Segregated Portfolio Company (SPC) in the Cayman Islands
Updated on Tuesday 13th August 2024
Rate this article based on 6 reviews
The Cayman Islands is an attractive jurisdiction and a great number of foreign investors have taken an interest in how to start a fund here. The jurisdiction provides numerous instruments for investment purposes, including exempted companies, which offer advantageous tax policies. The creation of a Cayman SPC falls under the Companies Act.
What is a segregated portfolio company?
Following the regulations of the Companies Law in the Cayman Islands, the segregated portfolio company (SPC) refers to a type of legal entity which has as a main characteristic the fact that the investors may set up internal portfolios.
An important trait of the internal portfolio refers to its assets and liabilities, which are separated from the ones of the company’s general assets. At the same time, the company may also have segregated portfolios which can also have separate assets and liabilities. The segregated portfolio company in Cayman comes with various advantages, and one of the most important is that it can also be used for starting a hedge fund in this jurisdiction.
| Quick Facts | |
|---|---|
| Applicable legislation | The segregated portfolio company (SPC) in the Caymans is registered under the Companies Act revised in 2021 |
Trading name requirements | The company must bear the SPC letters in its name |
Special shareholding requirements | The SPC company must have at least one shareholder |
| Management requirements | The segregated portfolio company in the Cayman Islands must have at least 2 managers |
| Specific management conditions | The SPC must have a board of directors and one of the following: separate portfolio directorate, investment or management committee. |
| Possibility to use for investment fund creation in the Cayman Islands (YES/NO) | YES, the SPC is suitable for starting an investment fund |
| Other uses of the SPC | This type of company can also be used to operate as a captive insurance company and structured-finance enterprise
|
| Registration authority | The SPC must be incorporated with the Companies Register |
| Special authorization requirements (YES/NO) | The segregated portfolio company must also register with the Monetary Authority of the Cayman Islands |
| Registration timeframe (approx.) | Approx. 5 to 10 business days |
| Types of funds it can be used for | The SPC can be used to create registered, administered and licensed mutual funds, master funds, limited investor funds, private funds |
| Taxation of a SPC | There are no taxes imposed on SPC companies in the Cayman Islands |
| Annual filing requirements for a SPC | SPCs must file annual tax returns in January for the past year |
| Advantages of the SPC company | Imposition of an annual fee instead of a corporate tax, possibilty to be used for the creation of various types of investment funds, as well as for other financial-related businesses, possibility to be used by foreign investors |
| Registration documents | - Memorandum and Articles of Association, - list of each segregated portfolio, - declaration of the company’s assets and liabilities, - notice of registration. |
Possibility to operate abroad (YES/NO) | Yes. |
Assets held by a SPC | - Share capital, - other assets. |
| Possibility of having corporate shareholders | Yes. |
| Possibility to have natural persons as shareholders | Yes. |
| Possibility to convert a regular exempt company into a SPC | Yes, such a conversion is possible. |
| Conversion requirements | - Passing a special resolution by the shareholders, - obtain the consent of the Monetary Authority in the case of licensed companies. |
| Types of investors addressed when used as an investment company | Various types of investors, in accordance with the type of fund created. |
| Minimum share capital | There is no minimum share capital requirement for this type of company, as it must have authorized capital established by the shareholders. |
| Restrictions (if any) | No, all restrictions have been lifted for the Cayman SPC. |
| Types of assets it can hold | - General assets, - portfolio assets. |
| Types of general assets | Income and property rights. |
| Types of portfolio assets | Share capital, and reserves attributed to the Portfolio. |
| Capital gains tax | No, there is no capital gains tax in the Cayman Islands. |
| Access to other tax benefits | Yes, the Tax Exemption Undertaking. |
| Legal forms available for registration | The SPC can be registered as an exempt private company. |
Full foreign ownership availability (YES/NO) | Yes, a Cayman SPC can have 100% foreign ownership. |
Considerations about portfolio assets | Portfolio assets may be used to mitigate liabilities towards shareholders and creditors of the SPC. |
| Contract requirements | Upon entering a contract, the Cayman SPC will execute the respective agreement on behalf of each Portfolio. |
