Cayman Islands taxes for US expats: Offshore benefits and compliance guide

Imagine a tropical paradise where your hard-earned money grows as effortlessly as the palm trees sway in the breeze. Welcome to the Cayman Islands, a British Overseas Territory in the Caribbean, known the world over as a tax haven attracting businesses and individuals seeking to optimize their financial situation.

With its pristine beaches, robust financial sector, and most notably, its favorable tax policies, including a zero tax rate for foreigners in the Cayman Islands, this tropical paradise has become an increasingly popular destination for US expats.

This guide delves into the alluring tax landscape of the Cayman Islands, exploring the corporate tax rate benefits for US expats, explaining the compliance requirements, the absence of income, capital gains, and property taxes, and the intricacies of international tax agreements. We'll uncover why the Cayman Islands remains a magnet for wealth-savvy individuals seeking both fiscal advantages and tropical bliss.

Tax overview of the Cayman Islands

The Cayman Islands' tax system is characterized by its simplicity and attractiveness to both individuals and businesses:

This zero-tax policy applies to both residents and foreign entities operating in the Cayman Islands, making it a true tax haven. There is no “tax year” so to speak, as there is no direct taxation system for individuals or corporations.

US citizens and residents must still comply with US tax obligations, such as filing Form 1040 and reporting foreign accounts under FATCA and FBAR regulations.

What makes the Cayman Islands a tax haven?

The Cayman Islands have long been celebrated as a tax haven, attracting businesses and individuals seeking to optimize their financial situation. This British Overseas Territory in the Caribbean offers a unique tax environment that has established it as a prominent offshore financial center. Let's look at the key factors that contribute to its status as a tax haven.

No direct taxation

The cornerstone of the Cayman Islands’ appeal as a tax haven is the complete absence of direct taxes. This means:

- no personal income tax
- no corporate tax
- no capital gains tax
- no inheritance tax
- no property tax
- no payroll tax
- no withholding tax

The Cayman Islands has a unique tax system where no one pays direct taxes – not local residents, not foreigners living there, and not businesses operating in the country. This creates a "tax-neutral" environment, meaning everyone is treated equally when it comes to taxes.

This policy has been in place since 1985. Before that, the government used to charge a small yearly fee of 10 Cayman Island dollars (about 12 US dollars) to adult men under 60 years old who lived on the islands. When they got rid of this fee, it marked the beginning of the Cayman Islands' current no-direct tax system.

Government revenue sources

In lieu of direct taxes, the Cayman Islands government funds its operations through various indirect means:

• Import duties: The primary source of government revenue, with rates typically ranging from 22% to 27% on most imported goods. Some items, such as baby formula, are exempt, while others, like automobiles, may be taxed at higher rates based on their value.
• Stamp duties: A 7.5% stamp duty is charged on the value of real estate at sale in most areas, with reduced rates available for Caymanians. Stamp duty also applies to mortgages and some other transactions at rates of 1% to 1.5%.
• Annual fees: Registered companies and financial institutions pay fees to maintain their legal and operational status.
• Some others include work permit fees, financial services fees, tourist accommodation tax, and licensing fees (flat fees charged on financial institutions operating in the islands).

Impact on individuals and businesses

For individuals, including US expats, income earned within the Cayman Islands is not subject to local taxes. This applies to salaries, wages, investment income, and other forms of personal revenue. The lack of capital gains tax benefits investors, as profits from investments remain untaxed.

Again, a reminder that this does not exempt US citizens from their US tax obligations. US expats must still report their worldwide income to the IRS, even if it's not taxed locally.

For businesses, the zero-tax policy, coupled with a stable political environment and a well-established financial services industry, makes the Cayman Islands an attractive jurisdiction for incorporation and operation.

The territory has become the world's most popular location for offshore banking and hedge funds, boasting world-class banking, financial, and professional resources.

Key benefits for businesses include:

• no corporate income tax on profits, capital gains, or dividends
• no withholding taxes on interest, dividends, or royalties paid to non-residents
• ability to apply for a guaranteed tax-exempt period (up to 20 years for some exempt companies)

As of the end of 2023, there were 118,443 active companies registered in the Cayman Islands, including numerous banks, insurers, and mutual funds.

