed. Although it has the right to veto local legislation, the British Government generally does not intervene in the legislative process. Legal System Cayman Islands’ law is primarily based upon English common law and principles of equity. In addition, laws passed by the Legislative Assembly and a substantive body of local case law have provided the Islands with a modern legal framework. British legislation does not apply in the Islands, save where it has been specifically extended to the territory. The Cayman Islands have a Summary Court, a Grand Court and a Court of Appeal. The English Privy Council is the ultimate court of appeal.The currency is the Cayman Islands Dollar , although the US dollar is generally accepted throughout the Islands. Sources of Law Trust creation and administration The Trusts Law is the main source of legislation governing the creation and administration of trusts. English common law is also a persuasive authority in the Cayman Islands’ courts.The Perpetuities Law superseded the common law rule against perpetuities, changing the perpetuity period to a maximum of 150 years. The law also introduced a “wait and see” provision which validates arrangements that would have been void at common. Property, estate, and probate The Islands have a system of registered land governed by the Registered Land Law and the Registered Land Rules .Succession of estates law is contained in the Succession Law . This is supplemented by the Probate and Administration Rules. Together, these provide the procedures for Grants of Probate or Letters of Administration and resealing of foreign grants. The procedures themselves are similar to those under British law. Taxation There are no taxes on income, capital gains, or inheritance in the Islands. The Government obtains revenue from stamp duty, customs duty imposed on certain goods imported to the Islands, and licensing and registration fees . Trusts Introduction The Trusts Law is a consolidation of trust legislation commencing with the Trusts Law 1967. It contains elements similar to two British statutes, namely the Trustee Act 1925 and the Variation of Trusts Act 1958. Most frequently used trustsAll the types of trusts commonly seen in most other common law jurisdictions are available under Cayman law. In addition, the Islands have introduced legislation providing for “settlor reserved powers”, “STAR trusts”, and “exempted trusts”. The Islands enacted “reserved powers” legislation in May 1998; this legislation has since been consolidated into the Trusts Law. This amendment to the Trusts Law addressed which powers may be reserved by the settlor of a trust without the court finding that such reservation created an agency or “sham trust”. The amendment created a presumption that, in construing any trust instrument that is not expressed to be a will, testament, or codicil, such instrument shall have immediate effect upon the trust property being identified and vested in the trustee save as otherwise expressly, or by necessity implied, in the instrument. The specific list of reservations of powers or grants by the settlor which will not be deemed to invalidate the trust or affect the presumption described above include:· power to revoke, vary or amend the trust instrument or any trust powers arising thereunder in whole or in part;· general or special power to appoint either income or capital of the trust property;· limited beneficial interest in the trust property; · power to act as director or officer of any company wholly or partly owned by the trust; · power to give binding directions to the trustee in connection with the purchase, holding or sale of the trust property;· power to appoint, add or remove any trustee, protector or beneficiary; · power to change the governing law and the forum for administration of the trust; and · power to restrict the exercise of any powers or discretions of the trustee by requiring that they shall only be exercisable with the consent of the settlor or any other person specified in the trust instrument. The Trusts Law further provides that any trustee who is acting in compliance with, or as a result of an otherwise valid exercise of any of the powers referred to above, shall not be acting in breach of trust. The “reserved powers” legislation applies to all trusts created after May 11, 1998. If a trust was created before May 11, 1998, the trustees may extend the application of the amendment to the trust by deed.In 1997, the Islands enacted the Special Trust Alternative Regime, commonly referred to as the “STAR law” , which introduced purpose trust legislation in the Islands. The object of a STAR trust or power may be persons or purposes or both. STAR law expressly provides that the law relating to a special trust and powers are the same as the law relating to non-STAR trusts and powers save as specifically provided. One of the key features of a STAR trust is the ability to appoint an enforcer; this permits the settlor to state who will have standing to enforce the trust and, if so desired, to stipulate that beneficiaries have no such right.While a trust is not required to be registered in the Islands for it to be considered valid, the Trusts Law enables the registration of a trust if desired. Registration of an “exempted trust” gives the trustees the right to apply to the Government to receive an undertaking as to the tax-free status of such trust for up to 50 years.It is normal practice for the Government to grant a tax-free exemption for the full 50 years. Proper law of a trust Legislation to overcome the problems of foreign forced heirship laws was first introduced in the Islands in 1987, and is now contained in the Trusts Law.The Trusts Law provides that all questions arising in regard