Private Client Guide - Cayman Islands (Legal 500)

Which factors bring an individual within the scope of tax on income and capital gains?

This question is intended to address the territorial scope of the taxes that your jurisdiction imposes on income and capital gains. Relevant factors may include (for example) residence, habitual residence, domicile, nationality, citizenship, location of assets and location of economic activity. Please briefly explain the broad meaning of each relevant factor.

The Cayman Islands has no income or capital gains tax.

What are the taxes and rates of tax to which an individual is subject in respect of income and capital gains and, in relation to those taxes, when does the tax year start and end, and when must tax returns be submitted and tax paid?

As well as answering this question in relation to actual income and gains, please indicate any commonplace events which cause income or gains to be deemed to arise to an individual, e.g. where there is a deemed disposal at market value on expatriation. Rules deeming an annual income to arise to an individual should, if they are in the nature of a wealth tax, be described under question 4 below. Rules imposing a deemed disposal at market value on death or on making gifts should be described under question 5 below. Rules specifically relevant to structures such as mentioned in question 18 below should be described there. Please include obligations to make social security payments if they are by reference to income or gains, and include any municipal taxes on income or gains.

As above, the Cayman Islands has no income or capital gains tax.

Are withholding taxes relevant to individuals and, if so, how, in what circumstances and at what rates do they apply?

Please describe any rules under which payments typically made to an individual (e.g. salaries, bank interest, dividends, royalties etc.) or payments typically made by an individual (e.g. rents) must be made after deduction of tax.

There is no withholding tax in the Cayman Islands.

Is there a wealth tax and, if so, which factors bring an individual within the scope of that tax, at what rate or rates is it charged, and when must tax returns be submitted and tax paid?

Relevant factors may include (for example) residence, domicile, citizenship and location of assets. Please briefly explain the broad meaning of each relevant factor if not previously explained above.

There is no wealth tax in the Cayman Islands.

Is tax charged on death or on gifts by individuals and, if so, which factors cause the tax to apply, when must a tax return be submitted, and at what rate, by whom and when must the tax be paid?

Relevant factors may include (for example) residence, domicile, citizenship and location of assets. Please briefly explain the broad meaning of each relevant factor if not previously explained above.

There are no death or gift taxes in the Cayman Islands. However, stamp duty does apply to the transfer of Cayman Islands real property and therefore gifts of Cayman Islands real property may incur a stamp duty tax unless certain permitted exemptions apply (§6).

Where stamp duty applies, it is levied at a rate of 7.5 per cent of the market value. First-time Caymanian purchasers of land are eligible for reduced rates of duty of zero to 2 per cent, depending on the value of the property being purchased and whether it is undeveloped land or developed property. 

Are tax reliefs available on gifts (either during the donor's lifetime or on death) to a spouse, civil partner, or to any other relation, or of particular kinds of assets (e.g. business or agricultural assets), and how do any such reliefs apply?

Where a gift of Cayman Islands real property is made, certain exemptions are available for transfers between spouses and transfers from a parent to a child under the "natural love and affection" exemption. It is possible to apply for a waiver of the duty payable where a transfer does not result in any change of beneficial ownership.

Do the tax laws encourage gifts (either during the donor's lifetime or on death) to a charity, public foundation or similar entity, and how do the relevant tax rules apply?

As there are no gift or estate taxes in the Cayman Islands, there is no tax advantage, from a Cayman Islands perspective, in gifts to charity.

How is real property situated in the jurisdiction taxed, in particular where it is owned by an individual who has no connection with the jurisdiction other than ownership of property there?

Please include a brief description of any municipal property taxes in your answer to this question, and whether an official valuation is required for the purposes of such taxes.

Other than stamp duty mentioned above, there are no property taxes in the Cayman Islands.

Are taxes other than those described above imposed on individuals and, if so, how do they apply?

The only other tax imposed in the Cayman Islands is an import duty on most imported goods. This is levied at a rate of 22 percent, subject to certain personal allowances and concessions on some goods.

Is there an advantageous tax regime for individuals who have recently arrived in or are only partially connected with the jurisdiction?

For persons moving to the Cayman Islands, they typically have up to six months to import their personal effects without import duty (§9) being levied.

What steps might an individual be advised to consider before establishing residence in (or becoming otherwise connected for tax purposes with) the jurisdiction?

Because the Cayman Islands do not impose income, capital gains, wealth, estate or gift taxes (outside of stamp duty and import duty), persons looking to establish residence in the Cayman Islands should investigate what the tax implications might be for their existing place of residence or domicile.

