Canada TIEA establishes a new era for Cayman captives

Read our article in the Cayman Financial Review Magazine, eversion 

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On 1 June, 2011 Canada and the Cayman Islands entered into a Tax Information Exchange Agreement, which, it is anticipated, will help forge far deeper links between the two countries as far as the financial services industry is concerned, and in particular, the captive insurance industry.

Cayman’s success within the field of captive insurance is remarkable and the industry has continued to remain strong and grow, even through tough economic times and a prolonged soft market, with 730 active class “B” licensees at the end of September and gross written premiums increasing to US$9.6 billion, up from US$8.6 billion as at the end of 2010.

Total assets in the third quarter of 2011 have grown to US$58.3 billion from US$57.9 billion in December 2010. In 2010 there were 25 new captives formed, while in the first ten months of 2011 that figure leapt to 31, with a further ten pending as at the end of November 2011.

Cayman is the world’s second largest domicile for the captive market and most complete financial centre, attracting high quality service providers. Its infrastructure is ideally suited for the industry, with carefully crafted insurance laws that embrace the captive proposition while regulating in accordance with IAIS International standards.

International regulatory compliance
Underscoring its commitment to adhering to international regulatory standards, Cayman has been diligent with regard to its ratification of Tax Information Exchange Agreements, with a healthy 27 signed to date, undoubtedly giving the jurisdiction the upper hand when it comes to captive formation and giving companies wishing to form new captive formations considerable food for thought when choosing the right domicile.

In addition, the Cayman Islands Monetary Authority has 22 bi-lateral and multi-lateral cooperation and information exchange agreements, including with the Office of the Superintendent of Financial Institutions in Canada.

Gordon Rowell, head of the Insurance Division at Cayman’s regulator, the Cayman Islands Monetary Authority, said the TIEA that the Cayman Islands government signed with Canada further extended Cayman’s network of international cooperation agreements with other jurisdictions on tax and regulatory matters, putting Cayman on an equal footing with other jurisdictions with which Canada has tax arrangements.

“This, when added to the island’s existing strong business and other ties with Canada and competitive strengths as a jurisdiction, should increase Cayman’s attractiveness for new captive formations from Canada, going forward”.

It is anticipated that this extensive global cooperation network is something that should also increase Canadians’ confidence in establishing their captives in the Cayman Islands, already one of the leading domiciles of choice for neighbouring US companies.

Steve Britton, Senior Vice President with Horseshoe Services (Cayman) Limited furthers:

“US companies have for some time enjoyed the benefits of establishing a captive in the Cayman Islands. Harvard Medical School, for example, was the very first healthcare captive in the Cayman Islands, formed in the 1970s.”

Greater links forged
Industry professionals are confident that the signing of the TIEA with Canada will encourage greater business between the two countries, with the anticipation that the currently popular domicile of choice, Barbados (thanks to its own double tax treaty with Canada), may well be edged into second or even third place.

The Cayman-Canada TIEA has effectively created a platform for a far more tax-efficient regime for Canadian companies to either continue to conduct business in Cayman, or decide to bring new business to the islands in the form of new captive formations.

The Cayman Islands does not levy any corporate income tax, capital gains tax or withholding tax, so Canadian corporations can find tax savings by using a Cayman-based subsidiary as part of their global structure.

The Canada-Cayman TIEA is expected to offer a more tax-effective platform for Canadian owned companies that have foreign operating subsidiaries as it will exempt certain dividends payable to foreign affiliates resident in the Cayman Islands and distributed to their Canadian parent companies from relevant Canadian taxation. Cayman is far more attractive to such corporations than other tax treaty partners of Canada where tax rates will undoubtedly be higher than in the Cayman Islands.

In his article on the Canadian TIEA, author Ian Bridges explains in further detail: “Now that the TIEA has entered into force, a Cayman Island captive subsidiary of a Canadian parent company will be eligible to include certain active business income and deemed active business income in its exempt earnings and exempt surplus.

Under Canadian income tax regulations, exempt earnings and exempt surplus income includes, among other things, income from active business and income deemed to be from an active business carried on by a foreign affiliate in a designated treaty country (DTC) or a TIEA country. A DTC is defined as a country with which Canada has entered into a tax treaty.

Barbados, for example, has been a traditional home for Canadian-owned captives because of its low domestic corporate tax rates and its tax treaty with Canada. However, a foreign affiliate resident in a country with which Canada has entered into a TIEA, such as the Cayman Islands, is now granted the status of a DTC.”