to a trust which is governed by the laws of the Islands, or to any disposition of property upon the trusts thereof, are to be decided only as a matter of the Islands’ domestic law, without any reference to the laws of any other jurisdiction with which the trust or disposition may be connected. Issues to be determined in this manner may include: · capacity of the settlor;· any aspect of the validity of the trust or disposition or the interpretation or effect thereof; · administration of the trust, whether the administration can be conducted in the Islands or elsewhere, including questions as to the powers, obligations, liabilities, and rights of trustees and their appointment and removal; and · existence and extent of powers confirmed or retained, including powers of variation or revocation of the trust and powers of appointment and the validity of any exercise thereof.The Islands are not a party to the Hague Convention on the Law Applicable to Trusts and on their Recognition, July 1, 1985. Creation of a trust i. Validly constituted trusts The validity of a trust created under the Islands’ law is based on English common law principles requiring certainty of intention to create a trust, certainty of beneficiaries, and certainty of subject matter or property to be placed in trust. ii. Duration and termination of a trust Cayman Islands’ law permits a 150-year perpetuity period for trusts other than charitable and STAR trusts, which may both exist in perpetuity. There is no law restricting the period of the accumulation of income. iii. Beneficiaries The rights of beneficiaries are also generally determined in accordance with English common law principles other than in the case of STAR trusts. iv. Trustees The Trusts Law provides for the appointment and discharge of trustees. However, the trust deed itself will usually make specific provision in this respect.The Trusts Law gives a trustee certain general powers and provides for the investment of the trust fund and the protection and indemnity of trustees. Again, though, these powers are usually expressly expanded or restricted in the trust provisions. v. Protectors The Islands have no specific legislation in relation to protectors and their powers, duties and rights, but these may be expressly provided for under the terms of a trust instrument.vi. Role of courtsThe Trusts Law provides a procedure for applying to the court for advice and directions on any question regarding the management or administration of a trust. Trustees acting upon the opinion, advice, or direction given by the court shall be deemed, so far as their own responsibility, to have discharged their duties as trustees on the subject matter of the application. This discharge is conditional on the trustee being innocent of fraud, wilful concealment, or misrepresentation in obtaining such opinion, advice, or direction. Trust administration i. Investment The Trusts Law deals with investments made by the trustees. It specifies certain authorized investments, which include any securities in which trustees in England are authorized to invest. Powers of investments are usually specifically expressed under the trust deed. ii. Maintenance and advancement The Trusts Law grants powers to apply income for maintenance, accumulate surplus income during a minority, and make advancements. Provisions for maintenance and advancement are usually expressly included and the statutory provisions are usually excluded, under the terms of a trust instrument. iii. Variation of a trust A trust may be varied in accordance with any express powers to amend or vary the trust. Where there is no such power it is possible to apply to the court for the variation of a trust. Confidentiality and disclosure Both common law and the Confidential Relationships Law govern confidentiality of business transactions.The original enactment of the CRPL in 1976 was intended to protect bona fide business dealings. The CRPL codifies the English common law duty of confidentiality owed by a bank to its customer, extends the duty to other professional relationships, and criminalizes a breach of that duty unless disclosure occurs in accordance with the provisions of the CRPL. The CRPL recognizes the duty of lawyers, bankers, accountants, government officials, and financial professionals to maintain the confidentiality of the identity and business of their clients.“Confidential information” is defined broadly in the CRPL. It includes “information concerning any property which the recipient thereof is not, otherwise than in the normal course of business, authorized by the principal to divulge”. Rights of creditors i. Transfer into trusts The Fraudulent Dispositions Law provides that a disposition of property made with intent to defraud and at an undervalue shall be voidable at the instance of the creditor prejudiced thereby. “Intent to defraud” means an intention of the transfer wilfully to defeat an obligation owed to a creditor. “Undervalue” is defined as the provision of no consideration for a disposition or a consideration for the disposition the value of which, in money or money’s worth, is significantly less than the value of the property subject to the disposition.The burden of proving the intent to defraud for the purposes of the FDL is on the creditor seeking to set aside the disposition. ii. Limitation period The creditor must commence any action within six years of the date of the relevant disposition. iii. Rights of trustees and beneficiaries If a disposition is set aside under the FDL, it will only be to the extent necessary to discharge the obligation owed to the creditor prejudiced by that disposition together with such costs as the court may allow. The FDL also contains various provisions protecting