Although it is one of the world's leading offshore centers today, the Cayman Islands did not have an easy start.Its first foreign bankers endured a mosquito-ridden tropical climate during the early 1960s, an era when becoming one of the region's wealthiest countries must have been near impossible to imagine. Like so many other Caribbean offshore centers, the Cayman Islands' beginnings were rooted in a colonial British past, and the chain of events that led to its emergence as a major financial center is, in many ways, an indication of how far the country has come as an offshore jurisdiction over the last five decades.
The Cayman Islands were under the administration of Jamaica until the latter became independent of the UK in 1962. Rather than join the many other Caribbean nations that chose independence, the Cayman Islands remained a British Crown colony; it was a decision that would determine the course of its history. Jamaica's split led to plenty of uncertainty about its stability, and a number of Jamaica-based businesses and business people relocated to the Cayman Islands as a result, choosing to invest in a country that still had the stability of the crown behind it. The influx of both money and expertise, along with the English common law system and the country's tax neutral status, brought about the establishment of an offshore financial center that was able to capitalize on the development of the international finance sector then being propelled by post war financial liberalization.
The Cayman Islands' English common law system and tax neutral status serve as two of the country's major draws, and the jurisdiction is currently believed to have the fifth largest financial services sector in the world. Its offshore banking services are particularly advanced, illustrated by the fact that the Cayman Islands, along with Switzerland, dominate the global market for offshore banking in terms of total deposits. Many of the first foreign banks in the Cayman Islands originally came from the Bahamas in the late sixties when - in a development that echoed Jamaica - an independence movement in the former colony raised concerns about the country's future. An already well developed offshore financial center, the Bahamas was home to several USowned banks, many of which were glad to relocate to a more politically stable and better located territory; the Cayman Islands is just a one hour flight away from Miami and is on Eastern Standard Time. The arrival of these banks signaled two trends: the accelerated development of the jurisdiction and a shift from British to American clientele. Targeted promotion of the jurisdiction to Americans and the arrival of US and Canadian businesses both contributed to a construction boom that began in the seventies. The financial services industry and the tourism industry both experienced significant growth as a result.
Today, the fruit of these boom years is still self-evident: the majority of business on the Cayman Islands comes from the US. As the jurisdiction grows in vigor, it is increasingly looking to diversify to Asian markets, and China in particular is becoming a more and more important source of business for the Caribbean success story.
China is a relatively young market and newcomers to the offshore industry often have different perspectives and needs when compared to investors from other parts of the world, says Michael Liu, managing director of the CIL Group, a China-based company that advises high net worth individuals and corporate clients on wealth management and offshore company formation. Wealthy Chinese tend to be more comfortable with the idea of investing their money in large, well-known offshore jurisdictions. The Cayman Islands is one of Mr Liu's clients' first two choices of financial center for the setting up of offshore companies - the only exception being Hong Kong, which is governed as a special administrative region within China. "Familiarity matters the most", says Mr. Liu. "When there is a Chinese embassy [in the jurisdiction], people have more confidence in it. Jurisdictions like the Cayman Islands have the benefit of a good reputation in China because there are many Chinese enterprises using them when listing abroad."
Effective and highly targeted marketing helps to make Chinesenewcomers to the industry aware of the benefits of the Cayman Islands' offshore products, says Mr Liu, while the opinions of big law firms also influence perceptions. One key difference in the way in which wealthy Chinese approach offshore finance, compared to their non- Chinese counterparts, is in the weight they place on professional advice. As a result, the number of companies fulfilling the growing need for services of this nature has proliferated in recent years. Being able to give Chinese clients the option of handling their offshore financial affairs in their native language - both when participating in meetings and when signing legal documents - naturally gives offshore specialists a competitive edge. Offshore jurisdictions' governments themselves are increasingly hiring dedicated Chinese-speaking staff, but where this service is not available advisors such as the CIL Group's Mr. Liu perform a vital intermediary function. "As a local Chinese consultant, we work with qualified agents and lawyers all over the world who provide offshore structuring services. We are the bridge between the two sides."
The Cayman Islands owes much of its reputation as a leading offshore financial center - both in China and elsewhere - to its legal system, and the efficacy with which its laws are upheld. The legal system is based on English common law, and several central issues - including corporate power, directors' fiduciary duties, limited liability and corporate benefit - are largely the same as with English common law. The Cayman Islands' commercial legislation, however, is said to be far less cumbersome in areas that typically create difficulties and uncertainty under the corresponding statutes in England. The jurisdiction's Companies Law, for instance, stipulatesthat company shares are not only redeemable out of profit but, subject to limited solvency checks, also from the credit balance on share premium accounts. Similarly, while it is unlawful for a company to directly or indirectly provide finance for the acquisition of its own shares by a third party under English law, it is legally permissible in the Cayman Islands - as long as the transaction is demonstrably for the material benefit of the company. As such, the Cayman Islands is often described as an ideal combination of English common law heritage and an extent of adaptability that is far better suited to commercial entities' modern day needs.
