The best place for registration of offshore fund

The best place for registration of offshore fund

If you ask professional experienced investor, in which country it is preferable to organize a fund, then almost everyone will immediately answer that you will not find better place than the Cayman Islands.

This decision is explained in very simple way. The point is that the legislation of the Cayman Islands is the most loyal to investment funds. Registration procedure is reduced to identifying the individual and verifying the competency of the founder of the fund, as well as auditing all the necessary documents. It is worth noting that more than half of all mutual investment funds in the world are registered in this territory.

Hedge funds, or simply mutual investment funds, are formed mainly in the territory of the offshore zone in the form of limited liability company, that, in turn, makes it possible to significantly reduce expenses on administrative fees for the purpose of establishing and managing the fund, and, in addition, completely eliminate the tax burden on the fund, which receives premium income from placement of the depositors’ resources.

Please, pay attention that preferential taxation of the fund itself does not lead to any favorable preferences for depositors, which act as tax residents of their own states. It means that when planning the placement of personal funds by means of underwater funds, we recommend you to consider all the following aspects related to the taxation of your subsequent profits from the activities of such company.

The tax system of the Cayman Islands provides diversity in terms of the establishment of funds of different formations. Among them, the umbrella funds should be noted, given the coexistence of subsidiaries, which act as diverse conductors for investment assets. These subsidiaries are established in low-tax jurisdictions, such as the Netherlands, Luxembourg, Denmark, Cyprus, that makes it possible to enjoy the advantages of agreements on avoidance of double taxation.

Hereafter, we will consider the most popular structure of offshore fund in this region, preservation of the status of non-resident fund, and determine the meaning of exempted enterprise.  

The background of all mutual investment funds is one or two organizations established in accordance with the regulatory acts of the country of registration using the most convenient organizational and legal form.

Public and private fund structures in the Cayman Islands are established on the basis of exempted enterprises, namely: limited liability companies, unit trusts or partnerships with limited liability. The exempted companies were called thereby because they work in the offshore operating mode and they have the status of non-resident, without reference to the status of participants or managers.

But, there is one significant restriction, because it is impossible to conclude deals with local residents, although at the same time the other Cayman offshore companies are not considered as the local residents, and therefore they can become the clients of the fund without negative consequences for their non-resident status.

According to the level of regulation of the organization of funds and their interrelation with the Cayman Islands’ Law on mutual investment funds, it is possible to mention the following.

Classification of funds in the Cayman Islands.

From the most practical side for the founders of the fund, there is classification according to the level of regulation of the organization and the activities of the fund. The basis for this classification is the system of conditions that are to be met by the required funds according to the Cayman Law on mutual funds.

According to the norms of this Law, the Caymanian investment funds can be exempted from registration under the provisions 4(4) (a) and 4(4) (b), in case they fall within the concept of "exempted funds". They can also be registered as regulated funds in accordance with the provision 4 (3) and as administered funds in accordance with the provision 4 (1) (b) of the Law. Licensed funds can also be registered, according to 4 (1) (a).

It is worth noting that such another fifth category can be defined as "exceptional funds". If the fund is established in such way that it does not fall within the definition of "mutual fund" according to the Cayman Law and which activities are not regulated by the Cayman Islands Monetary Authority  (CIMA).

The conditions to be complied with by the funds regulated by CIMA according to the Cayman Law  have the following provisions and are binding. They can initially be divided into two groups.

The first group implies conditions that are mandatory for the establishment of the fund. They include:

1. Coordination with the CIMA of the current actual version of the memorandum on the offering of shares of the fund or the final project and other agreements which are necessary for the operation of the fund. Because then the fund submits the reports on the work done by it and is liable according to the criteria specified in the memorandum.
2. The Fund shall be ensured with the set of corporate and contractual instruments, provided for in the constituent agreement, determining the existence of each of the structural units of the organization and the interrelation between them in such way that local regulator and auditor, shareholders and investors, administrator and fund operator can carry out and maintain the company's activities in accordance with the rules and regulations. It is also especially needed that the documents set forth the transparency of the fund's obligations to investors and shareholders, in the sphere of procedure and conditions of issue of shares and payment for shares, and the calculation of the amount of payment for the work of the fund operator concerning organization of the activities of the fund.
3. The administrator monitors the rules of keeping the register of shareholders, and the auditor is responsible for the correctness of the accrual and payment of remuneration to the manager. The duties of the manager include elaboration and organization of the fund's policy, as well as its long-term and short-term planning.   
4. The Fund needs to confirm the recruitment of the Cayman’s auditors and administrators by providing copies of letters and consent to maintaining.
5. It is necessary to confirm payment of the first annual fee, as well as payment of the minimum authorized capital of the fund.
6. All persons who are the founders of the fund are required to have excellent reputation. Practice shows that depending on the type of registered fund this condition is interpreted differently.  

   The second group puts forward the conditions for the procedure of management and organization of the work of the fund:

1. The fund manager, who fulfills the functions of the administrator, shall have good reputation, knowledge and experience which are sufficient to carry out management. Once again, checking the abovementioned characteristics depends on the type of fund being registered.
2. Represented by the board of directors or one single director, each Caymanian mutual investment fund should be managed by the operator who is engaged in the fund's supervisory activities. Such supervisory persons may be investors, partners, shareholders, who are the owners of the fund, or persons appointed by them for the purpose of performing operational management.  Nominal service is also available in full or in part regarding the trust fund.  

