In a move to reduce instances of tax evasion, governments globally have put in place standards to ensure the automatic sharing of financial account information between global fiscal authorities. This Guide provides a macro summary of the main action points and obligations for Cayman Islands open-ended and closed-ended investment funds that are either registered with the Cayman Islands Monetary Authority (CIMA) or unregistered.
This Guide is written in generalities, but each situation will be unique and there may be exemptions or qualifications to the information written here.
The Legislative Framework
The Cayman Islands Government is a signatory to:
- a Model 1B intergovernmental agreement with the United States (the US IGA) which provides the framework for the implementation of the US Foreign Account Tax Compliance Act (FATCA) in the Cayman Islands;
- an intergovernmental agreement with the United Kingdom (the UK IGA); and
- the OECD sponsored Multilateral Competent Authority Agreement regarding the new common reporting standard on automatic exchange of information (CRS, together with the US IGA and the UK IGA, the AEOI Agreements).
As Cayman Islands entities are not directly subject to the AEOI Agreements, the key Cayman Islands statute in relation to tax information exchange is the Tax Information Authority Law (the TIA Law) and the detailed rules regarding each of the AEOI Agreements are contained in the following regulations (the AEOI Regulations):
- the Tax Information Authority (International Tax Compliance) (United States of America) Regulations (the FATCA Regulations);
- the Tax Information Authority (International Tax Compliance) (United Kingdom) Regulations (the UK Regulations); and
- the Tax Information Authority (International Tax Compliance) (Common Reporting Standard) Regulations (the CRS Regulations).
The Department of International Tax Co-operation (the DITC) is the Cayman Islands government department responsible for tax affairs and the Tax Information Authority (the TIA), created by the TIA Law, is the Cayman Islands competent authority for tax co-operation and is housed within the DITC.
Funds as Investment Entities and therefore Financial Institutions
There are differences between all three of the AEOI Agreements and as a result between the AEOI Regulations in terms of definitions and application to the business of any Cayman Islands fund.
In practice, though, despite the differences, the majority of Cayman Islands investment funds fall within the definition of an Investment Entity, under the AEOI Regulations. There will be some very rare exceptions to this rule. Investment Entities are one of the types of Financial Institution. Under FATCA, the term Foreign Financial Institution is used, but for the purposes of this Guide we will be discussing FIs or Financial Institutions. In addition, this Guide is written for Reporting FIs, as the majority of Cayman Islands funds will, subject to some very limited exceptions, be Reporting FIs.
Reporting Financial Institutions
Reporting FIs are required to comply with the reporting and registration obligations imposed under the AEOI Legislation. The most notable obligations are:
- to register with the Internal Revenue Service of the United States (IRS) to obtain a global intermediary identification number (GIIN) (even if the Reporting FI has no US Reportable Accounts) either through the IRS FATCA Portal or through a paper submission1;
- to register with the TIA through the TIA AEOI Portal;
- to identify Reportable Accounts2 in accordance with the due diligence requirements set out in the AEOI Agreements, the Guidance Notes and the AEOI Legislation; and
- to report annually to the TIA certain specified information with respect to any Reportable Accounts.
Registration with IRS
A Cayman Islands fund which is a Reporting FI is required by the FATCA Regulations to register with the IRS within 30 days of `starting business'. While a fund is not technically operating until it starts to accept subscription payments from investors (for the purposes, at least, of the Mutual Funds Law), in reality, all funds are going to have to provide their GIIN numbers to banking and other counterparties at a very early stage of their creation in order to open accounts. It is therefore important to get this registration done as soon as possible after the vehicle has been formed.
The Cayman Islands Government has issued guidance in relation to the requirement for a FI to have a FATCA Responsible Officer. When registering for a GIIN, the IRS portal requires the name of a natural person to be listed as the FI's Responsible Officer despite the fact that under the US IGA and the FATCA Regulations this role is not even mentioned. The Cayman Islands guidance states that the Responsible Officer of a Cayman Islands FI will be the person required to deal with the IRS online registration, certify that certain information (entered as part of the online registration) is accurate, and certify that the Cayman Islands fund will comply with its FATCA obligations. It does not invoke the US Treasury concept of a Responsible Officer and those obligations are not imported into the Cayman Islands legal framework. Very often this person will be the compliance officer of the investment manager or one of the directors of the fund (if it is a corporate vehicle).
