Guide to Foundation Companies In the Cayman Islands

1. Preliminary

The Cayman Islands Foundation Companies Act 2017 (the FCA) came into force on 18 October 2017. A foundation company is a hybrid entity that combines features of a company and a trust, and can be used for a variety of purposes, such as succession planning, asset protection, charitable giving, and commercial transactions.

Foundation companies may exist without members and can be orphaned, which makes them attractive for use in commercial transactions such as special purpose vehicles in financial transactions, in private trust company structures, as the holders of management shares in investment funds, in the preservation of family wealth and family office structures.

A foundation company can essentially be used for any purpose for which a trust is currently used. This guide provides an overview of the main features and requirements of a foundation company, and how it differs from a conventional company or a trust. It also explains how to establish and operate a foundation company in the Cayman Islands, and the role and obligations of a director, secretary and supervisor.

2. Legal Status

A foundation company is a body corporate that has a separate legal personality from its members, directors, officers, supervisors, founders, and other persons connected with it. A foundation company is governed by the Companies Act (2023 Revision) (the Companies Act), except where it is inconsistent with the FCA. The FCA prevails over the Companies Act in case of any conflict or inconsistency. Consequently, the organisational framework of a foundation company will be recognisable to individuals accustomed to managing companies. Additionally, the same legal precedents that govern Cayman companies will be relevant to Cayman foundation companies, where appropriate.

A foundation company can be limited by shares or by guarantee, with or without share capital. It can have members or be memberless. It can have objects that are beneficial, charitable, or both. It can also have objects that are not for the benefit of any person, such as holding assets or carrying out a specific function.

3. Establishment of a Foundation Company

Any company incorporated under the Companies Act may apply to be declared a foundation company provided it meets the following conditions as set out in the FCA:

• limited by shares or by guarantee, with or without share capital;
• it has a memorandum of association that declares it is a foundation company and describes its objects which may include beneficiaries;
• provides directly or indirectly by its articles of association for the disposal of surplus assets on winding-up;
• prohibits dividends or other distributions of profits or assets to its members;
• it has adopted articles of association that are consistent with the FCA and the Companies Act; and
• it has a secretary who is licensed to provide company management services in the Cayman Islands.

A member would not be regarded as receiving a dividend or distribution merely because:

• they are a beneficiary of the Cayman foundation and receive benefits as such;
• receives reasonable remuneration as a director, officer, or person having a duty under the Cayman foundations constitution;
• they are indemnified or reimbursed for expenses or liabilities incurred in relation to the Cayman foundation;
• the benefit from a loan or other such transaction entered into on terms no more favorable that was negotiated on an arm’s length basis; or
• will or may, under the foundation’s constitution receive benefits from the disposing of surplus assets on winding up.

Alternatively, instead of transforming an existing Cayman company into a Cayman foundation, a foundation company can be set up from the outset.

A Cayman foundation is created with one or more members, similar to an exempted company under the Companies Act. Unless specified otherwise at formation, anyone can be a member of a Cayman foundation. Notably, after formation, a Cayman foundation can cease to have members at any point. This cessation will not impact its existence, capacity, or powers so long as it retains at least one “Supervisor”. If a Cayman foundation no longer has members, it cannot later admit members or issue shares unless its constitution explicitly permits it to do so.

The Secretary must maintain a full and proper record of the foundation company’s activities. The foundation company, its directors and interested persons must provide such accounts, documents and records as are required by the Secretary in order to comply with its regulatory obligations.

Further details are contained below under the heading “Roles and Responsibilities” of a Supervisor and Secretary.

4. Constitution

A foundation company’s constitution sets out the foundation company’s objects, powers and rules for its management and operation. The constitution can also give rights, powers and duties of any type to any person in relation to the foundation company, such as members, directors, officers, supervisors, founders and beneficiaries. Schedule 2 of the FCA includes a model constitution that could serve as the memorandum and articles of association for the foundation company, either fully or partially. Changes to the constitution of a Cayman foundation are allowed only if the constitution explicitly permits them.

