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.'