Registration on the TIA AEOI Portal and the Principal Point of Contact
All Reporting FIs are required to appoint a principal point of contact (the PPOC) and register on the TIA AEOI Portal by 30 April in the first calendar year in which it is required `to comply with reporting obligations'. In theory, this means that if a fund is formed in September 2016, it is not required to register until 30 April 2017. However, we recommend that clients register with the TIA at the same time as the GIIN application is made.
The principal point of contact must be appointed by the Reporting FI and a PDF document or letter must be signed by a senior official or director of the Reporting FI confirming that the PPOC has been authorised to be the PPOC on behalf of the Reporting FI.
Identifying Reportable Accounts
The directors, general partner, manager (for a limited liability company established in the Cayman Islands under the Limited Liability Law) or trustee(s) (each an Operator) of the Reporting FI must ensure that they have a compliance and diligence program in place to allow the Reporting FI to identify and report Reportable Accounts.
US and United Kingdom Reportable Accounts
In respect of the FATCA Regulations and the UK Regulations, a Reportable Account is any Financial Account maintained by the FI and held by one or more Specified US or United Kingdom Persons or by a non-US or United Kingdom entity with one or more controlling persons that is a Specified US or United Kingdom Person.
Reportable Accounts under CRS
In respect of the CRS Regulations, a Reportable Account is any Financial Account maintained by the FI and held by one or more Reportable Persons.
In the funds context, a Financial Account is `any equity or debt interest in the Investment Entity other than interests which are regularly traded on established securities markets'. As the majority of Cayman Islands funds do not issue debt or have their equity interests listed on an exchange, the classification of what the financial accounts are is relatively straightforward. For example, for a standard Cayman Islands corporate hedge fund, the Financial Account will be the shares held by the investor and the value will be the net asset value as reported from time to time.
Specified Persons or Reportable Persons
The AEOI Agreements and the AEOI Regulations set out in detail the scope of Specified Persons (both US and UK) and Reportable Persons under CRS and can be found in the relevant legislation. A detailed analysis is however beyond the scope of this Guide.
Reporting to the Tax Information Authority
Subject to certain transitional arrangements that will expire before 1 January 2018, reporting to the TIA must be done by 31 May in each year. The information which must be provided will eventually include the name, address, Taxpayer Identification Number (TIN), date of birth (where applicable), account number and account balance or value as at the period end. If the account holder is a passive non-financial entity3 whose Controlling Persons are Specified Persons or Reportable Persons then the name, address and TINs of those persons must be provided.
Where a Reporting FI is terminated before a calendar year end, a final return should be made by or before the next reporting deadline.
FATCA and Non-Participating FIs
Reporting FIs are not subject to withholding tax unless they are designated as Non-Participating FIs. The IRS may classify a Cayman Islands Reporting FI as a Non-Participating FI following the conclusion of the procedures set out in the US IGA. The IRS may determine that a Reporting FI is in "significant non-compliance" with the FATCA obligations. It may then notify the TIA and require it to compel the Reporting FI to obtain and report the required information. Failure to do so within 18 months of first notification permits the IRS to deem the Reporting FI to be a Non-Participating FI and the Cayman Islands entity will be subject to withholding tax.
Review of fund documentation
To address the issues arising under AEOI Legislation, investment managers are well advised to review their existing documentation to ensure that:
- there is sufficient disclosure regarding the various AEOI regimes;
- the fund has the ability to obtain self-certification documentation at subscription or on a regular basis;
- that there is a power for the fund to take broad steps to deal with investors who do not provide information or updated information and to allocate costs to those investors; and
- there are exculpation provisions for the Operators of the fund from liability arising from AEOI compliance.
Subscription documents require special attention and should include:
- an obligation on the investor to provide information and comply with due diligence requests which may require the provision of nationality, permanent residency information and tax residency representations. This can be in the form of a self-certification form4;
- an acknowledgement that the fund will disclose information to the TIA, which in turn will provide that information to tax authorities globally;
- a general waiver of any legal restrictions which might otherwise prevent disclosure of information by the fund (although it should be noted that the AEOI Legislation makes it clear that compliance with the disclosure obligations under the AEOI Legislation will not amount to a breach of other Cayman Islands laws);
- an acknowledgment of the effect of non-compliance and lack of disclosure by an investor and an acknowledgement that the fund may take any of the broad selection of powers that are reserved to the fund in its constitutional documents; and
- an agreement that the investor shall not have any claim against the fund for any damages or liability arising as a result of actions taken by the fund or remedies pursued by the fund in order to comply with any existing or future obligations imposed by any existing or future AEOI Agreements or any enabling legislation enacted in the Cayman Islands.