Some of the rights that can be given by the constitution are:

• admitting, appointing, or removing members, supervisors, directors, or officers;
• making and amending any by-laws;
• supervising the management and operation of the foundation company;
• enforcing duties owed to the foundation company;
• calling of and attendance at general meetings;
• voting on resolutions;
• amending the constitution; and
• winding-up the foundation company and disposal of its surplus assets.

Powers given by the constitution are for the benefit of the foundation company only and any rights are only enforceable on behalf of or against the foundation company.

5. Roles and responsibilities

A. Founder

A foundation company does not need to have a Founder, who is a person who transfers assets to the foundation company or causes it to be incorporated. The FCA does not provide for specific rights of a Founder, however, the Model Constitution provides for rights reserved for the Founder which could be adopted by the foundation company. For example, the Founder could reserve powers to amend the constitution, to appoint or remove directors or supervisors, or to wind up the foundation company.

Once established, the Cayman foundation is irrevocable. Nevertheless, if the constitution permits, the Founder may be granted powers that effectively resemble revocation, such as the ability to allocate foundation assets to themselves.

B. Beneficiaries

A Cayman foundation can have one or more beneficiaries who may benefit from its activities, or it might not have any beneficiaries at all. Notably, a beneficiary of a Cayman foundation has no statutory powers or rights with regards to the foundation, its management, or its assets, and is not deemed to be an “interested person.” For the purposes defined by the FCA, an “interested person” includes a member, Supervisor, or any other party with the authority to initiate actions in the name of, or on behalf of, the Cayman foundation.

Nonetheless, the constitution of a Cayman foundation can assign specific roles to beneficiaries, granting them particular duties, powers and rights. These might encompass direct enforceable rights against the directors.

Beneficiaries do not necessarily need to be identified from the start, which could be advantageous for a Founder aiming to protect the confidentiality of beneficiary information.

C. Supervisor

A Supervisor is a person who is appointed by the constitution or by a resolution of the foundation company to supervise the management and operation of the foundation company. A Supervisor can be an individual or a corporate entity, such as a trust company, a law firm, accounting firm or other specialist service provider.

The FCA defines a Supervisor as a person, other than a member, who under the foundation company’s constitution has an unconditional right to attend and vote at general meetings, whether or not that person has supervisory powers or duties in relation to the foundation company. A Supervisor may be permitted to act as a director of a Cayman foundation depending on its constitution.

A Supervisor has the following obligations:

• to act honestly and in good faith in the best interests of the foundation company;
• to exercise the rights and powers given by the constitution in accordance with its terms and purposes;
• to avoid conflicts of interest with the foundation company or any person connected with it;
• to keep confidential any information relating to the foundation company or any person connected with it, unless required by law or authorised by the constitution or the foundation company; and
• to comply with the FCA, the Companies Act, and any other applicable laws.

A Supervisor has the right to access any information, documents, or records relating to the foundation company, or any person connected with it, as necessary to perform their duties. A Supervisor also has the right to apply to the Grand Court for directions, opinions, or advice on any matter concerning the foundation company or its constitution.

Foundation companies must maintain a register of Supervisors at their registered office and update it within sixty days of any changes. If the foundation company does not comply with this requirement, it commits an offence and may be fined up to CI$500/US$609.76 for each day the violation continues. This penalty also applies to any director or manager of the foundation company who knowingly and willfully authorised or permitted the violation.

D. Board of Directors

A Cayman foundation is overseen by a board of directors. Individuals with full legal capacity are eligible to serve as directors, with no residency requirements or other limitations regarding who may assume this role. The standard of care expected from directors of a Cayman foundation aligns with that required of directors of any other company, and they have equivalent duties to the foundation as directors do to other Cayman companies. Directors must provide reports or explanations concerning the business and operations of the Cayman foundation to interested parties.

E. Secretary

A Cayman foundation must appoint a Secretary, who is authorised under the Companies Management Act of the Cayman Islands (as revised) to offer company management services in the Cayman Islands. The Secretary must maintain detailed records of enquiries and information for asset contributions, including providing a no-objection notice (see paragraph 7 for further details).

The Secretary’s office will serve as the registered office of the Cayman foundation, where statutory records must be kept. Failure to maintain these records can lead to fines and/or criminal charges against the foundation and any director or manager involved.

