Cayman Islands Corporate Structure Explained
Companies Law governs the activities of all entities registered in the Cayman Islands. The broad categories of companies issued with Certificates of Incorporation includes companies limited by shares (which are shareholder companies), companies limited by guarantee (which are not shareholder companies), unlimited shares companies and incorporated segregated portfolio companies. Each category of companies has its own unique characteristics.
Companies which are registered under the Laws of the Cayman Islands specifically formed for international business purposes are assigned the category exempted companies. This category is the long running favourite of international companies looking to register within the Cayman financial platform. Most of the recently incorporated companies recorded within the Companies Registry of the Cayman Islands are exempted companies limited by shares. Exempted companies, as mentioned above, are shareholder companies with limited liability. There are many factors which influence the decision to incorporate as an exempted company. The main reason cited for forming an exempted company is tax – most commonly the absence of taxation on profits. However in addition to tax, the confidentiality , stability and flexibility of the law governing exemptions companies are also drivers which influence the decision of international clients to incorporate within the Cayman Islands.
Companies which are limited by shares have prescribed authorised share capital. Companies must issue to their shareholder some or all of the authorised capital. The shareholder of an exempted company limited by shares, may be an individual or a corporate entity, subject at all times to the limits imposed by law. Corporate shareholders are also permitted to hold shares in an exempted company. Shares can be either voting or non-voting. Shareholders of exempted companies benefit from the avoidance of financial obligations which could be classed as unfair discrimination.
It is important to note that an interest in an exempted company (with the exception of interest in a segregated portfolio company, which is specifically addressed below) ranks in accordance with the order of priority set by the Articles of Association. The restrictions which apply to shareholders are that an interest cannot be transferred or assigned unless expressly permitted by the Articles of Association. A transferee of shares is entitled to become party to the rights and obligations attached to the shares for the residue of the period which remains unexpired. If an individual becomes a shareholder in an exempted company limited by shares, the limitation on his liability is limited to the amount remaining unpaid of the price of the shares held by him. The company is not liable to pay any interest or dividend of any debt or liability of the company.
Key Aspects of Cayman Islands Companies Law
In addition to the ability for companies to define their purposes in a flexible manner, there are a number of other key features of Cayman Islands Companies Law which are noted below:
One Shareholder
A Cayman Islands company may be incorporated with only one shareholder. Many of those who incorporate as a single shareholder will go on to incorporate a separate company as a subsidiary of the parent company (also as a single shareholder company). While there are some requirements for record keeping and certain documentation and filings which must be made in connection of a single shareholder company, these requirements are not overly burdensome and, therefore, it is quite common for single shareholder companies to be formed in this way.
Powers of Directors and Shareholders
Under Cayman Islands Companies Law, subject to the provisions of the other statutory codes, a Cayman Islands company has the same powers as a natural person (i.e. it can enter into contracts and take on legal obligations). It is also important to note that there are a variety of powers of the shareholders and directors under Cayman Islands Companies Law. These powers, however, are subject to the provisions set out in the constitutional documents. The directors’ powers are broad and cover various matters, including the power to issue shares, refuse registration of transfer of shares, convene extraordinary general meetings, declare dividends, amend the register of members and apply the company’s seal. The shareholder’s powers are also significant and include the power to appoint or remove directors, issue new shares, make an alteration of share capital and pass special and ordinary resolutions.
Management Structure
The rights of shareholders and directors in relation to the management and control of a Cayman Islands company can be adjusted relatively easily, on the consent of the shareholders. This is in sharp contrast to many other jurisdictions where the rights of shareholders and directors are prescribed by law. A single director will be sufficient to manage a company, unless the articles of incorporation prescribes that a larger number of directors is required. Where the articles do not prescribe a number of directors, the directors may fix the maximum and minimum number of directors who may attend and vote at board meetings. There are stringent rules governing how a company can issue shares in its capital. However, a company can vary the rights and restrictions attached to its shares. This can be done by executing a written resolution or by a meeting of shareholders. In such event, a shareholders’ resolution is required, whereby a special resolution must be passed.
