OECD CRS - Exemption Secured for 'Old and Cold' Cayman CDO/CLO Issuers
The Cayman Islands Tax Information Authority ("TIA") has issued an advisory to confirm that the limited life debt investment entity ("LLDIE") exemption established under FATCA has been extended in the Cayman Islands to the OECD Common Reporting Standard ("CRS").1 As such, a Cayman Islands LLDIE has been designated as a "Non-Reporting Financial Institution" ("NRFI") and exempt from the due diligence and reporting obligations of CRS as well as FATCA.
The categories of NRFI under CRS are limited and not as broad as those provided under FATCA, which includes additional categories of "Exempt Beneficial Owners" and "Deemed Compliant Financial Institutions" (such as LLDIE), which are all exempt from GIIN registration and reporting under FATCA.
The importance of the LLDIE exemption to the CLO market cannot be overstated. There are approximately 1,500 of such 'old and cold' deals in the Cayman Islands. For a number of reasons, it would be practically impossible to amend these deals to permit compliance with FATCA or CRS. In many cases, non-compliance would trigger the forced resignation of Cayman based directors in order to avoid criminal penalties, which in turn could result in such deals defaulting or becoming "zombie" CLOs to the potential detriment of investors.
As the leading CLO firm in the Cayman Islands, and in order to avoid these potential consequences, Maples and Calder submitted a detailed proposal to the TIA working group seeking an extension of the LLDIE exemption to CRS in the Cayman Islands. To qualify as an NRFI, we had to demonstrate to the TIA (and by extension, the OECD) that an LLDIE presented a "low risk for tax evasion purposes". The proposal emphasised the structural characteristics of CLOs and the regulated status of the main participants in a CLO recognised by the US Treasury in agreeing the exemption under FATCA.
In accordance with CRS requirements, the TIA gazetted the list of NRFI to include LLDIEs, with an additional link to the full definition under the advisory. The definition will be replicated in the CRS Guidance Notes which are due to be issued at the end of Q1 2016, in conjunction with the procedural requirements. The CRS Guidance Notes are promulgated under the Tax Information Authority (International Tax Compliance) (Common Reporting Standard) Regulations, 2015.
The LLDIE exemption, which was specifically crafted with pre-FATCA CDO and CLO vehicles in mind, is available to structured finance issuers that issued one or more classes of debt or equity interests to investors pursuant to a trust indenture, trust deed or similar agreement and where all such interests were issued on or before 17 January 2013. The relevant financial institution is also required to satisfy certain other tests, including the requirement that substantially all of the assets of the financial institution consist of debt instruments or interests therein (please see our prior update for a full description of the LLDIE requirements).
Cayman Islands entities seeking to rely on the LLDIE exemption will be required to provide an annual notification of such designation to the TIA. However, we understand that there should be scope for bulk notifications to be made by the relevant service provider in the Cayman Islands. To strengthen the low risk of tax evasion analysis, the initial LLDIE designation will expire on 31 December 2018. Importantly, it should be noted that the TIA has retained the ability to grant one or more extensions to the LLDIE exemption.
Further updates on CRS will be published when the second part of the CRS Regulations and the CRS Guidance Notes are issued.
For further information or advice on the application of CRS, please speak with your usual Maples and Calder or MaplesFS contact or any one of our FATCA / CRS experts listed below or on our dedicated FATCA and CRS webpage.
1 See our previous update on CRS: Cayman Islands Issue OECD Common Reporting Standard Regulations