A tax information exchange agreement (TIEA) was signed by Canada and the Cayman Islands on June 24 2010 and came into force on July 1 2011. This development represents another example of the Cayman Islands' commitment to international standards of tax transparency. Furthermore, it makes the Cayman Islands a more attractive destination for Canadian corporations, given its favourable tax regime and its sophisticated financial services infrastructure.
Now that the Cayman Islands is a designated treaty country, Canadian corporations (in particular, large oil and gas and resource companies) may look beyond Canada's traditional partners (eg, Barbados, Ireland and Cyprus). The principal offshore financial centres in the Caribbean – the Cayman Islands and Bermuda – are now prime jurisdictions for offshore corporate structuring by Canada-based corporations. The British Virgin Islands is expected to be added to the list by the end of 2011.
The TIEA not only sets out a framework for the exchange of information relevant to the domestic tax laws of each party, its entry into force also results in the Cayman Islands becoming a 'designated treaty country' for the purposes of Canada's Income Tax Regulations. This designation is important for Canadian corporations with international operations. More particularly, the regulations provide that actual or deemed business profits of a company that is resident in and carries on an active business in a designated treaty country are generally eligible for tax-free dividend repatriation to a Canadian parent as 'exempt surplus'. Consequently, Canadian corporations now have increased flexibility and greater choice of jurisdiction for Canadian investment which is eligible for Canada's favourable exempt surplus regime.
The Canadian Department of Finance announced the entry into force of the TIEA with the Cayman Islands on June 2 2011. Other countries also enjoy the 'designated treaty country' designation by virtue of having entered into bilateral TIEAs of their own or double taxation treaties with Canada. However, very few countries enjoy both the designation and a favourable tax regime which imposes no income, corporate, capital gains or withholding tax. Accordingly, the Cayman Islands are ideally placed as a jurisdiction of choice for Canadian corporations that are looking to structure their international investments and operations. By establishing an active Cayman subsidiary and structuring its international operations appropriately, a Canadian corporation may enjoy considerable tax advantages.
Now that the TIEA is in force and the Cayman Islands is a designated treaty country, it is possible to earn active business income through a Cayman subsidiary and repatriate that income to Canada without any adverse Canadian or Cayman tax consequences. These favourable developments from a tax perspective, coupled with Cayman's sophisticated financial infrastructure and strong commitment to international standards of tax transparency and international cooperation, make the Cayman Islands an even more attractive jurisdiction for Canadian corporations structuring their international operations.
For further information on this topic please contact Stephen James or Simon Raftopoulos at Appleby by telephone (+1 345 949 4900), fax (+1 345 949 4901) or email ([email protected] or [email protected]).