Restrictions on Share Issues
The restrictions that a Cayman Islands company must face in relation to its share capital is minimal. In particular, there are very few limitations on a company’s ability to issue its own shares. If a company wishes to issue additional shares, it may do so unless restrictions are provided for within that company’s articles of incorporation. The shareholders may, however, restrict the ability of directors to allot shares under their powers of discretion by passing a special resolution.
Cayman Islands Monetary Authority: An Overview
The Cayman Islands Monetary Authority (CIMA) provides important regulatory oversight and supervision of companies in the Cayman Islands, including those that operate or are registered here as an offshore vehicle. CIMA has extensive regulatory and enforcement powers under various laws (including the Law) which it uses to promote and monitor compliance by companies with their legal obligations. This includes its role in ensuring good corporate governance by Cayman companies, monitoring financial reporting by companies regulated under the Insurance Law and the Banks and Trust Companies Law, and supervising conduct by directors. CIMA publishes guidance notes explaining how the law and regulations it administers should apply in practice. For example CIMA has published guidance notes on its interpretation of ‘outside Cayman’ restrictions contained in the Law and explained its ‘soft sanctions’ policy (fines and censure) in cases of ‘technical non-compliance’. It also provides a complaints procedure for companies, employees and members to use when seeking to challenge CIMA’s decisions. Although so far CIMA has not taken any disciplinary action against a Cayman company, we know of at least two instances where a prosecution was launched. On both occasions the first instance of prosecution was unsuccessful but the second succeeded. In the first case concerning a failure by a company to file its annual return, the Court dismissed the prosecution on the basis that the Law did not make it an offence ‘to fail to file an annual return on time for the relevant year’. CIMA successfully prosecuted the failure to file the remittances tax withheld and collected from directors, officers and employees pursuant to section 539 of the Taxes Law which obliges the employer to remit tax withheld on or before 15 December following the end of the relevant year of assessment. From this it is clear that CIMA has the ability (in the appropriate circumstances) to bring a successful prosecution against a Cayman company.
Companies and LLCs: How to Incorporate
To incorporate a Cayman Islands exempted company you must follow these steps:
Step 1- Submission of Due Diligence Documents
Prior to commencing the application process to incorporate either a restricted or unrestricted entity in Cayman, it is a requirement to obtain and submit due diligence support for that entity. For both restricted and unrestricted entities, copies of the following documents are required:
For both restricted and unrestricted entities which are Cayman Islands Exempted Companies, it is further required to submit during the incorporation process:
Step 2- Filing of Memorandum and Articles of Association with the Registrar
Section 8 of The Companies Law provides that an object for which a company is incorporated must be lawful and any powers of a company must be necessary or expedient for the attainment of its object.
Section 9 of The Companies Law provides that the memorandum and articles of association may contain such information as may be prescribed but they must conform as nearly as circumstances permit to the form for the time being prescribed for contracts by deed by The Law Reform Law, 1977.
The memorandum must state the particulars contained in Schedule 2 to The Companies Law.
The articles must state the particulars contained in Schedule 3 to The Companies Law.
A ‘Limited Liability Company" in Cayman Islands must use the word ‘limited’ or the abbreviation ‘ltd’, otherwise it will be deemed contrary to The Law.
A company which is incorporated or registered in the Cayman Islands must maintain a registered office in the Cayman Islands.
Step 3- Payment of Government Fees
The Government fees for the incorporation of a company in the Cayman Islands depends on the amount of the share capital. For example, if a company has authorised share capital of US$50,000.00, the Government fees will be US$1,200.00.
Step 4- Issuance of Certificate of Incorporation
The Certificate of Incorporation will be issued with all the relevant information relating to the company along with a copy of the Memorandum and Articles of Association endorsed by The Registrar. This can take from 1 day to 1 week.