the interests of transferees and beneficiaries of trusts who have not acted in bad faith. Provision for private trust companies i. Requirements The licensing procedure for a “restricted trust licence” is normally first to apply in principle to the Inspector of Financial Services. The Inspector will consider the application, including the suitability of the directors, officers, and shareholders, and present findings and recommendations to the Executive Council of Government. If Exco approves the application, the necessary procedures relating to incorporation are then completed, and the applicant submits the certificate of incorporation and an opening balance sheet, certified by an approved auditor, back to the Inspector. If everything is in order, the Government then issues the licence.A private trust company is restricted to providing trust services to a limited number of persons . ii. Fees The paid-up capital required for a private trust company is at the discretion of the Inspector, subject to a statutory minimum of KYD 20,000 . The initial licence fee is KYD 7,000 and the KYD 1,000 application fee is credited against this. The annual licence fee is KYD 6,000 . Other Forms of Legal Entity Incorporation The Companies Law provides for three types of companies to be incorporated: ordinary companies; ordinary non-resident companies, and exempted companies. There are also four further sub-categories of companies: exempted limited duration ; guarantee ; hybrid ; and not for profit.Ordinary companies are companies which carry on business within the Islands. An ordinary non-resident company will be designated as such by the Financial Secretary under the Local Companies Control Law if the Financial Secretary is satisfied that such company does not carry on business within the Islands and does not intend to do so. An exempted company may not carry on business in the Islands except in furtherance of its business abroad. Generally, exempted and non-resident companies are chosen as the underlying companies in a Cayman trust structure.Filing the memorandum and articles of the company with the Registrar of Companies incorporates a company. For an express fee of KYD 400, a company may be incorporated within 24 hours; otherwise there is usually a 4-5 day wait for registration to be confirmed. Capitalization Companies must have at least one shareholder. Shares do not have to be paid upon issue and may be of any par value. Par value may be expressed in any one or more currencies. If authorized by its articles of association, a company may issue fractional shares. Director requirements Cayman Islands’ law does not require company directors to be resident in the Islands. However, both ordinary and exempted companies are required to maintain a register of directors and officers, and notify the Registrar of its contents. Such registers are not available for general inspection.Provisions relating to the number of directors, directors’ ability to hold shares, remuneration, etc., are usually contained in the articles of association.The directors may meet together for the dispatch of business, adjourn or otherwise regulate their meetings as they see fit. Disclosure and other requirements All companies must have a registered office in the Islands. Companies are required to file an annual return with the Government and to pay an annual governmental fee. Other licence fees may also be payable to the Government depending on the business of the company . Taxation Introduction and developments As stated above, there are no taxes in the nature of income, capital gains nor inheritance tax payable in the Islands. International – Tax treaties In 2001, an agreement between the US, the UK and the Government of the Islands was signed to facilitate the exchange of information between the US and the Islands. Such exchanges of information will relate to federal income taxes and will include information relevant to the determination, enforcement, or collection of tax claims with respect to persons subject to such taxes, or to the investigation or prosecution of criminal tax evasion in relation to such persons. The agreement provides a procedure for requests for information, and requires that very specific information be provided when making a request. The agreement also provides reasons for refusing a request for information, such as that the requesting party has not exhausted all available means in its own jurisdiction. Provision is also made for confidential treatment of information exchanged. The agreement is not retrospective and will only affect criminal tax evasion from January 1, 2004, and civil and administrative tax matters relating to federal income tax from January 1, 2006. Other taxes Under the Stamp Duty Law , stamp duty is payable on certain documents executed in, brought to, or produced before a court of the Cayman Islands. Such duty is generally nominal except in cases of a transfer of or a debenture or legal or equitable mortgage or charge over immovable property, or a legal or equitable mortgage or charge over movable property, a promissory note, a letter of credit, a note evidencing indebtedness, or similar instrument. Other Relevant Matters The Proceeds of Criminal Conduct Law , as supplemented by the Money Laundering Regulations and the Guidance Notes, contain rules for anti-money laundering reporting. They outline the requirements for due diligence which bankers and other professionals, such as attorneys and accountants, must perform on their clients to confirm identity and source of funds. In June 2001, the Cayman Islands were removed from a list of non-cooperative countries and territories issued by the Financial Action Task Force, making the Cayman Islands an approved jurisdiction.