Outside of tax, individuals looking to purchase Cayman Islands real estate or invest in Cayman Islands businesses would be well served to investigate whether they would be eligible for any of the residency certificates for persons of independent means or direct investment.

What are the main rules of succession, and what are the scope and effect of any rules of forced heirship?

Where forced heirship rules apply, please include information about the proportion or amount of an individual's estate which may be freely disposed of on death.

The rules governing succession in the Cayman Islands primarily derive from the Succession Law (2006 Revision), the Wills Law (2020 Revision) and the Probate and Administration Rules (2008 Revision).

Broadly, the Cayman Islands allows persons complete freedom of testamentary disposition over their estate during their lifetime. There are no "forced heirship" rules nor limits on the amount of an individual's estate which may be freely disposed on death.

Is there a special regime for matrimonial property or the property of a civil partnership, and how does that regime affect succession?

Please include a description of any choices available to individuals on contracting a marriage or civil partnership, and the effect of those choices.

There are special rules for matrimonial property or the property of a civil partnership in the Cayman Islands. As such, property will pass based upon how it is held; for jointly owned property, it will pass to the survivor and for property owned by persons as tenants in common, a person's identifiable share will pass to their estate to be determined in accordance with their will or relevant intestacy rules.

However, when a person domiciled in the Cayman Islands dies without a valid will, if they are survived by a spouse or civil partner, the spouse/civil partner has an absolute entitlement to all personal chattels and a portion of the residuary estate, depending upon whether the deceased was survived by any issue or their parents, ranging from 50% to 100% where the deceased was not survived by any issue or parents.

What factors cause the succession law of the jurisdiction to apply on the death of an individual?

Relevant factors may include (for example) residence, habitual residence, domicile, citizenship and location of assets. Please briefly explain the broad meaning of each relevant factor if not previously explained above.

If a person dies domiciled in the Cayman Islands, the Succession Law (2006 Revision) will apply. The test for domicile in the Cayman Islands is broadly that a person has a domicile of origin at birth (where the domicile of the person's father is usually used unless the person's parents were not married), however that can be displaced by adopting a domicile of choice by going to live in a new jurisdiction with an unequivocal intention of remaining there permanently such that they effectively abandon their domicile of origin.

Where a person domiciled outside of the Cayman Islands owns Cayman Islands immovable property, Cayman Islands law will govern the distribution on their death. Where a person domiciled outside of the Cayman Islands dies with Cayman Islands movable assets (such as Cayman Islands company shares), these will pass in accordance with the law of the person's last domicile.

How does the jurisdiction deal with conflict between its succession laws and those of another jurisdiction with which the deceased was connected or in which the deceased owned property?

Please include details of how your jurisdiction deals with a reference to its laws by the succession laws of another jurisdiction, and a description of how any doctrine of renvoi typically applies for these purposes. Please also include a consideration of any international law, treaty or convention which applies in your jurisdiction for these purposes.

Where there is a conflict between the succession law of the Cayman Islands and the succession laws of another jurisdiction, it is thought that the doctrine of renvoi may apply, albeit there are no reported cases in the Cayman Islands on the application of the doctrine of renvoi as it relates to succession of foreign immovable property.

Where the deceased had established a Cayman Islands trust prior to their death, subject to certain provisos, that will be presumed to take effect immediately notwithstanding inter alia that the trust may have been created in order to avoid the application of laws relating to wills, probate or succession. In addition, Part VII of the Trusts Law (2020 Revision) contains various conflict of laws rules designed to prevent challenges to the validity of trusts on the basis of forced heirship regimes and provides that foreign judgments will not be recognised or enforced or give rise to any estoppel to the extent they are inconsistent with heirship rights. 

In what circumstances should an individual make a Will, what are the consequences of dying without having made a Will, and what are the formal requirements for making a Will?

Please include a consideration of whether a Will should be made in your jurisdiction by an individual whose only connection with your jurisdiction is that he owns real property there.

If a person owns Cayman Island assets (whether that be real property or shares/bank accounts etc.), a Cayman Islands will is recommended as it means that steps can be taken in the Cayman Islands to have the will admitted to probate in order to deal with the Cayman Islands assets independent of any probate processes taking place elsewhere.

The Wills Law (2020 Revision) provides that to create a valid Cayman Islands will, a testator must possess the requisite testamentary and mental capacity to understand and approve the contents of the will, and have been free from undue influence. A will must be in written form and signed by the testator in the presence of two attesting witnesses. With regard to immovable property, the will must comply with Cayman Islands law. For movable assets, formal validity is determined by the law of the deceased's domicile.

