This article first appeared in The Alternative Investor, May 2025. You can sign up to receive the monthly publication here. 

The dominance of the Cayman Islands in the offshore funds market is due to a combination of its tax neutrality, proximity to the United States and bespoke fund legislation and regulatory regime that have continuously evolved to meet market demands. Additionally, the jurisdiction’s appeal as a stable British dependency with a judicial system underpinned by English common law is fundamental.

Tax neutrality is one of the most significant advantages. The jurisdiction does not impose corporate, income, capital gains or withholding taxes on investment funds or their investors. Consequently, investors can manage their tax obligations in their country of tax residence and are not subject to multiple layers of taxation.

The Cayman Islands are dedicated to upholding the highest international standards and practices, including compliance with the OECD's common reporting standard and the requirements set by the Financial Action Task Force. The jurisdiction has also established a comprehensive legislative framework to combat money laundering, terrorist financing and proliferation financing. These robust regulatory measures enhance investor confidence, making the Cayman Islands an attractive jurisdiction for both investors and fund managers.

Most investment funds in the Cayman Islands are regulated by the Cayman Islands Monetary Authority ("CIMA"), which issues rules and guidance to regulated funds to ensure compliance with global standards while maintaining a business-friendly environment. CIMA's aim is to achieve a sound financial system for the Cayman Islands that meets international standards and supports sustainable growth, development and resilience. The jurisdiction provides a flexible framework for investment managers underpinned by rules and guidance that require specific disclosures to investors, ensuring funds operate within a solid legal structure that protects investors while allowing flexibility for innovative fund structures.

Various entities can be used to structure investment funds, including: (i) exempted companies; (ii) exempted limited partnerships; (iii) segregated portfolio companies; (iv) limited liability companies and (v) unit trusts. Exempted companies and segregated portfolio companies are commonly used as open-ended funds, while closed-ended funds are typically structured as exempted limited partnerships. Limited liability companies are a relatively recent innovation, ideal for parallel funds that wish to replicate the terms of a US LLC; while unit trusts are primarily used for investors in particular jurisdictions where other types of vehicle suffer tax or regulatory disadvantages.

Given the number of investment funds established in the jurisdiction, there is a sophisticated network of professionals operating in the Cayman Islands including lawyers, accountants, auditors, administrators and fiduciary service providers ensuring that fund managers have access to expert services.

For all these reasons, the Cayman Islands remains a popular choice for investment funds.