Cayman funds: how to comply with the OECD Common Reporting Standard

A summary of the actions that managers and boards of Cayman Island funds should undertake in 2017 to be compliant with their Common Reporting Standard obligations.

The Cayman Islands implemented the Common Reporting Standard (CRS) with effect from 01 January 2016 pursuant to regulations adopted in 2015 and which were amended at the end of 2016 to (amongst other things) introduce criminal sanctions for non-compliance.

Cayman Islands Financial Institutions, including Cayman Islands managers and funds, have one-off and ongoing obligations under CRS as applied through the amended Cayman regulations.

Most Cayman Islands managers benefit from an exemption under the Foreign Account Tax Compliance Act (FATCA) which means they have no “real” obligations (unless they sponsor funds they manage), other than to certify their exempt status to other relevant financial institutions on request. Such Cayman managers are however reporting Financial Institutions for CRS purposes with resulting administrative obligations under CRS that they did not have under FATCA (see below). Equivalent UK based managers are not currently expected to have any equivalent administrative obligations in the UK under the UK’s implementation of CRS, although the position should be monitored on an ongoing basis.

What should have been completed by now?

A Cayman Islands fund should already have:

  • put in place written policies and procedures regarding CRS compliance (this applies equally to Cayman managers, albeit that their actual compliance obligations are likely to be limited in practice)
  • implemented CRS compliant on-boarding procedures (with effect from 01 January 2016), including in investor subscription documentation and self-certification forms
  • conducted CRS pre-existing account due diligence, at least in relation to high value (>$1m) individual accounts open on 31 December 2015, by 31 December 2016, and
  • put in place a services agreement with an administrator or other service provider to which CRS due diligence and/or reporting is delegated, setting out the relevant scope of services, payment terms and dealing with the allocation of liability should CRS obligations not be satisfied.

What needs to be done next (in 2017)?

A Cayman Islands manager and fund will need to do the following this year:

Action Deadline
1. Put in place adequate written policies and procedures regarding its CRS compliance, if it has not already done so, and/or review any existing written policies and procedures to ensure that they remain appropriate and deal with the relevant Financial Institution’s obligations under CRS (whether retained or delegated to a third party).1 As soon as possible
2. Notify the Cayman Islands Tax Information Authority of its reporting (or non-reporting) Financial Institution status under CRS on the online Automatic Exchange of Information (AEOI) Portal.2 30 June 2017 (extended from 30 April 2017)
3. File a first CRS report for the 2016 calendar year, with a nil report required if the Cayman Islands Financial Institution has no reportable financial accounts.3 31 July 2017 (extended from 31 May 2017)4
4. Complete pre-existing account due diligence for entity accounts (including in respect of Delaware LP feeder funds and other entity investors) and low value (≤$1m) individual accounts, to the extent not already done so.5 31 December 2017

Dormant and liquidating funds

Cayman Islands CRS guidance provides that Cayman Islands Financial Institutions that are in liquidation or being wound up continue to have CRS obligations, although no notification should be required if liquidation/dissolution has been completed before it is possible to comply with the notification obligation. This is a departure from the position for dormant or liquidating Cayman Investment Entity Financial Institutions (such as funds) under FATCA, where the closure or formal appointment of a liquidator causes the entity to cease to be an Investment Entity Financial Institution at that point, although FATCA obligations remain for the part of the calendar year when it was an Investment Entity Financial Institution. Arguably a fund that is closed or has formally appointed a liquidator may not even meet the definition of being an Investment Entity Financial Institution for CRS purposes. However, it is more difficult to reach such conclusion for CRS purposes than for FATCA purposes due to the broader definition of Investment Entity under CRS as well as the different approaches taken by the Caymans Islands for CRS and FATCA purposes in relation to dormant/liquidating Cayman funds described above. The position of dormant/liquidating Cayman funds under CRS will therefore very much depend on the specific facts and circumstances.

 




 

1Amendments made to the Cayman CRS implementation regulations at the end of 2016 made it clear that the policies/procedures must be in writing and guidance issued by the Cayman Islands in April 2017 gives some detail as to the expected content of such written policy/procedures - having an agreement in place that delegates CRS due diligence and/or reporting to a service provider is not sufficient of itself to discharge this obligation. The CRS policies/procedures for Cayman managers who are exempt under FATCA could be quite short and straightforward, given that they would generally be expected not to have reportable accounts for CRS purposes.

2Cayman Financial Institutions, including Cayman managers and funds, are required to notify the Cayman Islands Tax Information Authority of their reporting (or non-reporting) financial institution status under CRS and provide certain relevant information about the Financial Institution and individuals authorised to act as points of contact for Cayman Tax Information Authority in connection with the Financial Institution’s CRS compliance. Written evidence of such authorisation is expected to be required to be uploaded onto the AEOI Portal as part of the notification process.

Reporting Cayman Financial Institutions established in 2016 are required to make a FATCA notification on the AEOI Portal by the same 30 June 2017 deadline. The UK CDOT notification obligation will be fulfilled by making a CRS notification.

3It is expected that filing a nil return will involve the simple ticking of a box on the AEOI Portal. The Cayman CRS guidance provides that a Cayman manager with no financial accounts may avoid annual nil reporting under CRS if it confirms that it has no financial accounts in its CRS notification form (unless and until that confirmation is no longer correct).

4The deadline for filing a FATCA report for 2016 has also similarly been extended for 2017 to 31 July 2017. UK CDOT (the UK equivalent of FATCA relating to reporting of UK resident account holders) has not yet been repealed but there will not be separate reporting for UK CDOT purposes. In order to meet the UK CDOT reporting obligations in relation to UK reportable accounts, the Cayman Financial Institution must include in its CRS report all information required to be reported under UK CDOT for 2016 (including any additional information required to be reported under UK CDOT that is not required under CRS in relation to UK reportable accounts).

5This CRS obligation (relating to pre-existing account due diligence) is more relevant to Cayman funds than Cayman managers as most Cayman managers will not have any financial accounts for CRS due diligence purposes. The obligation to conduct CRS due diligence of new financial accounts is an on-going obligation that should be dealt with at the time of account opening/subscription.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.