If a person domiciled in the Cayman Islands does not make a valid will covering their Cayman Islands property, they will have died 'intestate'. In these circumstances, their estate will pass to family relatives in accordance with a fixed order of priority in accordance with the Succession Law (2006 Revision). Usually this results in the estate being shared between any surviving spouse and children of the deceased.

How is the estate of a deceased individual administered and who is responsible for collecting in assets, paying debts, and distributing to beneficiaries?

If the deceased dies leaving a valid will, the executors will be required to obtain a grant of probate from the Cayman Islands Grand Court authorising them to collect the deceased's assets, paying any debts and distributing the residuary to the beneficiaries in accordance with the will. Where a grant of probate has been obtained in certain other common law jurisdictions, an application can be made for that grant to be resealed by the Grand Court rather than making an application for a fresh grant of probate.

Where the deceased died without a valid will, relatives of the deceased (in the order prescribed by the Succession Law) will be required to seek a grant of letters of administration from the Cayman Islands Grand Court in order to administer the deceased's estate.

Do the laws of your jurisdiction allow individuals to create trusts, private foundations, family companies, family partnerships or similar structures to hold, administer and regulate succession to private family wealth and, if so, which structures are most commonly or advantageously used?

Individuals can create a wide range of structures to hold and protect their wealth and to regulate succession. The most common structures in the Cayman Islands are ordinary discretionary trusts and what are known as "STAR" trusts created pursuant to Part VIII of the Trusts Law (2020 Revision) which can be established for beneficiaries or purposes or both. 

Increasingly, individuals and families are looking to use Cayman Islands 'Foundation Companies' (established pursuant to the Foundation Companies Law, 2017) which is a form of hybrid vehicle with attributes of traditional companies and civil law foundations.

How is any such structure constituted, what are the main rules that govern it, and what requirements are there for registration with or disclosure to any authority or regulator?

For Cayman Islands trusts (whether ordinary or STAR trusts), these are constituted by execution of the trust deed/instrument or declaration of trust and the transfer to the trustees of the initial trust property. For STAR trusts, there must be an 'enforcer' and at least one of the trustees must be a Cayman Islands licensed trust corporation.

Ordinary and STAR trusts are not subject to any registration requirements however the Trusts Law (2020 Revision) requires that a Cayman Islands 'exempted' trust (being a trust without Cayman Islands beneficiaries) must be registered with and provide certain information to the Registrar of Trusts which may share that information with other competent authorities.

For certain trusts, information in relation to parties connected with trusts may need to be disclosed to the Cayman Islands tax authority pursuant to the Common Reporting Standard (CRS).

What information is required to be made available to the public regarding such structures and the ultimate beneficial ownership or control of such structures or of private assets generally?

Please include comments on any steps commonly recommended in your jurisdiction to secure and maintain the confidentiality of the ultimate beneficial interests in such structures and assets, including residential property.

The Cayman Islands beneficial ownership register for Cayman Islands companies does not directly impact upon Cayman Islands trusts but may do so indirectly where the trust structure involves a Cayman Islands company. This register is not publicly accessible at this time. 

How are such structures and their settlors, founders, trustees, directors and beneficiaries treated for tax purposes?

Please refer to your answers above where the relevant tax rules have already been described there, e.g. where income or gains are deemed to arise to a settlor or beneficiary.

The Cayman Islands does not impose any taxes in respect of Cayman Islands trusts. A nominal stamp duty fee is however payable on the establishment of trusts and other dealings involving trusts where the trust documents are executed or brought into the Cayman Islands.

Are foreign trusts, private foundations etc. recognised?

Where such a structure is not recognised in your jurisdiction, please explain how it is treated. For example, are trustees of a foreign trust treated as owning the trust property themselves, or are beneficiaries of a foreign discretionary trust each treated as owning a share of the trust property?

Foreign trusts are generally recognised in the Cayman Islands to the extent they do not conflict with or infringe upon Cayman Islands law. The Cayman Islands courts are familiar with trusts and vehicles from other common law jurisdictions but less so with regard to civil law vehicles such as private foundations which has no equivalent in the Cayman Islands albeit the hybrid Cayman Islands foundation company has some similarities (§19).

How are such foreign structures and their settlors, founders, trustees, directors and beneficiaries treated for tax purposes?

As above, the Cayman Islands does not impose any form of taxes on individuals aside from stamp duty and import duty. Because of this, foreign structures and those connected with them are unlikely to be subject to any form of taxes in the Cayman Islands.

To what extent can trusts, private foundations etc be used to shelter assets from the creditors of a settlor or beneficiary of the structure?