Bridges identifies a variety of reasons why Canadian-owned captives may choose Cayman rather than a DTC country, other than for tax reasons, including the fact that the foreign affiliate must be resident in a DTC in order to have its active business or deemed active business earnings qualify as exempt earnings.

In addition, the new agreement will make it easier for Canadian firms to form new Cayman companies, particularly captives and financing vehicles, and to potentially move business to Cayman from other double-tax treaty jurisdictions via redomestication.

Even though Bermuda followed in Cayman’s footsteps and ratified its own TIEA with Canada soon after Cayman, industry professionals say Cayman offers a more efficient proposition since Bermuda has chosen to adopt Solvency II and unless a dual regulatory status is granted to Bermuda, Solvency II will likely add extra capital costs.

Cayman in general is a cost effective option for Canadian owners.
The cost of a Cayman captive is more often than not a less costly proposition than one in Bermuda due to Cayman’s competitive environment. In addition it should be emphasised that Cayman’s service providers are highly responsive and provide a first class quality product.

Cayman’s success
The industry believes that there are several likely reasons for Cayman’s success in 2011, ranging from its sound regulatory approach with its solid and long standing track record which includes its reputation for providing reliable data.

At this year’s Cayman Captive Forum, which was held at The Ritz-Carlton at the end of November 2011 and attracted a record number of over 1,200 delegates, Gordon Rowell outlined what made Cayman the sensible choice for the formation of captives. His top ten list included Cayman’s track record which included a low turnover rate as well as Cayman’s innovation.

“Our legislation has been developed with all stakeholders in mind and has created products that consumers need. Products such as SPCs and Star Trusts were once exclusive ideas generated from within the Cayman Islands,” he noted.

Rowell also accredited the variety of insurance options on offer in Cayman along with a large fund and banking industry which are able to provide a broad range of services. The quality of the insurance managers themselves was also highlighted; Rowell characterised them as the “glue that holds the system together”.

The quality of legal advice, banking and audit services was excellent and created a strong support network for the industry, Rowell said, while the industry was cost effective, with expense ratios of Cayman captives averaging less than 10 per cent. High standards, an ease of doing business, appropriate regulation and professionalism were all key factors also.

“Our collective industry, whether they be regulators, lawyers, insurance managers or auditors work in harmony to provide the best possible options for licensees and clients alike. As you can see, this has been the impetus that has led to progressive growth in the popularity of Cayman captives”.

With regard to Cayman’s signing of the Canada TIEA, Rowell said that it put Cayman on an equal footing with other jurisdictions with which Canada has tax arrangements. This, when added to Cayman’s existing strong business and other ties with Canada and the island’s competitive strengths as a jurisdiction, should increase Cayman’s attractiveness for new captive formations from that country going forward.

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Clayton Price

Clayton Price heads of Marsh Management Services Cayman Ltd., the largest captive manager in Cayman and  has a staff of 37 employees. During his 30-year career with Marsh, Clayton has held positions in the Casualty Practice and Captive Management in Atlanta, New York and Bermuda. Clayton is the Chairperson of the IMAC Executive Committee for 2011-2012.

Clayton Price
Managing Director and Office Head
Marsh Management Services Cayman Ltd
Governors Square,
23 Lime Tree Bay Ave
Grand Cayman
Cayman Islands

T. +1 (345) 914 5722
E. Clayton.Price@marsh.com
W. www.marsh.com

Marsh

Marsh, a global leader in insurance broking and risk management, teams with its clients to define, design, and deliver innovative industry-specific solutions that help them protect their future and thrive. It has approximately 26,000 colleagues who collaborate to provide advice and transactional capabilities to clients in over 100 countries. Marsh Canada Limited has 1,100 employees and offices in 13 cities across Canada. Marsh is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), a global team of professional services companies offering clients advice and solutions in the areas of risk, strategy and human capital. With 53,000 employees worldwide and annual revenue exceeding $11 billion, Marsh & McLennan Companies is also the parent company of Guy Carpenter, a global leader in providing risk and reinsurance intermediary services; Mercer, a global leader in human resource consulting and related services; and Oliver Wyman, a global leader in management consulting.

Marsh Management Services
Governors Square
Building 4, 2nd Floor
23 Lime Tree Bay Avenue
P.O. Box 1051
Grand Cayman
Cayman Islands

T: (345) 914-5722
F:
(345) 949-7849
E. Clayton.Price@marsh.com
W: www.marshmanagement.com