Cayman Islands Registration Affects Investment Firms
Investment firms, including private equity and venture capital funds, with Cayman Islands domiciled investment vehicles may need to comply with new registration requirements later this year. The Cayman Islands government recently enacted two pieces of legislation called the Private Funds Law and the Mutual Funds (Amendment) Law that were passed into legislation on Feb. 7, 2020 and will affect small and closed-ended investment funds.
The driving motivation for the newly enacted Private Funds Law and Mutual Funds (Amendment) Law was the European Union’s (EU) listing of the Cayman Islands as a non-cooperative tax jurisdiction. In April 2019, the EU acknowledged that the Cayman Islands were making progress in their efforts to address the concerns of the EU. However, during the EU’s most recent Code of Conduct Group meeting held on Feb. 4, 2020, the EU placed the Cayman Islands on its blacklist due to the fact that the newly enacted laws had not yet been passed at the time of the meeting (the laws were passed on Feb. 7, 2020 and are summarized below). Being placed on the EU’s blacklist carries the potential for a number of restrictions that may be placed on EU investors investing in the Cayman Islands. With the passing of the Private Funds Law and Mutual Fund (Amendment) Law, it is expected that the EU will remove the Cayman Islands from the blacklist in the near future. The next Code of Conduct Group meeting will be held in Oct. 2020.
Investment fund managers favor the Cayman Islands because the jurisdiction’s neutral tax structure effectively eliminates a layer of taxation. The government’s straightforward regulations allow investment firms to structure flexible investments with participants across the globe. For many years, fund managers with small and private funds flocked to the Cayman Islands because they were excused from burdensome filing expectations that other jurisdictions required.
Under prior laws, private investment funds and mutual funds with 15 or fewer investors that were domiciled in the Cayman Islands were not obligated to register with the Cayman Islands Monetary Authority (CIMA). This meant that these funds were not expected to obtain an annual local audit, pay registration fees, or electronically submit the Fund Annual Return (FAR) with CIMA. The recently enacted Private Funds Law and the Mutual Funds (Amendment) Law amended these rules. Now, small funds and private funds will be subject to CIMA registration requirements.
Private Funds Law of 2020
The Cayman Islands government enacted the Private Funds Law on Feb. 7, 2020, which states that all Cayman Islands-domiciled private investment funds must comply with the same CIMA registration and reporting requirements that public funds have followed for years. This means they must:
- Commission annual audits by a CIMA-approved auditor
- Pay annual registration fees
- File annual returns
- Commission annual asset valuations
- Appoint a legal custodian to care for the fund’s assets
- Assign an independent party to monitor the fund’s cash flows
- Keep records of traded securities (if any)
Private funds already operating in the jurisdiction must register with CIMA by Aug. 7, 2020. Private funds domiciling in the Cayman Islands for the first time must register within 21 days of accepting new investments.
Mutual Funds (Amendment) Law of 2020
The Mutual Funds (Amendment) Law, which also passed on Feb. 7, 2020, expands CIMA’s purview to mutual funds with 15 or fewer investors. Small mutual funds will no longer be exempt from registration. They will now have the same reporting requirements as those outlined in the Private Funds Law. Even feeder funds may be subject to CIMA’s rules, so when organizing funds in the Cayman Islands, fund operators should work closely with their legal counsel to determine the optimal structure.
What This Looks Like Going Forward
Fund operators will need to collect reports to submit with their application, including certificates of incorporation, articles of association, auditors’ letters of consent, and others. CIMA’s FAQ section outlines the complete list.
It’s also worth noting that more regulations may be coming. As a British territory, the Cayman Islands are heavily influenced by European standards and best practices. These law changes are just one step the jurisdiction has taken toward adhering to international financial reporting standards.
Other International Reporting Updates to Monitor
If your firm operates in the Cayman Islands, you may already be complying with the reporting obligations required under the Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standard (CRS). Please note that the Cayman Islands Automatic Exchange of Information (AEOI) portal is currently offline. The development of a new portal called the Department of International Tax Cooperation (DITC) Portal is underway and will be more robust and include a number of updates and improvements. It is expected that the DITC Portal will be available beginning in June 2020, and as a result, the deadline to register for 2019 FATCA and CRS reporting has been extended to Sept. 18, 2020. For the 2020 year, the FATCA and CRS reporting deadline will be July 31, 2021.
If you have questions about your firm’s activities in the Cayman Islands, please contact us.