Cayman Islands

Country code – KY

Legal Basis – Common law

Legal framework – The Foundation Companies Law, 2017

Regulatory board – Cayman Islands Monetary Authority

Entity – Foundation Company

Liability - The properties and resources of a Foundation Company constitute an independent patrimony from that of the Members, Directors, Supervisors and Beneficiaries.

Requirements - For a company to be a foundation company, the requirements are that:

(a) it is limited by shares or by guarantee, with or without share capital;

(b) it has a memorandum that - (i) states the company is a foundation company; (ii) generally or specifically describes its objects (which may, but need not, be beneficial to other persons); (iii) provides, directly or by reference to its articles, for the disposal of any surplus assets the company may have on winding-up; and (iv) prohibits dividends or other distributions of profits or assets to its members or proposed members as such; and

(c) it has adopted articles; and

(d) its secretary is a qualified person.

A member is not regarded as receiving a dividend or distribution as a member merely because the member:

(a) is a beneficiary of the foundation company and receives benefits as such;

(b) receives reasonable remuneration as a director, officer or a person having a duty under its constitution;

(c) is indemnified or reimbursed for expenses or liabilities incurred in relation to the company;

(d) benefits from a loan or other transaction or relationship entered into with the company on terms that are no more favourable to the member than if they had been negotiated at arm’s length; or

(e) will or may, under the constitution, receive benefits from the disposing of surplus assets on winding-up.

Purpose - A foundation company may be formed for any lawful object which need not be beneficial to other persons.  Such as acting as a holding company or an investment company or providing financial assistance or benefits to beneficiaries.

Capital – A foundation company must be limited by shares or by guarantee with or without share capital.  There is minimum asset contribution or share capital required to incorporate a Foundation company.

Economic Substance – Under the International Tax Co-operation (Economic Substance) Act, 2018, companies conducting relevant activities must meet substance requirements.

'Relevant activities' include:

• banking i.e. banking business
• insurance i.e. insurer
• finance and leasing i.e. business of providing financing or leasing of assets
• fund management i.e. management of collective investment schemes
• distribution and service center business i.e. reselling goods to affiliated companies or providing services to affiliated companies. Affiliated company is defined as a company which is part of the same group (e.g. parent-subsidiary, sister entity with common parent company, etc).
• headquartering i.e. providing management services to affiliated companies
• intellectual-property business i.e. holding and exploiting IP assets, generating identifiable revenue from such assets. Please note that the provision of services for developing IP assets or holding or using IP assets for ordinary commercial or service business is not considered an intellectual property business. IP businesses are those that generate separate and identifiable revenue from IP assets (e.g. patent licensing)
• shipping i.e. transportation by sea of persons, animals, goods or mail, the renting or chartering of ships for such transportation, management of ship crew, sale of travel tickets, the use, maintenance or rental of containers, including trailers and other vehicles or equipment for the transport of containers, used for the transport of anything by sea
• and pure equity holding company, companies that only own equity interests in other companies, and only earn dividends and capital gains.

Note that investment fund vehicles are explicitly excluded from this legislation.

Companies that carry out relevant activities must satisfy the economic substance test – they must:

• conduct its core income-generating activities in Cayman (which are defined in the law).
• be directed and managed from within Cayman.
• have an adequate amount of operating expenditures incurred in or from within the Islands.
• have an adequate physical presence (including maintaining a place of business or plant, property, and equipment) in the Islands.
• have an adequate number of full-time employees or other personnel with appropriate qualifications in the Islands.

Holding companies which only hold equity participations in other entities and only earn dividends and capital gains will be subject to a reduced economic substance test – it must have complied with all applicable filing requirements and must have adequate human resources and adequate premises in the Islands for holding and managing equity participations.

All Cayman companies are required to notify annually the Department of International Tax Co-Operation – stating whether or not they are carrying out relevant activities.

Companies carrying out relevant activities are required to file a return related to the amount and type of income with respect to the relevant activity, expenses, assets, management, employees, and physical presence, among other requirements.