| Limitations on the number of portfolios an SPC can create (YES/NO) | No, there are no limitations on the number of such portfolios. |
| Resident director requirement (YES/NO) | No. |
| Exchange control restrictions over an SPC in the Caymans | No, there are no exchange control restrictions for this type of entity. |
| Possibility for each segregated portfolio to have its own investment manager (YES/NO) | Yes, according to the Cayman Companies Law. |
| Possibility to transfer assets between segregated portfolios (YES/NO) | Yes, however, directors must ensure the transfer is made at full value of each asset. |
| Rights of creditors in an SPC | The assets of a portfolio are available for creditors of the respective portfolio. |
| Possibility to transfer the assets of a portfolio to the general assets of the SPC (YES/NO) | Yes. |
| Conditions to convert portfolio assets into general ones | The conversion can be made for the payment of: - registration fees, - annual return fees, - taxes, - fines, - professional fees, - service provider fees. |
| Repatriation of profits availability for foreign shareholders (YES/NO) | Yes, profits may repatriated by foreign stakeholders. |
| Access to double tax treaties (YES/NO) | Yes, among which with countries like the UK, New Zealand, Japan, Argentina, Australia, Belgium, France, Denmark, Italy, Germany, Canada, and the USA. |
| Availability of SPC forms in other jursidictions (YES/NO) | Yes, in British Virgin Islands, Delaware (USA), Bermuda, Guernsey and Jersey. |
The assets or liabilities of the segregated portfolios in the Cayman Islands will belong to the owner of the respective segregated portfolio. According to the Part XIV of the Companies Law, the SPC was created to provide a high level of protection to investors who are carrying out different business strategies through the same legal entity. A similar strategy is available for fund domiciliation.
For example, investors who want to start a hedge fund may set up compartments within the fund, which will allow them to carry out multiple investment strategies. The Cayman SPC relies on its Memorandum of Association which contains the activities it can undertake.
Registration of a SPC in the Cayman Islands
In accordance with Section 216 of the Companies Law, a Cayman SPC can establish one or more segregated portfolios to separate its assets and liabilities held within or on behalf of a portfolio.
The Law also requires an SPC to distinguish between "segregated portfolio liabilities," or obligations that have been designated or allocated for the account of a specific segregated portfolio of an SPC, and general obligations, or SPC obligations that have not been designated or allocated for the account of any specific segregated portfolio of an SPC.
According to the regulations of the Companies Law, any exempted company registered in this jurisdiction may apply for the SPC statute. The procedure is handled by the Registrar of Companies. Previous to this action, the company should be also registered with the Cayman Islands Monetary Authority.
To register as an exempted segregated portfolio company in the Cayman Islands, the shareholders must submit an application to the Registrar of Companies.
The following papers must be submitted in order to set up an SPC in the Caymans:
- the Memorandum and Articles of Association;
- notice to the Registrar of Companies;
- a list of the names of each newly constituted segregated portfolio.
The following steps must be taken by the company when it is planned to transform an existing exempted company into an SPC:
- submit a declaration signed by at least 2 directors to the Registrar of Companies with information about the company's assets and liabilities, and the assets and liabilities intended for transfer, among others;
- approve the transfer of assets and liabilities by special resolution.
If you need support in setting up an exempt company or transforming such an entity into a Cayman SPC, we have local affiliates that can advise and offer support in this sense.
Officers in a Cayman SPC
The SPC must have a board of directors. Additionally, each SP is allowed to establish its own:
- separate portfolio directorate;
- investment committee;
- or management committee.
These will control and oversees the activities of the respective entity. The board of directors of the SPC will grant authority to the segregated portfolio directorate, investment committee, or management committee.
Also, each SP can have its own investment manager, trading advisor, and other service providers, but the agreements should make specify which SP of the SPC hired them.
The registration should be completed by two directors of the company, through an application in which they will provide relevant information on the assets and liabilities of the company, the transactions of the company, and other similar aspects. If you want to create a segregated portfolio company in Cayman, you can ask for the support of our local affiliates.