If the Secretary fails to keep proper records of activities and enquiries made for notices given pursuant to the FCA, they can be fined up to CI$15,000/US$18,293 and face 5 years of imprisonment, or both.

Ongoing obligations of the Secretary include but are not limited to:

• maintain the registers and records of the foundation company, such as the register of members, the register of directors and officers, the register of supervisors, the register of founders, the register of beneficiaries, the register of mortgages and charges, and the minute books (as applicable); and
• file any returns, notices, statements, or documents with the Registrar of Companies or any other competent authority, as required by law or the constitution.

6. Ongoing Requirements of a Foundation Company

A. Filing Requirements

A Cayman foundation must adhere to the same documentation and filing requirements as other Cayman companies. It is specifically required to maintain various registers and information at its registered office, including a minute book and records for anti-money laundering regulations.

Any resolution or document that modifies the memorandum of association must be submitted to the Registrar of Companies within fifteen days, along with the required fee.

There is no legal mandate under the FCA or the Companies Act for a Cayman foundation to file or audit its accounts. Nonetheless, the directors must keep accurate records of all funds received or distributed by the Cayman foundation. These records should provide a true and fair view of the foundation’s financial situation and clearly explain its transactions.

B. Beneficial Ownership Register

Requirement for Foundation Companies

A Cayman foundation must maintain a register of its beneficial owners (the BOR) to be kept at its registered office, unless it can benefit from an alternative route to compliance by appointing a Contact Person (defined below) by virtue of being a legal entity or subsidiary which is:

• listed on the Cayman Islands Stock Exchange or another approved stock exchange;
• registered or licensed by the Cayman Islands Monetary Authority (CIMA);
• being wound up by a liquidator (in certain circumstances); and
• a not-for-profit organisation designated under section 80 of the Companies Act (2023 Revision), (together, the Categories).

Contact Person

Only an entity that is either licensed or registered with CIMA to supply beneficial ownership information, generally a corporate services provider (CSP) or a fund administrator who holds a Mutual Fund Administrators Licence under the Mutual Funds Act, can be designated as a Contact Person. Trafalgar CS Ltd. is available to serve as a Contact Person, pending agreement. Please reach out to one of the contacts listed below if you would like to discuss further.

The Contact Person acts as an intermediary, ensuring communication between the Legal Person (defined below) and the appropriate regulatory authority. While the Contact Person does not need to keep a beneficial ownership register or beneficial ownership details for the Legal Person they represent, they must be able to access this information and provide the requested beneficial ownership information to the regulatory authority within 24 hours of the request (or any other reasonable timeframe set by the regulatory authority) of the request.

Legal Person

A “Legal Person” is (a) a company, (b) a limited liability company, (c) a limited liability partnership, (iv) a limited partnership, (v) a foundation company, (vi) an exempted limited partnership or (vii) any other legal person that may be prescribed by the regulations.

Meaning of Beneficial Owner

“Beneficial Owner” means an individual who:

(a) ultimately owns or controls, whether through direct or indirect ownership or control, 25% or more of the shares, voting rights or partnership interests in the Legal Person;

(b) exercises ultimate effective control (i.e. through a series of ownership layers or other forms of indirect control) over the management of the Legal Person; or

(c) is identified as exercising control of the Legal Person through other means,

together, conditions (a) to (c) are referred to as the “Specified Conditions”.

Governments, government departments, international organisations whose members include two or more countries, or their governments and public authorities are all deemed to be individuals and fall within the definition of Beneficial Owner.

If no individual meets any of the Specified Conditions but the trustees of a trust do meet one of these conditions concerning the Legal Person, then the trustees are considered to be the Beneficial Owners of the Legal Person provided that they have ultimate effective control over the trust’s activities, and excluding control solely in their capacity as Professional Advisor or Professional Manager.

A person who acts exclusively as a “Professional Advisor” (such as a lawyer, accountant, or financial advisor who provides advice or direction in a professional capacity) or as a “Professional Manager” (such as a liquidator, receiver, or restructuring officer fulfilling statutory duties) does not meet the Specified Conditions.

