Asian growth: building on Cayman’s success

The September 2010 edition of The Global Financial Centres Index (GFCI), which provides profiles, ratings and rankings for 75 financial centres, highlighted a familiar trend noting that Asian centres continue to exhibit good growth with Shanghai entering the top 10 and Seoul gaining four places and moving into the top 25 for the first time.

In addition, the GFCI noted that Hong Kong is now in 3rd place just 10 points below New York having been 81 points behind in March 2009. The top four global financial centres (London, New York, Hong Kong and Singapore) control a large proportion of financial transactions (over 70 per cent of equity trading).

Analysts predict that the next few years will see a dramatic acceleration in the shift of global economic and political power from the west to the east. The Peoples’ Republic of China has become the second largest economy in the world and is expected to overtake the United States in as little as 10 years.

Coupled with the growth of the Asian financial centres there has been a significant increase in foreign direct investment in Asia, and particularly in China. According to data released by the Chinese Ministry of Commerce, the Cayman Islands is among the top sources of foreign direct investment, based on actual amounts of foreign capital invested.

Asian companies targeting foreign direct investment have typically used Cayman Islands or British Virgin Islands holding companies in their corporate structure.  The offshore company is often listed on a stock exchange. Tax advantages or tax neutrality are often believed to be the primary reasons for using an offshore financial centre like the Cayman Islands. However, the reputation of the jurisdiction, the dependability of the legal system and the flexibility of its legislation are often equally important factors in choosing to use an offshore vehicle. The reasons that Cayman stands out as the jurisdiction of choice are clear:

  • Cayman registered companies have been permitted to list on the Hong Kong Stock Exchange since the mid 1990’s and remain among a short list of approved jurisdictions. The Hong Kong Stock Exchange listing rules set out specific requirements in order for a company to be suitable for listing, and Cayman’s Companies Law provides the necessary flexibility to enable the adoption of articles of association to comply with the requirements.
  • There are no exchange control restrictions or regulations in the Cayman Islands. Funds can be freely transferred in and out of Cayman in unlimited amounts. The Cayman Islands dollar is tied to the US dollar and the latter is freely accepted and used within the local economy.
  • There is no requirement to have local directors or maintain assets in Cayman.
  • The Cayman Islands have no direct taxes of any kind. There are no corporation, capital gains, income, profits or withholding taxes. Under the terms of the relevant legislation, it is possible for exempted companies, unit trusts and exempted limited partnerships to register with and apply to the Cayman Islands government for a written undertaking that they will remain tax-free for a minimum period (20 years in the case of exempted companies and 50 years in the case of unit trusts and exempted limited partnerships).
  • Cayman Islands law derives from English common law, supplemented by local legislation. The courts system is well-developed and experienced. Major civil cases are heard in the Grand Court with appeals to the Cayman Islands Court of Appeal and ultimately to the Privy Council in London.
  • The Cayman Islands is a British overseas territory and has a long history of stable government. The British government retains responsibility for internal security, defence and external affairs.
  • The mission of the Cayman Islands Monetary Authority (CIMA) is to regulate and supervise the financial services industry in order to maintain a first class financial system. CIMA has regard to international standards and the need for operational freedom by financial services providers and for the maintenance of a dynamic and competitive industry.
  • As Cayman entities can be formed on the day of filing and there is no lengthy regulation or filing procedures, transactions can be brought to market very quickly. The cost of forming and maintaining Cayman entities is competitive and usually minimal in the context of most transactions. Since 1998, company registration documentation can be provided in Cantonese or Mandarin.

The Cayman Islands has long committed to implementing best international practices including the requirements of the Organisation of Economic Co-operation and Development (OECD) and the Financial Action Task Force (FATF), both of which are locally manifested in the Proceeds of Crime Law, Money Laundering Regulations and Guidance Notes.

Almost all of the world’s 50 leading banks have a presence in the Cayman Islands.  All the leading accountancy firms are represented in Cayman. Institutions and arrangers doing business in the Cayman Islands also benefit from top quality professional service providers (attorneys, fund administrators, trust companies, company managers etc) with extensive experience.

The Cayman Islands are situated in the western Caribbean, 480 miles south of Miami and 180 miles northwest of Jamaica. Cayman is five hours behind Greenwich Mean Time in the Eastern Standard Time zone. Cayman benefits from state-of-the-art telecommunications facilities and direct flights are available from a number of major international centres.

Opportunities
Economic growth in Asia has led to private wealth accumulating at an unprecedented speed. 

Cayman is well placed to capitalise on the resulting growth in Asian private wealth and the desire for wealth structuring and estate planning. Cayman’s trust laws, including the relatively new Private Trust Company legislation, together with experienced service providers and professionals will continue to enable Cayman to attract Asian private clients.

The ability for a Cayman registered company to list on the Hong Kong Stock Exchange sets Cayman apart and should not be underestimated. Cayman is well placed to build on its success as stock exchanges in other Asian cities, most notably Shenzhen and Shanghai, have witnessed continuing dramatic growth.  Chinese authorities are set to open the gates to allow foreign companies to list on the Shanghai Stock Exchange, potentially creating new opportunities for Cayman. 

In recent years, familiarity with offshore structures has greatly increased in China with investment funds gaining more and more recognition.  As the leading offshore jurisdiction for investment funds, Cayman is well placed to tap into China’s growing demand for alternative investment vehicles.

Challenges
China has recently enacted new tax and regulatory policies that are aimed at preventing offshore structures from improperly avoiding tax. The most recent legislation, known as “Circular 698”, allows taxes to be imposed in certain circumstances on foreign companies that dispose of Chinese assets. Circular 698 has recently been enforced by the Jiangsu tax authorities against a leading private equity fund and some tax analysts and commentators believe there is a real risk of the tax authorities pursuing other offshore structures. Future guidance on the interpretation of Circular 698 will be needed to provide more clarity.

One of the most interesting aspects of Circular 698 is that it provides that an offshore company with a reasonable business purpose will not be subject to tax on the transaction. It is somewhat unclear what will amount to a reasonable business purpose. It has been suggested that a substantial physical presence in the offshore jurisdiction with an office and staff will be required. 

The challenge for Cayman will be to recognise the opportunities that Asian growth affords and to continue its history of adaptability and flexibility to meet Asian offshore investment needs.

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