Cayman And The BVI Have Savings Tax Advantage, Says Law Firm

by Robin Pilgrim, LawAndTax-News.com, London

21 July 2005

Cayman Islands law firm Maples & Calder says that Cayman and the BVI have an advantage over other offshore jurisdictions because they have 'positively engaged' with the EU over the Savings Tax Directive.

The firm says that when the Cayman Islands and the BVI agreed to implement measures equivalent to the EUSD many anticipated an outflow of fund business from those jurisdictions. Now that the details of the implementation have been published it is clear that the reverse is the case. Both Cayman and the BVI clearly have a distinct advantage over other offshore jurisdictions, which have not implemented equivalent measures, for example Bermuda and the Bahamas.

Under the Directive, EU and Swiss paying agents can include (i) a feeder fund into an offshore master fund, and (ii) nominees of individual EU residents who make investments in offshore funds (in the case of nominees on the basis that they are "receiving or securing" payments for EU resident individuals). Both types of paying agent must report or withhold if the distributions constitute "interest payments" under the applicable EUSD legislation (in particular that the underlying fund has 40%/15% invested in debt obligations) and that the offshore fund is "in scope".

As a result of the Cayman Islands and the BVI agreeing to implement measures similar to the EUSD, certain EU jurisdictions, notably the UK and Ireland and, in addition, Switzerland have implemented legislation and/or guidance notes that acknowledge the non-UCITS equivalent of Cayman and BVI funds for the purpose of determining whether or not such fund is in or out of scope.

Accordingly, all Cayman and BVI funds are deemed to be non-UCITS equivalent and therefore "out of scope" other than (a) for a Cayman fund, a fund which is both licensed under Section 5 of the Mutual Funds Law and is listed on the Cayman Islands Stock Exchange and (b) for a BVI fund, a restricted public fund as defined in the Mutual Funds Act 1996.

Accordingly, in respect of any such Cayman or BVI non-UCITS equivalent funds, paying agents (whether feeder funds or nominees or otherwise) will not be required to make reports or withhold on the distributions regardless of the application of the asset test or the identity or residence of the recipient of the dividend or distribution.

Conversely, funds based in the Bahamas and Bermuda are in scope, says Maples & Calder.

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