Positive steps: regulation and tax in Cayman

Cayman Captive: It’s been a poor year for the world’s economy, full of stories of doom and gloom; has there been any good news for Cayman?

Ben Leung: There’s no doubt that it has been a tough year for Cayman as well. However, there have been many positives that should be emphasised. Cayman Finance, the umbrella body for the financial services industry, recently highlighted that Cayman is the leading offshore domicile for cat bonds. For the sponsors of cat bonds, usually insurance or reinsurance companies, the bonds represent an alternative to traditional reinsurance, where the risk of low-frequency, high-severity events such as hurricanes or earthquakes can be passed to the capital markets.

Four new captive insurance managers have opened their doors in Cayman. Eighteen new captives have formed, with another 11 agreed in principle. We have a new and improved Insurance Law, the Insurance Law 2010, which implements recommendations from the 2009 International Monetary Fund review and is partially structured to protect existing business and attract new business into the Cayman Islands. Our regulator, the Cayman Islands Monetary Authority (CIM A) is also making investments in technology and contributing its ideas on best practice on the global stage.

Cayman Captive: Is there any new US tax law that will have an impact on Cayman?

Paul Dougherty: There are proposed changes to the regulations of US tax laws. Special purpose companies (SPCs) will now be treated as separate corporations for US tax purposes.

The Internal Revenue Service issued proposed regulations on September 13, 2010 on the classification for federal tax purposes of a foreign series or cell that conducts insurance business. The proposed regulations provide that a foreign series or cell that conducts insurance business is a legal person for local law purposes, while for federal tax purposes, it is treated as an entity formed under local law. The proposed regulations require that each series and series organisation file a statement for each taxable year. This statement contains the identifying information with respect to the series or series organisation on or before March 15 of the year following the period for which the return is made.

"In a financial services company, investing in people and cutting-edge technology is paramount."

In general, series LLC statutes provide that a limited liability company may establish separate series or protected cells. A cell company may establish multiple cells, each of which has its own name, but generally is not treated under local law as a legal entity distinct from the cell company. The assets of each cell are statutorily protected from creditors of any other cell and from the creditors for the cell company. The cell may issue insurance or annuity contracts, reinsurance for such contracts or facilitate the securitisation of obligations of a sponsoring insurance company. The protected cell companies must meet the requisite risk shifting and risk distribution to qualify as insurance for federal income tax purposes.

Cayman Captive: What is new in the Insurance Law 2010?

Leung: The exciting parts depend upon your point of view. Penalties for non-compliance with the law have been strengthened, which is usually of interest to those in the industry. The most highlighted part of the law is the introduction of the Class C and D categories for insurance companies. Prior to this law, there were only Class A and Class B. Class A related to domestic business and Class B was the category for all other business. Class A is still for domestic business. Class B has been split into three sub-categories, which are differentiated by the amount of related party business transacted, or looking at it from another direction, the amount of third-party business written. Class C will contain structures such as cat bonds and other insurance-linked securities. Class D will cover reinsurers, and this specific provision is designed to encourage reinsurers to come to Cayman.

Dianne Batistoni: At present, Cayman only has one open market reinsurance company (Greenlight Re). The Insurance Law has been passed by the Legislative Assembly of the Cayman Islands. It will come into effect when approved by the Governor and the commencement date is predicted to be early 2011. There are associated Insurance Regulations accompanying the Insurance Law2010, and they have been released in draft form and sent to the industry as part of the government’s consultation process.

Cayman Captive: What about CIMA’s investment in technology?

Leung: In a financial services company, investing in people and cutting-edge technology is paramount. It is fantastic that our regulator is leading the way in a parallel fashion. We already have eReporting, where financial statements and an annual return are submitted electronically. For Investment Services, the division of CIM A that deals with mutual funds, CIM AConnect takes this to another level, where requests to CIM A can be made online and tracked with notification of when applications are approved. This allows more transparency and responsiveness to stakeholders in the regulated entity and allows automation of data processing, which enables the regulators to spend more time assessing and controlling risk as compared to processing pieces of paper. The stated aim is to phase in the same principles for insurance entities.

Cayman Captive: How has the combination of Eisner LLP and Amper, Politziner & Mattia, LLP into EisnerAmper LLP helped complement your existing expertise, and what advantages will a deeper bench bring to the company?

Batistoni: Both firms had significant expertise in the financial markets, with Eisner a recognised specialist in alternative finance, and Amper a major player in the insurance field. Together, EisnerAmper’s knowledge of the capital markets helps clients with advice on mergers and acquisitions, debt financing, IP Os, international expansion and restructuring. Through PKF Cayman and EisnerAmper Cayman, we now offer a suite of services ranging from audit and tax for captives, to advisory services for issues of fund administration, regulation and compliance. Both firms are independent members of PKF International, one of the world’s largest networks of independent accounting, tax and advisory firms.

Ben Leung is managing partner of PKF Cayman, Dianne Batistoni is an audit partner and head of the EisnerAmper insurance broker/ agency practice; and Paul Dougherty is a tax partner in the insurance practice of EisnerAmper.

They can be contacted at: bleung@pkfcayman.com; dianne. bastitoni@eisneramper.com and paul.dougherty@eisneramper.com