The Cayman Islands is a British Overseas Territory and the leading jurisdiction for establishing offshore investment funds globally. It is considered to be the most attractive hubs for offshore financial businesses as it provides a stable, tax-neutral platform but also offers a sound legislative and judicial system, confidentiality, a leading banking sector and legal and support services.
To register for a Cayman fund license, it is necessary to first incorporate a Cayman Exempted Limited Partnership (ELP). In this article, we will outline some important factors to consider when setting up an investment fund in the Cayman Islands to help fund managers decide whether it is the right domicile for their fund.
What is the Cayman Exempted Limited Partnership (ELP)?
Cayman Exempted Limited Partnership (ELP), is a Cayman partnership that is registered under the Exempted Limited Partnership Act (ELP Act). The ELP Act takes these partnership concepts and provides a modern framework that makes an ELP the vehicle for a variety of purposes. Apart from it being used as a tool for investment funds, it is also used in all types of private equity and real estate; as tax transparent master funds in onshore/ offshore hedge fund structures; and as single-investor vehicles replicating managed accounts.
What should we consider while setting up a Cayman Exempted Limited Partnership (ELP)?
- Company Name
The company’s name must end with “Limited Partnership, “LP”or “L.P.”. The name shall not include any misleading or sensitive (discriminatory) words. In other cases, the company name, such as “bank”, “insurance”, “trust”, “royal”, may require the prior consent from the Registrar.
- Registered Office
The company must have a registered office in the Cayman Islands, and the address needs to be used to receive notices and documents.
- Operating Years
The company’s operating period can be fixed or indefinite.
- Limited Partnership Agreement
Cayman Exempted Limited Partnerships requires the registration of a partnership agreement, which need not be public information, or exposed to any public scrutiny.
- Company Structure
The company requires at least two independent individuals or entities to form a partnership (the “two-party rule”), including one general partner and one limited partner. Since the Cayman ELP is not a separate entity, the power, duties and responsibilities of the general partner is very important.
At least one general partner must be a ‘qualifying general partner’: typically, a Cayman exempted company; a non-Cayman company (or LLC) registered in Cayman as a foreign company; or a non-Cayman limited partnership registered in Cayman as a foreign limited partnership.
The articles of incorporation will dictate the respective rights and obligations of the general partners. The general partners shall sign all letters, contracts, deeds and documents on behalf of the ELP. On top of that, any debts or obligations incurred by the general partners will automatically be assumed as the ELP’s debts and obligations. Unless the Limited Partnership Agreement states otherwise, the general partners shall maintain good faith to always act in the interest of the ELP.
Similarly, at least one limited partner must be in place. It can be an individual or a local/ foreign company. The limited partners are not allowed to participate in any business operations and have limited liabilities.
Generally, the limited partners are required to contribute to the ELP the pre-agreed amount under the terms of the Limited Partnership Agreement or accompanying subscription agreement. There is no statutory requirement for contributions to be made in the form of money. Unless the Limited Partnership states otherwise, contributions of investments, properties or other assets can all be considered.
- Tax Treatment
Neither ELP nor any partners are subjected to taxation in the Cayman Islands. Nonetheless, an ELP need to apply for an undertaking to be granted on behalf of the Cayman Islands Government that, for a period not exceeding 50 years from the date of the undertaking, no law which is enacted in the Cayman Islands imposing any tax to be levied on profits, income, gains or appreciations shall apply to the ELP or to any partner in respect of the operations of the ELP, the assets of the ELP or the interest of a partner in the ELP.
Most LPA would have provisions prescribing the winding up and dissolution of the ELP upon the occurrence of a particular event – typically passing of a resolution by the general partner to the effect that the partnership’s affairs be wound up and dissolved. Otherwise, a solvent partnership will continue in existence until wound up and dissolved by a resolution from all general partners and majority of the limited partners.
In the case of death, bankruptcy or incapacity of the last remaining general partner will lead to an automatic dissolution of the ELP, unless there are steps taken from the limited partners to replace them.
It is also possible to apply to the court for a dissolution order.
- Compliance and Regulation
Should the ELP be established as an open-ended Investment fund in the Cayman Islands and falls within the definition of a “mutual fund”, it may be regulated by the Cayman Islands Monetary Authority (CIMA) and will have to comply with the local money laundering legislation.
On the other hand, close-ended funds established as ELPs, typically private equity funds, need not be regulated by CIMA. Closed-ended ELPs are not expressly covered within the relevant definitions in the Cayman Islands money laundering statutes as such, but their activities may constitute “relevant financial business” and they may, therefore, be covered by those laws. Despite that, it is most ideal for general partners to have standard KYC and due diligence procedures in accordance with the Cayman Islands anti-money laundering legislation or delegate responsibilities for compliance to an administrator.
Desfran has always been on top of the recent trends and developments for the Cayman fund industry. We are able to assist with your Cayman Exempted Limited Partnership (ELP) registration. With over a decade of experience, we will be able to assist in the establishment of business, company formation, compliance (KYC) and any other related matters.
Contact us to learn more about registering an ELP.