Going Offshore: The Cayman Islands

Article excerpt

MOST MAJOR INVESTMENT COMPANIES have offshore funds which are offered to U.S. residents.

Off-shore investing in U.S. markets has become a mainstay of the U.S. financial markets. Offshore financial centers such as the Cayman Islands, Bermuda, and the Netherlands Antilles, for example, have become renowned for their capabilities as a base for funds that deal regularly with U.S. markets.

Below is a brief introduction to the Cayman Islands and some of the ways individuals have used offshore investments to their advantage.

What Are the Cyn Islands?

The Cayman Islands are located about 475 miles south of Miami in the Caribbean. They are a British Crown Colony; the British government handles the islands' external relations and defense and appoints government officials. The islands have a local executive branch that is drawn from the majority party in the legislative assembly representing the islands' population.

The population of the Caymans is about 35,000, approximately 40% of whom are from outside the islands, with substantial representation from Canada, the U.S., and the U.K. Internationals primarily staff the nearly 100 banks, 29 law firms, and numerous financial services enterprises that have established representation in the islands. The islands have become a key player in the world's financial market: Currently, the islands are home to the fifth largest financial center in the world.

There are no direct taxes imposed within the Caymans on individuals or companies; government income derives primarily through the collection of import duties and fees and through the Caymans' extensive tourism business. Foreign ownership of real estate is permitted.

Privacy is held at a premium within the Caymans. The government enacted the Confidential Relationships (Preservations) law, which prohibits the unauthorized dissemination of any business information. Failure to comply with the law is a criminal offense and carries with it fines and/or imprisonment if information is improperly disclosed.

U.S. Investors

The reasons why U.S. individuals or entities may opt for offshore investing are varied. Some individuals may wish to establish a mechanism for protecting their assets by transferring them pursuant to an orderly estate plan or structuring asset protection trusts.

One wealthy individual, for example, entered a new venture which greatly increased his wealth, but also increased his risk of encountering potentially expensive law suits. He sought to transfer his assets to a separate entity in the Caymans. By taking these steps, he was then able to increase the level of protection for those assets from any adverse developments from his new venture. Other U.S. individuals and institutional investors may find it easier to use offshore investment funds to invest in securities of companies not listed or registered in the U.S. For this reason, most major investment companies have offshore funds which are offered to U.S. residents.

Some U.S. investors take advantage of offshore investment centers simply to avoid U.S. taxation on business ventures not specifically related to activities in the U.S. For example, after establishing a healthy business in the U.S., an American importer of products manufactured in the People's Republic of China was ready to expand distribution to the European market. By setting up his own company in the Caymans, he established an intermediary between China and Europe and, in the process, deferred taxation on the services which he provided for his European venture. …