The  Cayman  Islands'  compliance  with  the European  Union's  Savings  Tax  Directive, once  vehemently  resisted  by  the government,  has  provided  an  unexpected boost  for  the  territory's  fund  industry, according  to  industry  practitioners  and  the financial  services  regulator,  the  Cayman Islands  Monetary  Authority.

After at one point bringing a case before the European Court of Justice to prevent the directive being imposed on Cayman by the UK, the previous government eventually negotiated a deal under which the islands would report to their home country any interest income earned in Cayman by individuals resident for tax purposes in the EU. In  return,  Cayman  received  a  number  of benefits,  including  recognition  of  the  Cayman Islands  Stock  Exchange  by  the  UK  tax authority,  HM  Revenue  &  Customs,  wider access  to  EU  markets  for  Cayman-based financial  services,  and  access  to  the  UK  tax treaty  network.

But  most  importantly,  falling  into  line  with the  directive  clarified  the  fact  that  since around  98  per  cent  of  Cayman  funds  are  not considered  equivalent  to  the  EU's Ucits  retail fund  category,  they  are  exempt  from  the legislation's  provisions.

Canover  Watson,  general  manager  of Admiral  Administration,  commends  the previous  government  for  its  skill  in  dealing with  the  issue.  'The  attorney-general  did  an incredible  job  in  negotiating  with  the  UK  to carve  out  certain  exemptions  that  have  really made  the  EU  directive  a  non-event  for Cayman,'  he  said.

Adds  Ogier  partner  Peter  Cockhill:  'The directive  was  initially  trumpeted  as  a  bit  of  a bogeyman,  but  in  fact  it's  actually  turned  into a  very  beneficial  piece  of  legislation  from  a Cayman  perspective.' Not  only  are  the  vast  majority  of  Cayman funds  not  affected  by  the  directive,  but  the jurisdiction  is  starting  to  attract  funds previously  domiciled  in  Bermuda  and  the Bahamas  because  of  the  tax  certainty provided  by  its  agreement  with  the  EU. Because  neither  of  the  other  territories signed  up  to  the  directive,  the  status  of  their funds  is  unclear.

According to CIMA, it has authorised at least 80 funds previously domiciled in the Bahamas or Bermuda since the directive came into force on July 1 this year, and Gary Linford, head of the regulator's Investments and Securities Division, says it has received a significant number of enquiries that could result in further redomiciliations. The outflow of Bermuda funds to Cayman amounts to 25 funds with net assets of USD5.7bn, according to the Bermuda Monetary Authority. According  to  Paul  Scrivener,  a  partner with  law  firm  Solomon  Harris,  Cayman's advantage  stems  principally  from  the  way Switzerland  has  implemented  the  directive.

'Switzerland's  rules  as  to  how  the  directive  is applied  mean  it  is  far  easier  for  Swiss  banks to  invest  in  jurisdictions  that  are  subject  to the  directive,'  he  says.

Craig  Fulton,  senior  legal  counsel  at  Fortis Fund  Services  (Cayman),  notes  that  any impact  from  adopting  the  directive  would have  been  limited  anyway  because  the  lion's share  of  Cayman's  business,  whether managers  or  investors,  is  with  North  America rather  than  Europe 'It's  not  going  to  have  a  particularly  strong effect  on  us  as  a  business,'  he  says.  'We don't  have  very  many  investors  who  are domiciled  in  the  EU,  while  the  majority  of managers  who  are  our  clients  are  based  in either  the US  or  Canada.  In  addition,  the government's  decision  to  opt  for  reporting rather  than  a  withholding  tax  also  makes things  simpler  to  deal  with.'