The concept and positive aspects of formation of the exempted (unregulated) fund.

Exempted funds (which are exempt from registration under the Law) are the most popular type of fund among the investors. These funds are also called unregulated due to the fact that there is no need to regulate and coordinate establishment and activities of the fund with the CIMA.

It is also the least expensive alternative, both in terms of the amount of required investments and the time for its registration. But at the same time it is considered as full-fledged fund, which activities completely comply with the legislation of the Cayman Islands, and therefore this type of fund can present itself as hedge fund having legal opportunity to establish bank, stock exchange, joint stock company, and other financial institutions.

In the event the founder of the fund does not plan to attract large scale investments, but tend to perform activities exceptionally relying on its own financial reserves, the necessity for banking services of this organization is still present, which means that it will be necessary to provide the bank with the documents confirming the legal basis for the functioning of the client base structure .

Given the fact that at the moment each bank is informed of the necessity for licensing or obtaining permit in another form in order to carry out investment activities, contribute financial assets of unlimited range of parties, so the abovementioned aspects can be treated as the activity of each fund. Regarding the exempted funds, this condition is transformed into requirement to prove that the activities of the fund fully comply with legal norms and rules that are set forth by the tax authority in the state where the fund is registered. Examination of the law of the Cayman Islands will help you to deal with different issues, so that in the future there will be no problems with those.

What requirements are necessary to obtain the "exempted" fund status? And the procedure for managing this fund and the structure of legal entities of the exempted fund.

The Cayman Islands’ law does not contain requirements for funds with respect to the registration in the CIMA. But, it is worth noting that number of conditions to be fulfilled are put forward for such funds, so that the fund retains the status of the exempted one.
According to the norm 4 (4) (a) of the Law, the composition of the exempted fund can not be more than fifteen direct investors. Investors are the foundering persons, the initial shareholders of the fund.

The right of the majority of the founders to appoint and terminate the powers of the operator shall be provided for in the constituent documents.

But, it is worth noting that, without taking into account special conditions, general conditions, which should be fulfilled in accordance with the Caymanian law and which should be mandatory executed by all investment funds, are also related to the exempted funds.

As for the conditions concerning necessity to provide agreements and other documents, which maintain the activities of the fund, for coordination with the CIMA, then there is no need in such ones, and the sole agent who performs the supervisory functions in relation to the norms of the law is the Legal Counsel who is the lawyer initially present in the project for the registration of the fund in accordance with the legislation, represented by the incorporator, the adviser to the secretary, having license for fiduciary services.

The exempted fund structure in the form of the legal entity may be insignificant and contain only the managing organization and the fund company.
In the same case, the managing organization acts as the investors of the fund, and the investors themselves act as shareholders of the managing organization.

The investors of the fund independently or with the participation of the nominee director are acting as the directors of the fund.

In the absence of the auditor and even the administrator in order to comply with the provisions of the Law on the fair and independent assessment of the net assets of the fund, this fund needs to engage an independent structure to fulfill the obligations to calculate the net assets of the fund. But, the lack of the administrator and the auditor is undesirable for the fund's reputation, although it is not prohibited by the legislation.

Other functions and responsibilities for elaboration of investment policy, interaction with depositors, and administration of the fund can also be executed by one manager.
In order to establish the status of the exempted fund, the operator of this fund shall send the required application to the CIMA.

According to the Cayman Islands’ Law on Mutual Investment Funds, the funds that are required to be registered imply such funds, as: regulated, administrated, licensed funds. Let’s consider their distinctive features.

Administered funds. Their distinctive characteristic implies the necessity to appoint Caimanian resident administrator who has the special license. But at the same time the law does not limit the fund to the minimum number of investors or the amount of investments made by each investor.

Regulated funds. In this case, there is also no limit on the number of fund investors, but there is the minimum amount of future capital to be gained by the investor, which is one hundred thousand US dollars or the same amount in different currency.
Along with other requirements, there are also requirements which imply the registration of shares of the fund for subsequent engagement in stock exchanges recognized by the CIMA.

Licensed funds. This type is subject to the most demanding due diligence procedure for investors and managers, because the license to be obtained is issued to them as agents being able to manage investments of the third parties.

Concerning the term of organization of the fund structure, it is necessary to note the following. The term of ready made fund organization should be considered as several periods:

1. As the period of collection of the required documents, which are necessary for successful passing of due diligence procedure by the founders of the fund. This indicator is quite unique for everyone, because usually this period ranges from 14 to 30 days.
2. The period, necessary for the coordinated approval of constituent documents of all persons and base of agreements, which is the basis of the fund’s activity, ranges from two to four weeks with due cooperation of both parties, since this procedure is considered as one of the most difficult.
3. The third period should be considered the term that, depending on the selected fund, implies either the submission of documents to the CIMA or the use of them for registration of the organization, if there is no need for the CIMA approval. If the submitted documents are analyzed by the CIMA, then the consideration period may be more than thirty days, and during the subsequent procedure for registering the fund, it can be about two weeks.             

It is worth noting that this term is calculated from execution and conclusion of agreements with administrators, auditors, brokers, banks and other entities or persons necessary for sustaining of the required fund.

Regarding the cost, the price of establishing unregulated fund will be thirty-six thousand US dollars. However, this price implies only standard form of fund establishment and is not the key one. It includes the incorporation of a couple of legal entities, issuing package of various agreements and other documents providing for internal and external relationships, as well as maintaining the fund's activities for them.