Cayman Islands trusts can be an effective tool for asset protection provided they are not established with a view to putting assets of reach of existing creditors. The Fraudulent Dispositions Law (1996 Revision) provides that every disposition of property made with intent to defraud and at an undervalue shall be voidable at the instance of a creditor thereby prejudiced.

Care must be taken in establishing trusts to ensure that they are meet the requirements of the Trusts Law (2020 Revision). While the Cayman Islands provides a statutory basis for reserved powers pursuant to section 14 of the Trusts Law (2020 Revision), it is important that any powers reserved are not so extensive as to render the trust invalid or a 'sham'. In addition, if reserved powers are considered to be 'property' of the power holder, there is a risk that a receiver can be appointed over the power by way of equitable execution as was the case in Privy Council decision of Tasarruf Mevduati Sigorta Fonu (Apellant) v Merrill Lynch Bank and Trust Company (Cayman) Limited and others (Respondents) [2011] UKPC 17 which concerned a Cayman Islands trust.

More generally, the 'firewall' provisions contained in the Trusts Law (2020 Revision) provide that a Cayman Islands trust will not be void or liable to be set aside by reason that it defeats the rights of any person by virtue of their relationship to the settlor or a beneficiary. Care is however needed when the trust assets are subject to the jurisdiction of a foreign court, particularly a foreign court which may not be familiar with trusts.

What provision can be made to hold and manage assets for minor children and grandchildren?

Please indicate the tax treatment of any typical arrangement if it is not already described above.

Cayman Islands trusts can be established to benefit a person's children and remoter issue. Pursuant to sections 32 and 33 of the Trusts Law (2020 Revision), these trusts can contain provisions giving the trustees power to apply income and capital of the trust for the maintenance, education, benefit and advancement of minors by the payment to their parent or guardian. These trusts usually record that the assets are held by trustees for the benefit of a minor until they reach a certain age, typically 18 or 25. As above, there are no income, gains, gift or wealth taxes on individuals in the Cayman Islands (outside of stamp duty on real property as previously noted).

In addition, 'protective' trusts can also be created for a specific person for a specified period by virtue of section 34 of the Trusts Law (2020 Revision).

Are individuals advised to create documents or take other steps in view of their possible mental incapacity and, if so, what are the main features of the advisable arrangements?

Please consider mental incapacity in the context of dealings with property as well as in the context of decisions about medical treatment, nursing homes etc.

The Cayman Islands does not have any enduring powers of attorney regime meaning that any power of attorney granted will expire upon the event of incapacity. Trusts can be a good way to guard against the complications associated with incapacity, provided they include appropriate provisions dealing with the incapacity of any power holder. By doing so, a person's incapacity should not affect any property settled into trust. An appropriately drafted trust can also provide scope for trustees to meet medical bills and other costs such as nursing home expenses of the beneficiaries of the trust.

What forms of charitable trust, charitable company, or philanthropic foundation are commonly established by individuals, and how is this done?

Individuals looking to promote charitable causes usually do so via Cayman Islands charitable trusts (established as an ordinary trust but exclusively for charitable purposes) or as a STAR trust with charitable purposes (either instead of or in addition to beneficiaries and/or non-charitable purposes). 

Foundation companies (as discussed under question 18 above) have also proven popular given their separate legal personality and features similar to trusts. They have the added advantage of not requiring members or shareholders.

Under the Non-Profit Organisations Law, 2017 'non-profit organisations', which have been established primarily for the promotion of charitable, philanthropic or other similar purposes and solicit contributions from the public within Cayman or elsewhere are subject to registration and other requirements.

What important legislative changes do you anticipate so far as they affect your advice to private clients?

Where possible, please indicate the date on which the laws will change if current legislative proposals are implemented in your jurisdiction, and whether any changes might have retrospective effect.

Whilst not yet adopted in the Cayman Islands, the OECD's Mandatory Disclosure Rules (MDRs) would have an impact on private clients and service providers if they do come into effect. In broad terms, the MDRs seek to prevent the circumvention of the Common Reporting Standard (CRS) and oblige certain persons (including promoters, intermediaries and service providers) to make disclosures to local tax authorities in circumstances where arrangements may have the effect of circumventing CRS. Importantly, the MDRs would operate with retrospective effect such that a disclosure would be required in respect of any arrangement which had the effect of circumventing CRS dating back to 29 October 2014.

The Cayman Islands have recently established a beneficial ownership register for Cayman Islands companies (§20). This does not impact upon Cayman Islands trusts directly but may do so indirectly where the trust structure involves a Cayman Islands entity in respect of which beneficial ownership information is required. The Cayman Islands government has committed to making this register accessible by the public in the future if that becomes the global standard.

 

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