In addition to the above, depending on the nature of the business and shares of the company, several of the following additional requirements may apply.
The above is a guide only. There may be other documentary requirements.
Reporting and Compliance Requirements
Compliance and reporting obligations are an ongoing, active part of being a Cayman Islands company; in fact, failure to comply can result in serious adverse consequences. One of the reasons the Companies Law facilitates the electronic maintenance of companies’ registers (through a Registry-maintained eRegistry) is to reduce the burden on company administrators and agents that completing the requisite annual returns would create if they were not able to do so electronically. Not all company registers can be maintained by the Registry (such as registers of mortgages). Nevertheless, companies are required to file an annual return together with a fee based on the number of shares authorised. The annual return is required to be filed within 30 days of the anniversary of the incorporation of the company . Additionally, any company whose shares have been listed on a stock exchange or that are deemed to have been listed under the Companies Law (due to corporate debt listed on a stock exchange) is required to file an annual return within three months of each anniversary of the company’s incorporation.
Filing the required annual return does not require an independent audit of the company’s accounts. Not all larger companies must have their accounts audited by a third-party independent auditor – provided that the company can be classified as small, medium or large based on the size of its balance sheet. Small and medium companies have the option to dispense with appointing auditors and to instead appoint a company director to check the accuracy of the accounting records that the company must keep under the Companies Law.
Why Incorporate in the Cayman Islands?
The Cayman Islands offers a multitude of advantages for those seeking to register a company in an offshore jurisdiction. One of the most significant benefits is the absence of corporate, capital gains, and income taxes. This tax neutrality extends to businesses, which makes the Cayman Islands one of the most attractive places to incorporate from a tax perspective. This is an advantage that many other places do not offer, and one that draws in thousands of businesses every year.
Confidentiality is another key benefit to incorporating in the Cayman Islands. Business affairs can be structured and held in anonymity, shielding directors’ identities, bank accounts, and corporate affairs from public view. This degree of privacy is difficult to come by in other offshore jurisdictions. To that end, the country also has a robust and independent judiciary which interprets and applies law in accordance with common law principles.
In addition to the lack of taxes and the enhanced privacy, the level of capital and regulatory compliance required is significantly less than other offshore jurisdictions. The ability to complete the incorporation process quickly and liaise easily with local government offices are key benefits that will make setting up a business in the Cayman Islands a hassle-free experience.
Recent Changes to Cayman Islands Companies Law
Companies law in the Cayman Islands continues to evolve as new legislative amendments come into force to deal with perceived gaps or uncertainties in the existing legal framework. One key example of this within the past year has been the passing of the Criminal Records (Spent Convictions) Law, 2017 which removes the bar on a convicted company director or officer who wants to have their spent convictions disregarded so they can be designated as "fit and proper".
The most significant recent change to company law was the introduction of two new types of Cayman law companies: the new form restricted economic interest company (or "RIExC"), and the new form restricted liability company ("RLC"). The RIExC may only pay dividends from capital in line with its stated business purposes. The RLC structure is intended for private investors to pool investment resources and jointly bear investment risk in ventures with a view towards obtaining a return on investment . These companies enable the creation of investment vehicle vehicles which allow companies to make periodic distributions of capital without being subject to the restrictions applicable to other companies.
On 28 March 2017, the Companies (Revised) Law, 2016 came into force consolidating and amending certain aspects of the Companies Law. Among other things, the new law:
Some minor amendments were also made to the new Companies Law. For example, creditors will now only need the approval of 50% of the shareholders in order to object to a merger. In addition, on 21 December 2016 the Companies (Amendment) Law, 2016 was passed. This law amends the Companies Law so that special rights conferred by a class of shares are deemed only to affect the shares in that class and not shares in another class. The recent movement by the Companies Law to address issues relating to share classes and restructuring, specifically in the area of directors’ powers, is notable as it continues to bring Cayman legislation in line with the United Kingdom Companies Act 2006.