Common structuresi Islamic transactions
As described in Section I.i, the Cayman Islands is an international financial centre. The benefits of companies incorporated in IFCs have been well documented, including:
- stable legal systems (typically based on English law);
- low costs and efficient company incorporation;
- little or no taxation, no exchange control;
- trusted court systems; and
- sophisticated professional infrastructure (with an array of experienced professional service providers).
Accordingly, Cayman exempted companies are used as the issuer (often described as the trustee) in many Islamic financing transactions, including sukuk, wakalah and ijarah. Exempted companies are the most common type of company incorporated in the Cayman Islands and are formed to conduct business outside the Cayman Islands. Exempted companies are similar in structure to companies formed in other common law jurisdictions: shareholders' liability is limited (typically by shares) and the directors manage the business of the company.
Specifically, the Cayman company is set up as an 'orphan' special purpose vehicle (SPV). The company is referred to as an SPV because it is formed solely for the purpose of the relevant financing transaction. The SPV is referred to as an orphan because the beneficial interest in the shares of the SPV, rather than being held by a parent company, is held by a trustee (either pursuant to a charitable trust or Cayman STAR Trust) for charitable or other specific purposes. As a result of the trust structure, the SPV is not part of the company group that is the ultimate borrower in the financing transaction. In that way, in the event of the insolvency of the borrower, a court is unlikely to find that the SPV should be included within the assets of the borrower's insolvent estate. The SPV is also made bankruptcy-remote under its constitutional documents or the transaction documents, or both, because it is prohibited from undertaking any activities other than the financing transaction. In that way, the SPV is unlikely to be liquidated, with a view to the transaction remaining intact and the lenders being repaid.
The sukuk structure essentially works as follows:
- the Cayman SPV issues certificates to investors;
- the proceeds are used by the Cayman SPV to purchase an asset from the borrower. The asset is then leased back to the borrower;
- the borrower pays rent to the Cayman SPV so that the SPV may pay principal and coupon payments on the certificates; and
- if specific events of default occur, the borrower is obliged to repurchase the asset at a certain exercise price so that the SPV may redeem the certificates.
As discussed in in Section I.i, both open-ended and close-ended funds are typically regulated by CIMA. Open-ended funds are usually hedge funds established in the form of Cayman exempted companies.
On the other hand, closed-ended funds (i.e., funds whose interests are not redeemable at the option of investors) typically include private equity and property funds and are often established as Cayman exempted limited partnerships (ELPs) under the Exempted Limited Partnership Law 2018.
The structure of an exempted limited partnership is essentially as follows:
- the general partner (GP) is solely responsible for the management of the ELP. Limited partners (LPs) are excluded from the management;
- any debt or obligation incurred by the GP in the conduct of the business of an ELP is a debt or obligation of the ELP; and
- to meet such debts or obligations, the GP may call on the capital commitments of the LPs. That is, under the terms of the ELP agreement, each LP will agree to contribute amounts to the ELP up to a certain fixed amount (i.e., its total capital commitment).
The Cayman ELP is one of the most commonly used investment vehicles in the world, both for Islamic and non-Islamic funds. Islamic funds are established in compliance with applicable shariah principles. For example, an Islamic fund may only invest in industries or properties that comply with Islamic law, but will be established using an ELP, similarly to a conventional fund.
As the area is an IFC, there is little taxation. The Cayman Islands have no form of income or capital gains tax; nor do they have any estate duty, inheritance tax or gift tax. Where transaction documents are executed in, or taken into, the Cayman Islands, stamp duty will generally be payable. In most cases, the stamp duty will be nominal. However, ad valorem stamp duty will be payable where a transaction involves a transfer of, or security over, Cayman real property or shares in a Cayman company that holds Cayman real property. In relation to transfers, stamp duty is payable at a rate of 7.5 per cent on the purchase price or market value of the property, whichever is higher. In relation to security, stamp duty is payable on a sliding scale of 1 to 1.5 per cent depending on the amount secured by the mortgage. The Cayman Islands is not party to any double tax treaties. The tax position is the same for both Islamic and other types of finance transactions.