The jurisdiction's tax regime is another major attraction for investorsand business people looking to minimize their tax burden. There are no corporation taxes on any Cayman Islands company carrying out either domestic business or offshore business. Specifically, the corporation tax leakage that may arise from structured finance transactions can be prevented with a Cayman Islands' special purpose vehicle. Another important reason that Chinese business people are making use of Cayman Islands offshore financial structures is the versatility and appeal of these special purpose vehicles, which are extremely useful for bringing foreign capital into China. Both international investors in China and local businesses have found these structures to be an effective way to facilitate the movement of global capital to emerging economies, including China's.
Cayman Islands' special purpose vehicles are typically incorporated under the Companies Law as an exempted company and have several distinguishing features. Special purpose vehicles do not require government authorisation before they can be incorporated and are not liable for any form of income tax, capital gains tax or corporation tax. Furthermore, Cayman Islands' withholding tax is not imposed on cash flow. Special purpose vehicles with exempted company status may also obtain a guarantee from the Cayman Islands government that they will continue to be free of tax for a period of 20 years - and, under certain circumstances, up to 30 years.
Th elegal and administrative framework within which special purpose vehicles operate is also extremely straightforward. Neither company shareholders nor company directors are required to be resident in the Cayman Islands. Although all special purpose vehicles must have a registered office in the Cayman Islands, there is no requirement that the directors hold meetings in the jurisdiction itself. Shareholders' meetings can also take place anywhere in the world. All of this adds to the jurisdiction's appeal for Chinese and other non-American investors, for whom flying halfway across the world to attend mandatory meetings seems like an unreasonable requirement and often dissuades them from choosing to invest in other offshore jurisdictions overseas.
Chief Officer of Financial Services for the Cayman Islands Government's Ministry of Finance, Dr. Dax Basdeo, explains that the advantages of establishing a Chinese entity in the Cayman Islands include reasonable reporting requirements, the ability to form a company with only one shareholder, no minimum capital requirements, and tax neutrality. The jurisdiction's General Registry additionally has the ability to register companies in Cantonese and Mandarin since 1998, which often makes all the difference to Chinese clients. Other experts within the industry feel that it is the Cayman Islands' recognition by independent supranational bodies such as the Financial Stability Board, which makes it a more attractive jurisdiction for the registration of Chinese companies. The growing number of publically traded Chinese companies which are based in the Cayman Islands - China Unicom and China Mobile among the best known of them - is proof that the country's financial service sector is excelling. Two of China's largest banks, the Bank of China and the Industrial and Commercial Bank of China, have also maintained a presence in the Cayman Islands since 1982 and 1995 respectively.
Another important factor inattracting Chinese business, Dr. Dax Basdeo points out, is that Cayman Islands companies can be listed on the Hong Kong Stock Exchange. According to Dr. Basdeo, Cayman Islands' companies accounted for 37 percent of all listings on the Hong Kong Stock Exchange at the end of 2010, and a report commissioned by Offshore Incorporations Ltd (OIL) stated that, at the time of research, the jurisdiction occupied the top spot for fund management. The Cayman Islands is also recognized as having a particularly well-developed funds market, as well as a stable and flexible regulatory system. Cayman Island holding companies have successfully funded several leading Chinese bus ines ses , among them China's most popular search engine, Baidu, frequently cited as Google's Chinese equivalent. The Cayman Islands' investment holding companies that are listed on the Hong Kong Stock Exchange include Tingyi (Cayman Islands) Holding Corp., which specializes in the production and distribution of instant noodles, beverages and baked goods within China, and Yorkey Optical International (Cayman) Ltd., which is primarily engaged in the manufacture and sale of optical and opto-electronic products' components.
The private trust business is another area that is growing encouragingly in mainland China in line with the country's increasing wealth creation. China's new generation is gravitating towards private trusts for the purpose of protecting their assets and consolidating family wealth into a single structure. Wealthy Chinese investors consider trusts to be increasingly important because of concerns over family succession. Chinese individuals' wealth is nearly always tied to that of their family - either because offspring will be expected to support their parents in their old age, or because young couples depend on their parents before becoming financially independent - and because of this, family members will involve themselves in determining how assets are allocated within their children's marriages. In recent years, as family planning policies become more stringent, the situation has intensified. Lawyer Zheng Zhi of Dacheng Law Offices, who advises high net worth individualson offshore wealth management , explains: "What makes China different from other countries is that China also implemented family planning policies, meaning that today, quite a few high net worth individuals are the only successorswihtin the family lt is there fo re considered vital that a family's joint assets are protected against the event of a divorce. The Cayman Islands caters to the needs of many cautious Chinese with its Special Trusts Alternative Regime (STAR) trust, which provides non-charitablepurpose trust legislation that can be used in any standard personal scenario while offering increased planning flexibility.
As the financial requirements of wealthy Chinese continue to develop - and the Cayman Islands establishes itself as an offshore financial center that is well suited to their evolving needs - it is expected that bilateral cooperation between the two countries will increase as well. September 2011 saw thesigning of the 26th agreement for exchange of information for tax purposes between the Cayman Islands and China in a move that reaffirmed the potential for the two sides in the future. "Signing this TIEA [Tax Information Exchange Agreement] is a significant step in enhancing the relationship between the Cayman Islands and China," the Cayman Islands Premier, McKeeva Bush, told the press. "With China being one of the fastest growing economies in the world, we are confident that this TIEA will contribute positively to economic activity between the two countries." As such, it seems the two emerging countries can only go one way: up.