If no person qualifies as a Beneficial Owner based on the specified criteria, the Senior Managing Official of the Legal Person must be identified. This can include individuals such as a director or the chief executive officer. Unlike individual Beneficial Owners, a Senior Managing Official might also be a Professional Advisor or Professional Manager. While Legal Persons can have multiple directors, only one will be the Senior Managing Official. This is usually the individual with greater authority, such as the managing or executive director or the chairman.

Ongoing Obligations

Where a Legal Person does not fall within the Categories whereby a Contact Person can be appointed as the intermediary with the regulatory authority, the Legal Person has an obligation to identify registrable beneficial owners which include:

(a) every individual who is a Beneficial Owner of the Legal Person;

(b) every Reportable Legal Entity (defined below); and

(c) the trustees of a trust if they have ultimate effective control over the activities of the trust other than solely in their capacity as Professional Advisor or Professional Manager.

Looking through the ownership structure, a “Reportable Legal Entity” is another Legal Person (other than a foreign company, foreign entity or a foreign limited partnership) that if it were an individual would be a Beneficial Owner of the first mentioned Legal Person. To be a registrable beneficial owner, the Reportable Legal Entity must either (i) directly hold a Relevant Interest (defined below) in the Legal Person, or (ii) indirectly possess a Relevant Interest in the initial Legal Person. A “Relevant Interest” consists of a partnership interest, shares, or voting rights in a Legal Person or having ultimate effective control over the management of the Legal Person.

A Legal Person does not need to report individual Beneficial Owners of a Reportable Legal Entity because the Reportable Legal Entity will be required to fulfil its own reporting duties under the beneficial ownership regime, identifying such Beneficial Owners to the Cayman Islands Registrar.

If the directors become aware of a relevant change regarding a registrable beneficial owner whose required particulars are recorded in its BOR, they must notify the registrable beneficial person in writing as soon as reasonably possible after becoming aware or reasonably suspecting the change has occurred, requesting confirmation of the change. The notice requires persons within no later than 30 days from the date of the notice to state (i) whether or not they are a registerable beneficial owner and if so, confirm or correct the change. Within the 30-day timeframe, the Cayman foundation shall document the details and instruct the CSP to update its BOR with (a) the confirmed details of the relevant change; (b) the date the change was made; and (c) any additional necessary amendments to the BOR.

Specific information must be recorded in the BOR. For individuals, this includes their full legal name, address, date of birth, nationality/nationalities, details from their unexpired and valid passport, driver’s licence or other government issued identification document, the nature in which the individual owns or exercises control of the Legal Person, and the date on which the individual became (or ceased to be) a registerable Beneficial Owner. For Reportable Legal Entities, this includes their name, address of registered or principal office, legal form, governing law, the nature of the Reportable Legal Entity’s ownership or its exercise of control of the Legal Person, register in which they are entered and registration number (if applicable) and the date on which the Reportable Legal Entity became (or ceased to be) a registerable beneficial owner.

Access to Beneficial Ownership Information

Information about beneficial ownership will only be accessible to the public when specific regulations are proposed by Cabinet and endorsed by a future Parliamentary resolution. Thus, this information will not be publicly available until such a resolution is passed. It is anticipated that limited access might be granted to individuals with “legitimate interests” in the future, with various safeguards in place.

Currently, only competent authorities can request access to the centralised platform holding beneficial ownership information. The competent authorities include the Royal Cayman Islands Police Service (RCIPS), the Financial Reporting Authority, CIMA, the Anti-Corruption Commission, the Tax Information Authority, the Maritime Authority of the Cayman Islands, the Civil Aviation Authority of the Cayman Islands, the Registrar of Lands or an entity undertaking procurement in accordance with the Procurement Act and any other body which is assigned responsibility under the Proceeds of Crime Act for monitoring compliance with money laundering regulations, any licensed financial institution, or designated non-financial business and profession (i.e. accountants and law firms).

The United Kingdom (UK) and the Cayman Islands Government have agreed to share beneficial ownership information. Under this agreement, the UK can ask the RCIPS to request a search by the competent authority, sharing the information with UK law enforcement. Other countries can still request information through existing laws, agreements, or legal arrangements, such as the Tax Information Authority Act and the Monetary Authority Act.

