Why Are the Cayman Islands an Offshore Financial Haven?

Cayman Islands

The Cayman Islands is a British territory located in the Caribbean Sea and made up of three Islands of Cayman Brac, Little Cayman, and the Grand Cayman. The Cayman Islands has a population of 52,000 inhabitant. English is the official national language. The island territory is a popular tourist destination due to its beautiful beaches and clear waters of the surrounding Caribbean Sea. However, The Cayman Islands attracts visitors who visit for business purposes due to the territory’s reputation of being a financial haven.

Cayman Islands As a Tax Haven

A financial haven is a jurisdiction which puts in place business-friendly legislation as well as favorable tax conditions which can include a “zero-tax” policy and provide banking services for offshore clients. While there are many countries globally which are tax havens, the Cayman Islands is in a league of its own. The reason why the territory is so popular for investors is that there is no capital gains tax, income tax, estate tax, corporate tax, withholding tax, and gift tax. Businesses based on the island are exempted from paying stamp duty on any transaction. The Cayman Islands, while under the United Kingdom, has its constitution and has laws establishing the island as a tax haven and has never signed any tax treaties with foreign countries hence protecting offshore companies from tax authorities in their home countries. The Cayman Islands are one of the few countries in the world to not have a corporate tax policy, and this makes it so appealing to international companies. The British Territory has 100,000 companies registered under its jurisdiction with about 20,000 companies having offices in one five-story building called the Ugland House.

Tax Laws in the Cayman Islands

The island’s proximity to the United States has prompted several large corporations to set up subsidiaries in Cayman Islands and then channel entire business processes to these subsidiaries which are governed by the lenient laws of the island. An example of such a case is Shell Corporation which has directed all its sales to be handled by its Cayman Islands’ subsidiary and hence evading the heavy US corporate taxation which can reach more than 30%. The Cayman Islands also have strict privacy laws which shield their offshore clients from any prying individuals and revelation of the identities of business owners is not mandatory in the British territory. Unauthorized disclosure of bank information belonging to offshore clients is illegal in Cayman Islands and can attract a heavy fine as well as a jail term. Another interesting law is that offshore companies are not required by law to report their annual financial reports to any authority further protecting the privacy of the offshore clients’ businesses. However, companies are required to pay annual license fees to the government, and the fees are based on the amount of shares held by the respective companies.

Global Criticism

The Cayman Islands and all tax havens in the world have seen increased criticism from countries which are deprived of tax income from companies who use facilities in the islands to legally evade taxation. Many developing countries have also suffered by having politicians use tax havens such as the Cayman Islands to hide misappropriated public funds.