Companies failing the substance test will be given direction on how to meet the test and may face a fine of up to KYD 10,000.

Continued failure to meet the test in the following year may result in higher fines of up to KYD 100,000.

Founder – A Foundation Company does not require anyone to have a formal role as a founder as such.

A Foundation Company is incorporated on the instructions of the person(s) promoting it in the same way as any other Cayman Islands company. A founder does not have any automatic rights in relation to the Foundation, but may reserve rights if he/she wishes.

The founder may be given a power to amend any of the provisions of the Foundation’s constitution but only if expressly provided in the constitution.

Members – A Foundation company may be incorporated by one or more members, who can be non-residents, corporate bodies or individuals. A Cayman Foundation can cease to have members at any time, and the cessation will not affect the Cayman Foundation’s existence, capacity or powers, provided that it continues to have one or more supervisors.

Board of directors – A Foundation company is managed by a board of directors. Any individual of full capacity and any company may be a director. There is no residency requirement for directors and there are no other restrictions as to who may act as a director of a Foundation Company. Directors are required to give interested persons reports, accounts, and any information/explanations concerning the Foundation’s business and affairs.

Supervisors - A supervisor is defined by the Law as a person, other than a member, who, under the Foundation Company’s constitution has the right to attend and vote at general meetings.

Interested Person - An interested person is a person that is any of the Foundation Company members or supervisors.

An interested person is someone declared under a Foundation company's constitution to be an interested person or someone who has the right to be a member or supervisor of the Foundation. Further, an interested person can bring an action in the name or on behalf of the Foundation company for the enforcement of the duties or liabilities of directors in the same circumstances and manner as may a member of a company that is not a Foundation Company.

Beneficiaries – A beneficiary of a Foundation Company is a person who will or may benefit from the Foundation carrying out its objects. The constitution may provide for any type of beneficiary and for any type of beneficial provision.

It is possible for a Foundation company constitution to provide for any duties, powers or rights to be vested in beneficiaries. Therefore, a beneficiary can be given direct enforceable rights against the directors, officers and interested persons.

A Foundation Company may not have beneficiaries.

Beneficiaries' Right to Information - A beneficiary of the foundation company has no powers or rights relating to the foundation company, its management or its assets and is not an interested person.

Therefore, beneficiaries do not have the power to request reports, accounts, information and explanations concerning the foundation company’s business and affairs, and the discharge of its directors’ duties and the exercise of their powers.

Secretary – The foundation company shall have a Cayman Islands’ qualified secretary licensed under the Companies Management Law.

Registered Office – A foundation company’s registered office shall be at its secretary’s business address as a Cayman Islands’ qualified person

Foundation’s Constitution - A foundation company’s constitution may, as well as providing for its management by directors or their delegates, give rights, powers and duties of any type to members, directors, officers, supervisors, founders or others concerning the foundation company.

A foundation company has a duty to carry out the objects set out in its memorandum if, and only if, the memorandum - (a) expressly so declares; and (b) designates, or provides for the designation of, persons with standing to enforce the duty by action against the foundation company.

Disclosure – Details of members, directors, supervisors and officers are not disclosed in a public registry.

Re-domiciliation – A foreign company may continue in Cayman and change its status to a Foundation company.

Mergers - There is no ability for a Cayman foundation company to merge with any other entity.

Charitable/Philanthropic Purposes - Permitted.

Electronic Signature – Allowed.

Compliance – Cayman Islands companies must keep accounting records. The records may not be kept in Cayman, but must be made available at the registered office if an order or notice for production under the Tax Information Authority Act is made.

Companies are not required to file financial statements or tax returns. An annual return must be submitted every January stating whether there has been a modification of the Memorandum of Association and confirming that no business has been conducted within the jurisdiction. Companies are also required to pay an annual government fee every January.

An economic substance notification must also be filed outlining whether the company has been carrying on a relevant activity for the purposes of economic substance during the previous financial year. If the company has been subject to economic substance, an economic substance return must be completed and filed with the DITC on or before 31 December.