Penalties for Non-Compliance

Legal entities may face penalties for several offenses. These include not establishing or maintaining a beneficial ownership register, not complying with notices or making false statements in response to such notice (such as failing to adhere to a restrictions notice or knowingly providing false information), and not supplying required information (including a registerable beneficial owner neglecting to provide necessary details or intentionally giving false information). Penalties for offences vary from fines of CI$5,000/US$6,098 to CI$100,000/US$121,951, and may include imprisonment. The court can strike a Legal Person off the register for repeated violations.

The Registrar of Companies also has the power to impose fines for a number of breaches under the Monetary Authority (Administrative Fines) Regulations (2022 Revision) and any amendment thereof (the Administrative Fines Regime), which apply to ‘in-scope’ entities who fail to take reasonable steps to identify beneficial owners and Reportable Legal Entities, fail to ensure their BOR remains up to date and/or fail to provide particulars of registrable beneficial owner information to their CSPs or certain notices to their registrable persons. Of particular note, Cayman foundations whose BOR indicates a status of ‘pending’ for three or more calendar months will be presumed to be in breach and liable to fines under the Administrative Fines Regime. There are several other technical breaches for which Cayman foundations and/ or their CSPs may be fined.

7. Assets and Investments

A foundation company can hold any type of assets, such as cash, securities, real estate, or intellectual property. A foundation company can also invest in any type of investment, such as stocks, bonds, funds, or derivatives. There is no minimum capital requirement for a foundation company. Once acquired, the assets can be used to advance the objectives of the foundation company. In such cases, there will be no difference between capital and income unless specified otherwise in the constitution.

Any person, including the Founder, can transfer assets to the foundation company, either during their lifetime or on their death. The transfer of assets to the foundation company is irrevocable, unless the constitution provides otherwise. The Secretary of the foundation company must give notice to the foundation company that the transfer of assets is compliant with the Proceeds of Crime Act, the Terrorism Act and the Anti-Money Laundering Regulations in the Cayman Islands and that the Secretary has no objection to the transfer of assets.

The assets of the foundation company are owned by the foundation company itself, and not by its members, directors, supervisors, founders, or beneficiaries. The assets of the foundation company are not subject to the claims of the creditors of any person connected with the foundation company, unless the transfer of assets to the foundation company was fraudulent or intended to defraud creditors.

8. Dispute Resolution

A foundation company’s constitution may include provisions for resolving disputes, differences, or issues (each an issue) among its directors, officers, interested parties, or beneficiaries (to the extent that beneficiaries have any rights) regarding the foundation company, its operations, affairs, or the duties, powers, or rights of individuals under the constitution, by arbitration or other lawful methods. An agreement between the parties involved in an issue is final unless it is invalidated by fraud or bad faith.

9. Direction from the Grand Court

An interested person may apply to the Grand Court on behalf of the foundation company for opinions, directions, and advice on resolving any difficulties in relation to its constitution and the disposal of surplus assets in the same way a trustee can apply under the Cayman Islands Trusts Act (2021 Revision) (Trust Act) in relation to trusts.

10. Insolvency

A Cayman foundation can handle financial challenges or insolvency just like any other company formed under the Companies Act, with the applicable winding-up provisions also relevant to Cayman foundations, with necessary adjustments. When addressing solvency matters, the directors of a Cayman foundation have an obligation to consider the creditors’ interests as part of their duty to act in the interests of the Cayman foundation.

11. Application of the Trusts Act

The operation of a Cayman foundation is subject to the provisions of sections 92 and 93 of the Trusts Act, which operates to deny heirship rights conferred by foreign law to the property of a living person and will apply to property contributed to the Cayman foundation.
Moreover, section 48 of the Trusts Act which allows trustees of Cayman Islands trusts to apply for the directions of the Grand Court applies to Cayman foundations.

12. How can we help?

If you require further information concerning the incorporation, operation or disputes regarding foundation companies in the Cayman Islands, please contact us and we will be pleased to assist you on +1 (345) 949 9710 or via email at info@nelsonslegal.com or Trafalgar CS Ltd admin@trafalgarcs.com.

This guide gives a general overview of this topic and is not legal advice, and you may not rely on it. If you would like legal advice on this topic, please get in touch. Our corporate team will be happy to assist you with any questions or queries you have regarding your regulatory requirements in the Cayman Islands.

Published September 2024