Why domicile in the Cayman Islands

Investment Fund Regulation in the Cayman Islands and categories of funds

Investment Fund Vehicles

Sharia compliant funds

Japanese Retail investment Funds

Mutual Fund Administration

Cayman Islands Investment Fund Lawyers

Industry Trends

Related links

Related Articles

Mutual Fund Vehicles

Exempted Company

Mutual funds in the Cayman Islands are frequently established as an exempted company under the Companies Law. An exempted company is so called because it may obtain an undertaking from the Cayman Islands Government that in the unlikely event that direct taxes were ever introduced in the Cayman Islands the company would be exempted from such taxes for thirty years from the date of the undertaking.

An exempted company must have a board of directors, unless it is shareholder managed. The directors are subject to common law fiduciary obligations and must act with care and in the best interests of the company.

The following features of the Companies Law are particularly helpful when establishing a Cayman mutual fund as an exempted company:

  1. The company may designate its share capital in various currencies.
  2. No par value shares are permitted and shares may be issued at a substantial premium to facilitate redemptions (see below)
  3. Redeemable shares of any class are permissible.
  4. Repurchase of shares is permissible.
  5. Shares may be redeemed or repurchased out of profits, the proceeds of a fresh issue of shares, out of the share premium account and (subject to a solvency test) out of capital.
  6. Dividends and distributions may be paid not only out of profits but (subject to a solvency test) also out of the share premium account.

An exempted company must file an annual statutory declaration with the Registrar of Companies each year and pay an annual fee.

Exempted Unit Trusts

Unit trusts are often used where because of regulatory or marketing reasons in the jurisdictions where the fund will be sold, a company is not a suitable vehicle.

A unit trust is formed by a trustee declaring a trust over the trust fund in favour of the unitholders (investors) pursuant to a trust deed. The trustee must be licensed in the Cayman Islands both as a trust corporation and as a mutual fund administrator.

Cayman Islands trust law is based on English trust law and the primary legislation is the Trusts Law which is substantially based upon the English Trustee Act of 1925. Investors contribute funds to a trustee which typically holds those funds as custodian whilst they are managed by the investment manager for the benefit of the unitholders. Each unitholder is entitled to a pro-rata share of the trust‘s assets.

The trustee is subject to the usual fiduciary obligations of a trustee with detailed obligations and responsibilities to which it is subject being set out in the trust deed.

Most unit trusts also apply for registration as an “exempted trust” by filing with the Registrar of Trusts the trust deed, a statutory declaration from the trustee that there will be no unitholders resident or domiciled in the Cayman Islands (except in certain limited circumstances) together with a registration fee. There is also an annual filing fee. The advantage of an exempted trust is that the trustee may obtain an undertaking that the trustees, beneficiaries and trust property will not be subject to any future imposition of tax in the Cayman Islands for a fifty year period. An exempted trust must file any changes in its trust deed with the Registrar of Trusts.

Exempted Limited Partnerships

Exempted limited partnerships are commonly used for private equity or venture capital funds where there will be a limited number of investors. An exempted limited partnership is a statutory vehicle established under the Exempted Limited Partnership Law and is similar to the form of US limited partnership used for US domiciled investment funds.

An exempted limited partnership is formed by a general partner (one of whom must be resident, registered or incorporated in the Cayman Islands) and the limited partner(s) entering into a limited partnership agreement. The exempted limited partnership is registered under the Exempted Limited Partnership Law by the general partner filing a statutory declaration with and paying a fee to the Registrar of Limited Partnerships.

The general partner (investment manager) will conduct the business of the exempted limited partnership to the exclusion of the limited partner(s) (investors) and, subject to limited exceptions, the limited partners will enjoy limited liability. The general partner is under a statutory obligation to act in good faith and in the interests of the partnership. The obligations and responsibilities of the general partner will be set out in the partnership agreement. Because of an applicable exemption, the general partner will not need to obtain a mutual fund administrator’s licence under the Mutual Funds Law.

A limited partnership interest may be redeemed at any time without dissolving the partnership, subject to the partnership being solvent. Any such redemption can be cancelled within six months if the partnership is insolvent.

An exempted limited partnership may obtain an undertaking from the Cayman Islands Government against the future imposition of taxes for a period of fifty years.

An exempted limited partnership must file an annual statutory return with and pay an annual fee to the Registrar of Limited Partnerships.