Cayman Islands domiciled investment funds historically have faced challenges when seeking to invest into Indian capital markets. One of the major hurdles in this regard has been addressed by the admission of the Cayman Islands Monetary Authority (CIMA) as full (or ordinary) member of the International Organization of Securities Commissions (IOSCO).
The IOSCO objectives and principles of securities regulation were endorsed by its member regulators in 1998 and generally are viewed by securities regulators as the key international benchmark on sound principles and practices for securities regulation. Currently, IOSCO members regulate the vast majority of the world's securities markets.
To access the Indian markets, according to Dennis Ryan, and Sonia Xavier both associates in the Dubai office of Conyers Dill & Pearman, an investment fund must register as a foreign institutional investor (FII) with the Securities and Exchange Board of India (SEBI).
Previously, when CIMA was not an IOSCO member, SEBI often engaged in extensive due diligence and inquiries before allowing registration of a Cayman fund as a FII. This meant that few Cayman Islands funds registered with SEBI. Now with CIMA's admission to IOSCO, this could change.
One remaining challenge is that the Cayman Islands has not signed an exchange of information tax treaty with India. Mauritius, so far has been the preferred jurisdiction for investment into India because of its favourable double taxation agreement wit h India.
Investment funds from non-tax treaty jurisdictions have developed a structure involving a wholly owned Mauritius subsidiary for purposes of Indian investment. Typically, this structure requires a Cayman Islands (or other non-treaty jurisdiction) investment fund to register with SEBI as a FII.
The Mauritius subsidiary fund then is registered with SEBI as a sub-account of the FII, allowing it to invest directly in Indian securities via SEBI.
The Mauritius fund is set up as a global business company category 1 (GBC1) that is resident in Mauritius for tax purposes. As a Mauritius tax resident the fund is subject to tax on income at s flat rate of 15%.
However, it is entitled to claim a credit for foreign tax on income not derived from Mauritius against the Mauritius tax, resulting in an effective tax rate generally of between 3% and zero. As a tax resident GBC1, the fund is also entitled to take advantage of Mauritius's network of tax treaties, including the Mauritius-India deal.