International perspective and compliance

While the Cayman Islands' tax policies are attractive, the jurisdiction has faced international pressure to increase transparency and combat potential tax evasion. In response, the Cayman Islands has:

1. signed tax information exchange agreements with 36 jurisdictions
2. participated in the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, allowing tax information exchange with more than 140 countries
3. adopted and implemented US FATCA and the OECD's Common Reporting Standard
4. joined the OECD/G20 Inclusive Framework on BEPS (Base Erosion and Profit Shifting) in 2017

It's worth noting that the Cayman Islands government maintains that it does not meet the definitions of a tax haven set out by the OECD, Transparency International, or Tax Justice Network. The jurisdiction does not offer tax incentives designed to favor non-resident individuals and businesses, nor does it have differing tax rates for foreign entities.

The Cayman Islands' status as a tax haven is primarily due to its absence of direct taxation, coupled with a robust financial services sector and strong regulatory framework. While this creates significant advantages for individuals and businesses, it's essential to understand the full implications, including compliance requirements and potential obligations in one's home country.

Who can be considered a resident of the Cayman Islands?

While specific requirements and investment amounts may vary – residency in the Cayman Islands is determined by meeting one of three criteria:

1. citizenship or permanent residency status in the Cayman Islands
2. physical presence in the territory for at least 183 days within a calendar year
3. maintaining a primary residence in the Cayman Islands

For tax purposes, residency status is particularly relevant for individuals seeking to benefit from the Cayman Islands' tax-neutral environment.

It’s also handy to know that despite being a British Overseas Territory, the Cayman Islands use the Cayman Islands dollar, which is pegged to the US dollar at a fixed rate of 1 KYD = 1.20 USD.

NOTE! For US citizens, obtaining residency in the Cayman Islands does not alleviate their tax obligations to the United States, as we will explain in more detail below.

Tax obligations for US expats in the Cayman Islands

Despite the Cayman Islands' tax-free environment, US expats must still file annual tax returns and report their global income to the IRS. You can, however, take advantage of certain provisions:

• Foreign Earned Income Exclusion (FEIE)
  The FEIE allows US expats to exclude up to $130,000 of foreign-earned income for the 2025 tax year.
• Foreign housing exclusion
  US expats can exclude or deduct certain foreign housing expenses like rent and utilities – given the potentially high cost of living in the Cayman Islands.
• Foreign Tax Credit (FTC)
  However, the FTC is generally not applicable for income earned in the Cayman Islands since it does not impose income taxes.

NOTE! While these provisions can help reduce a US expat's tax burden, they do not exempt them from filing obligations with the IRS.

Required tax forms for US expats in the Cayman Islands

US expats residing in the Cayman Islands are required to file several tax forms annually:

• Form 1040: The standard individual tax return
• Form 2555: Used to claim the Foreign Earned Income Exclusion (FEIE)
• Form 1116: Used to claim the Foreign Tax Credit (if applicable)
• Form 8938: Statement of Specified Foreign Financial Assets (if applicable)
• FinCEN Form 114 (FBAR): Report of Foreign Bank and Financial Accounts (if applicable)

Pro tip: The deadline for filing US tax returns for expats is typically June 15th, with an automatic two-month extension from the standard April 15th deadline. However, any taxes owed are still due by April 15th to avoid interest charges.

Tax compliance for US expats in the Cayman Islands

Maintaining tax compliance as a US expat in the Cayman Islands is essential to avoid penalties and potential legal consequences. Key compliance considerations include:

1. FATCA reporting: The Cayman Islands has signed an agreement with the US to implement the Foreign Account Tax Compliance Act (FATCA), which requires foreign financial institutions to report on US account holders.
2. FBAR filing: US expats with foreign financial accounts exceeding $10,000 in aggregate at any time during the year must file an FBAR.
3. Streamlined filing compliance procedures: For US expats who have failed to file US tax returns, the IRS offers streamlined procedures to help them catch up on their filing obligations without facing penalties – our especially trained tax professionals can help you with this.