Most people driving over a bridge, filling a tea kettle or turning on their lights don't think of those activities as having a connection to the global financial services industry. However modern infrastructure projects like roads, water systems and power plants are frequently paid for by raising capital from investors around the world - capital that is often pooled and invested through the Cayman Islands.
Infrastructure is capital intensive. The costs for modern projects such as electricity generation, telecommunications and transportation can easily run into the billions of dollars. That can overwhelm the financial resources of companies, municipalities or even smaller countries, and in developing markets there may be limited access to credit markets at all. Fortunately, large infrastructure projects also represent stable, long-term opportunities for investors who want to diversify their portfolios. The Cayman Islands financial services industry is the link between those investors and the opportunities represented by new infrastructure projects, which benefit people and countries around the world.
Cayman facilitates that kind of international investment because it is recognised as a premier global financial hub, efficiently connecting law abiding users and providers of investment capital and financing around the world. Institutional investors, regulators, lenders and other stakeholders have done years of due diligence on Cayman as a jurisdiction. It is a tried, tested and trusted jurisdiction that is seen as a transparent and compliant centre of excellence by major respected international entities such as banks and other financial institutions as well as those seeming to raise investment capital. These users and providers come from a range of different jurisdictions, each with its own tax laws, legal frameworks, regulations and culture. What Cayman offers them is a neutral platform in which to pool their investment capital. The Cayman Islands is viewed as a fair and reliable jurisdiction with a robust and trusted legal system and appropriate regulations, where no particular investor, stakeholder or investment manager has a perceived "home field" advantage.
Cayman also offers investors access to a market known for transparency. The Cayman Islands has been consistently assessed as upholding the highest global standards for cross-border information sharing with tax and law enforcement authorities. Investors considering participating in Cayman funds understand that their identity will be registered and checked under Anti-Money Laundering and "Know Your Customer" regulations. They also know their investment activity will be automatically reported to their home jurisdiction tax authorities under the OECD Common Reporting Standard and US FATCA.
Major institutional investors are attracted by that kind of investment environment. That's why they seek out joint ventures based in the Cayman Islands with international investors to raise capital to build ports, hospitals, solar power facilities or other infrastructure projects around the world. In the post-Panama Papers era, that "Flight to Quality" has only accelerated.
Cayman funds are the vehicles through which capital is provided to develop these infrastructure projects, which then generate income or profits for the investors. Cayman's status as a tax neutral jurisdiction, with no corporate or withholding taxes, helps investors maximise those returns which are still subject to taxation in the investor's home jurisdiction. Unlike many other countries, the Cayman Islands is not party to any double taxation treaties so there is no sheltering or offsetting a Cayman tax liability against one that might be payable in other jurisdictions.
Many investors in infrastructure funds based in the Cayman Islands are private and government pension funds, charities or university endowments who are exempt from taxes in their home countries. By investing in infrastructure funds in tax neutral Cayman, they avoid paying a duplicative or unnecessary additional layer of tax which would only reduce the returns payable ultimately to their beneficiaries. This is similar to a US partnership which operates as a pass-through and does not pay any tax as an entity in the United States. In some cases, given the scale of infrastructure projects Cayman funds invest in, initial investment capital may need to be supplemented with additional borrowing. Here again, Cayman's jurisdictional reputation, rated Aa3 Stable by Moody's, offers an advantage to investors in Cayman domiciled funds.
Lenders are very familiar with the Cayman Islands' legal system and consistently demonstrate their comfort with its protections for lenders. Cayman Islands law respects foreign law governed security interests, which helps certain Cayman investment funds get additional financing which provides even more capital for infrastructure investments. As noted above, in some developing countries where the investment projects might be located, there may be limited access to credit, the legal framework might be less well established or there might be political or other risks for investors and lenders. So, assembling the capital in Cayman is a more attractive proposition for potential investors and lenders.
Development agencies such as the US Overseas Private Investment Corporation (OPIC) and the World Bank's International Finance Corporation (IFC) often invest through Cayman funds to provide capital for these important projects. They do so, in part, because they have a duty to protect taxpayer and member country resources and Cayman's legal system has an excellent reputation for respecting investors' rights.
In 2015 alone, the IFC invested $400 million through Cayman-domiciled funds in conjunction with investors from around the world to support projects in developing countries in Latin America, Africa and Asia. Cayman companies have also been used to fund micro-financing loan programmes which helps small businesses get started. The benefits of infrastructure investments through Cayman domiciled funds isn't limited to the location of the projects, the home jurisdictions of the investors or the Cayman Islands. The investment professionals who manage these funds are almost entirely based in the world's leading financial centres, in the US, EU and Asia. The fees they earn from managing Cayman funds are subject to tax in their home jurisdictions. They are also employers, generating additional jobs, economic activity and taxable revenues in those countries.
The Cayman Islands financial services industry plays a pivotal role in supporting infrastructure development and investment opportunities around the world. By creating a stable legal framework, embracing global transparency standards, attracting talented professionals and adopting neutral tax policy, Cayman has established itself as the leading marketplace for global infrastructure investment – and it is committed to maintaining that leadership.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
