There have been a number of changes to the offshore funds landscape in recent months. Walkers' global team sets out below a high level summary of the current position in the Cayman Islands, Bermuda and the British Virgin Islands ("BVI").
The Cayman Islands
The Cayman Islands has been the leading jurisdiction for the formation of hedge funds and private equity funds for many decades. As at December 2019, there were over 10,000 hedge funds registered with the Cayman Islands Monetary Authority ("CIMA"). Over recent years the number of hedge funds registered has remained stable despite the headwinds faced by the global hedge fund industry. The rise of private equity since the global financial crisis is reflected in the number of Cayman Islands exempted limited partnerships (the vehicle most commonly used for private equity funds).
Cayman Islands laws and regulations have developed over many years to meet the evolving demands of sponsors and investors who use Cayman Islands fund vehicles and also to accord with international regulatory requirements. The most recent development in this regard comes with the introduction of the Private Funds Law, 2020 and an amendment to the Mutual Funds Law (which governs hedge funds). Together, these broaden the scope of the long-standing hedge funds registration regime to also include smaller funds, which were previously able to rely on a 'fifteen investor exemption', and private funds (meaning only the primary investor-facing vehicle offered to investors in closed-ended funds) subject to a number of exemptions.
Over the last couple of years there have been various amendments to the Cayman Islands regime for anti-money laundering and countering terrorist and proliferation financing. These have been driven by developments in global standards, primarily of the Financial Action Task Force ("FATF"), and in response to the Caribbean FATF ("CFATF") Mutual Evaluation Report, a process which is drawing to a close.
The Cayman Islands is a member of the OECD Inclusive Framework on Base Erosion and Profit Shifting ("BEPS") and, along with all other OECDcompliant jurisdictions, including Bermuda and the BVI, with no or nominal tax, enacted legislation in response to requirements for entities conducting certain types of activities to have economic substance developed under BEPS Action 5. The OECD has confirmed that the Cayman Islands' legislation meets its standards. Investment funds are expressly carved out of the economic substance requirements and, as such, there is little impact for funds.
The Cayman Islands was moved to Annex I of the EU's list of non-cooperative jurisdictions for tax purposes on 18 February 2020 due to not having appropriate measures in place relating to economic substance in the area of collective investment vehicles ("CIVs"). The Cayman Islands passed legislation relating to CIVs (in the form of the Private Funds Law and Mutual Funds (Amendment) Law discussed above), which came into force on 7 February 2020, to address the EU's requirements in relation to CIVs. The move to Annex I appears to be a technical issue arising out of the timing of this legislation and it is therefore expected that the Cayman Islands will be removed from Annex I at the first available opportunity. The inclusion of the Cayman Islands on Annex I will have limited or no direct immediate consequences for investors or clients using Cayman Islands structures.
The Cayman Islands Data Protection Law, 2017 came into effect on 30 September 2019. It is designed to align with the data protection laws of other jurisdictions where international financial sector businesses are active.
The Cayman Islands as a fund domicile has, over many years, adapted to the opportunities and challenges that the evolving alternative investment industry and the global economic landscape have presented. As the industry enters a period where those opportunities and challenges become more acute, the experience of Cayman Islands service providers and regulators are becoming increasingly important to sponsors and investors.
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Originally published by Walkers, April 2020
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.