Part 1: https://bbcincorp.hatenablog.com/entry/cayman-islands-llc
3. Before incorporation: Matters to be considered
3.1 Taxation
Taxation system of Cayman LLC is similar to Delaware LLC. The Islands is considered as the ideal place for offshore companies as there is no corporate income tax levied on the company’s profits.
The LLC enjoys pass-through tax treatment, so all profits and losses of the company will be reported as the personal income.
Besides, Cayman LLCs may apply for a tax undertaking certificate with the maximum period of 50 years. This means that it is not allowed to legislate to tax the relevant Cayman LLCs on profits, income, gains or appreciation within this period.
3.2 Limited Liability Company Agreement (LLC agreement)
An LLC agreement, also known as an operating agreement or LLC record, of Cayman Islands is an agreement finalized by all members of the LLC. It may be entered before, after or during the company registration process. If it is entered before the filing, it will be effective on the date of registration filing.
The agreement includes a set of rules regulating LLC business or affairs and internal business operations. The membership interests, or the ownership stake in other words, are clarified in the agreement. It determines who will be eligible to make future actions including amendment of LLC records, and vote on business matters.
Business decisions are made through written resolutions made by all the majority of members unless it is required to be made by all members in the LLC agreement.
An LLC agreement is not compulsory but advisable for all LLCs in the Islands. It is not required to be filed with the Registrar unless it is combined with a Registration statement.
3.3 Membership
Upon the company registration, a person is appointed to be the initial member of the company. All conditions and criteria of membership admission should be defined in the LLC agreement. A person can be admitted as a member if he or she meets all these requirements. A qualified member is also possible with the consent of all members in the company.
Another way to be a member of Cayman LLC is by receiving LLC interest from other company members under conditions specified by the company.
All members of the LLC are subject to terms defined in operating agreement, which includes the withdrawal of membership. The withdrawal of membership can be done also with the agreement of company members.
The management will be provided under LLC agreement or given to its members acting by a majority in number. The responsible management persons are required to comply with the obligations included in the agreement.
4. Some notes of post incorporation duties
4.1 Cash or property allocation
Profits and losses are distributed to members based on agreed value by all members or set out in LLC records. The amount of distributions are determined by their capital contributions.
One thing you should keep in mind is that the receiver will be liable for the company on the amount of distribution if he or she has actual knowledge of the company insolvency. When the company is not able to pay its debts, it is determined as insolvency status.
4.2 Register of members and managers
Register of members. It is compulsory for every Cayman LLC to maintain the Register of Members at the registered office or other places outside the Islands. If it is kept at a place other than the Cayman Islands, a record of the place’s address shall be maintained at the registered office of the company.
Register of managers. Like the register of members, the maintenance of the register of managers is also obligatory for the LLC. The register of mortgages and charges must be also maintained along with the record of the manager register.
A heavy penalty will be applied on cases which fail to comply with the requirements for the register of members and managers.
4.3 Books of Account & Records
Books of account. All Cayman Islands LLCs that are registered within the country must submit proper books of account recording all business transactions. Such books give an accurate and fair view of the business and LLC financial condition.
Records. The LLC is required to maintain records of the contributions given by its members and the company’s distributions to the members. The records shall specify the amount of the contributions and distributions including the date when all related activities take place.
All records shall be kept at the registered office of the LLC within the Islands. They can be kept in other places other than Islands, but their copies must be available at the registered office in electronic form or any other medium.
The records are maintained for the minimum of five years from the date of its preparation.
4.4 Annual Return
In January each year, all Cayman LLCs must file a return signed by or on behalf of the LLC. The signed document must state that the LLC complied with all provisions of the Cayman Islands LLC law during the calendar year with the completion of the annual fee payment to the Registrar.
5. Economic Substance (ES)
Cayman Islands has developed its legislation system to meet the Organization of Economic Co-operation and Development’s (OECD) principles and EU requirements for improving sufficient economic substance. The economic substance regulations are applied to all Cayman LLCs in connection with relevant activities in Cayman under ES law.
Economic substance refers to the legislation designed to determine whether a jurisdiction is abusive tax shelter – illegal tax optimization. The economic substance requirements are set for business entities to reduce harmful tax practice. It is required for a business entity to actually have substantial activities and carry out business activities rather than aim for tax purposes.
Business entities that fall under ES are required to do an Economic Substance Test with certain examination criteria. They must meet some requirements to satisfy the ES test, which includes:
- Conduct Core Income Generating Activities in Cayman;
- Be directed and managed in Cayman;
- Have adequacy of operating expenditure amount, physical presence, number of full-time employees in Cayman.
The Tax Information Authority monitors and enforces the compliance of the ES requirements in the Islands. The failure to comply with the requirements is subject to a penalty.
6. Conclusion
The Cayman Islands has plenty of benefits that make it an ideal option for incorporation. Cayman LLC is simple to form, still it is important to understand its characteristics, legal requirements and general principles applicable to the registration and other related matters.
BBCIncorp is experienced in handling business registration in the Cayman Islands. Contact us for more information!
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