Annual requirements for a SPC in the Cayman Islands
Every exempted company, including the Cayman SPC, is required to comply with annual accounting requirements. As such, it needs to submit:
- an annual return, which must be filed in January;
- payment receipt of the annual filing fee.
The annual return will show that the exempted company has complied with the Companies Act's requirements since its incorporation or since the last year. The service provider who keeps the company's registered office in the Cayman Islands is often in charge of filing the annual return.
An SPC can also be subject to additional costs and provide a notification to the Registry listing all of the Portfolios it has created, in addition to the yearly return. Here is an infographic on this type of entity:
An SPC can also be subject to additional costs and provide a notification to the Registry listing all of the Portfolios it has created, in addition to the yearly return. Here is an infographic on this type of entity:
The main uses of a SPC in the Caymans
A segregated portfolio company in the Cayman Islands can be used for various purposes, among which:
- for creating investment funds;
- for operating as captive insurance companies;
- as structured-finance entities.
Cayman SPCs can be employed by investment funds, especially in the context of multi-class funds when one or more portfolios use leverage, short sales, and other tools that may result in significant obligations to third parties as part of its investment strategy.
The SPC can also be used by captive insurers, as it enables an insurer to include more partners in a reinsurance program without running cross-liability risks.
The assets in a Cayman segregated portfolio company
An SPC’s assets are made up of:
- assets that represent the share capital and reserves (which include profits, retained earnings, capital reserves, and share premiums) that are attributable to the entity;
- all other assets that are attributable to or held inside the SPC (such as bonds, equities, real estate, and intellectual property, for example).
Shares of the SPC may be issued in connection with a specific portfolio, and the proceeds of such issuance are counted among the assets of that company. The shares of the SPC may also hold the right to distribute from that portfolio. The SPC's general assets must include the profits from the issue of any shares that are not segregated portfolio shares.
The Companies Law also requires that a Cayman SPC distinguish between general and segregated portfolio liabilities, the latter being defined as liabilities of the SPC that have not been designated or allocated for the account of any particular portfolio of the SPC.
In this sense, the directors of the SPC are responsible:
- for establishing and maintaining procedures for segregating and maintaining segregated portfolio assets that are distinct from general assets;
- for the separation and maintenance of the separation of each of the assets of each segregated portfolio.
In capital market transactions, Cayman exempted companies can be also employed as bankruptcy-remote vehicles. Here is also a video on this topic:
The advantages of the SPC company
Not only in the Cayman Islands but also in other jurisdictions, the SPC is growing in popularity and usefulness. There are more and more jurisdictions, including numerous US states, such as Delaware, that have their own variations on the law governing segregated cells.
However, it is likely that in some jurisdictions an SPC may be viewed as an unknown structure, which is why caution is advised when using it, even to set up investment funds.
The Cayman SPC corporate structure has multiple advantages, which is why multi-class hedge funds, umbrella, and master-feeder funds usually adopt it. Apart from this:
- the possibility to create a statutory "ring fence" within an SPC allows for protection against potential cross-liability problems involving the assets and liabilities of the multiple cells;
- such a business form pays annual government fees that are 50% less than those of an exempted corporation;
- the SPC is a Cayman business structure with no residency requirements for directors or shareholders, similar to a typical exempted company;
- there are no limits on exchange control.
Among other advantages, the SPC and its owners are exempt from Cayman taxes.
If you are considering other jurisdictions for the creation of similar structures, you can consider Luxembourg and Liechtenstein in Europe.
Investment funds operating in the Cayman Islands
According to the Cayman Islands Monetary Authority, 2021 was a very good year for the investment funds sector, considering that:
- the total number of active mutual and private funds rose to 27,398;
- out of the total, 12,719 were active mutual funds, a 6.9% increase compared to the previous year;
- 12,695 were private funds, 15.6% more compared to the number of similar funds accounted for at the end of December 2020.
Investors interested in starting a hedge fund or a segregated portfolio company in this country are welcome to contact our team of affiliates in the Cayman Islands for more details on the legal requirements. If you have any questions on the segregated portfolio company in Cayman and its uses, our partners can advise you.