The use of offshore is an integral part of African financing. Offshore vehicles are used for a variety of structures including bond issuances, listing, loan financing, JVs and PE structures. Investors in and out of Africa have an appetite for using offshore in various transactions because they understand the benefits of structuring transactions, in particular through Cayman Islands vehicles. This need for offshore and the realisation that offshore vehicles are an attractive conduit for foreign direct investment into Africa (FDI) has prompted a few African countries to attempt to mirror the success of Cayman by establishing themselves as International Financial Centres (IFCs).
Mauritius has succeeded in marketing itself as the go-to jurisdiction for Africa and adopted the Limited Partnership Act 2011 to enable it compete with Cayman by making it more attractive for collective investment schemes. However, incorporating a company in Mauritius is more expensive than Cayman, making it less attractive to Africans, who tend to be very cost sensitive with respect to ‘offshore’.
The Seychelles are a close second to Mauritius, marketing themselves as an alternative to the British Virgin Islands. However, this jurisdiction is not as favourable as Mauritius due to the various coup attempts in recent years.
In June 2015, the then-President of Ghana, John Dufour, signed a Memorandum of Undertaking with Barclays Bank of Ghana to investigate the potential for creating an IFC. Ghana was threatened with blacklisting by the Organisation for Economic Development (OECD). The then-head of the OECD’s Tax centre, Jeffery Owens, stated, “The last thing Africa needs is a tax haven in the centre of the African continent”. To avoid blacklisting by the OECD, President John Atta Mills revoked Barclays Bank’s offshore banking licence effective June 2011, but the legal mechanism establishing the IFC has not been revoked, making it easy for reactivation at a later stage.
Liberia has succeeded in establishing itself as a ‘flag state’ and provides corporate and maritime services to vessel owners and operators, often referred to as ‘flags of convenience’. It is important to note that Panama’s growth in financial services occurred by Panama establishing itself as a ‘flag state’. Only time will tell if Liberia will succeed. Liberia has resisted the new global disclosure standards, leaving it open to illegal tax evasion and concealment of foreign wealth.
Botswana exempts firms from paying capital gains tax on exit, and offers low corporate income tax rates and tax holidays. Botswana, like Liberia, has resisted the new global disclosure standards, leaving it open to illegal tax evasion and concealment of foreign wealth.
These African countries lack the long-standing economic and political stability of Cayman. Cayman is at the forefront of offshore structures, as it currently has a substantial trade surplus with the outside world as a result of the activities of the financial community and tourism. Cayman has been white-listed by the OECD, is a full member of the International Organisation of Securities Commissions (IOSCO), and has a stringent anti-money laundering regime in place. Cayman has also implemented legislation to comply with the Foreign Account Tax Compliance Act of the United Kingdom and United States of America (FATCA) respectively, and the OECD Common Reporting Standards (CRS).
There are no exchange control regulations in Cayman, so money and securities of any currency may be transferred to and from the jurisdiction. This is a very attractive variable to those investing from Africa who are prohibited from remitting monies abroad because of currency controls, and who find it difficult to transfer money abroad. An example is the current currency control in Nigeria, which damaged Nigeria’s economies as investors and international companies were unable to repatriate their funds and, in some cases, had no choice but to shut down their operations.
The tax neutrality, political and economic stability, professional facilities, a sound judicial system and modern legislation have made Cayman attractive to those investing from Africa who are seeking a flexible and sophisticated jurisdiction for international transactions. The jurisdiction’s corporate flexibility and lack of burdensome corporate compliance has made Cayman an attractive domicile for public and private holding companies.
How Cayman is used in Africa transactions
Cayman vehicles are used in a variety of ways in the African finance space:
The Cayman structure vests ownership of aircraft with a Cayman special purpose vehicle (SPV) which acquires the aircraft through funding by way of loan to the lender. The aircraft is then leased by way of operating lease to the airline. The lender then takes security over the aircraft, over the SPV’s rights as lessor and usually over the issued share capital of the SPV itself. The SPV is established as an off-balance sheet vehicle with its issued share capital, held by an offshore trust company on charitable trust. The SPV will then grant security over the aircraft in the form of a mortgage and will always grant security over its rights under the lease with the airline which will allow the lender to enforce directly the rights of the SPV against the airline in default.
The charitable trust in Cayman is a method of having an independent person (a trust company licensed by The Cayman Islands Monetary Authority) own the voting shares in the SPV. In the declaration of trust establishing the trust, the trustee will covenant not to wind up the SPV. This enables the SPC to be held as ‘orphan’, in that no one party has the ability to wind up or take control of the SPV during the life of the transaction.
Cayman has a first class shipping registry. The typical Cayman Islands structure vests ownership of the vessel with a special purpose vehicle which then acquires the vessel through funding by way of loan from the lender. The vessel is then chartered to a shipping company. As with aircraft financing, the SPV will typically be established as an off-balance sheet vehicle with its share capital held by an offshore trust company or charitable trust. The lender would then take security over the vessel, over the SPV’s rights as owner/charterer and usually over the issued share capital of the SPV itself. The principal loan and security documentation will generally be entered into by the SPV rather than the shipping company, thereby avoiding potential enforcement problems in the shipping company’s own jurisdiction where the legal system may be different.
To securitise a debt, the bank/originator will firstly incorporate a Cayman SPV to isolate the debt risk from the bank’s main operations, and separate the legal rights to the debt, enabling it to be transferred to new holders. The SPV typically purchases assets from the originator (companies that originate loans such as credit card or mortgages may often convert these debt obligations to marketable securities which are the sold to investors), and in turn issues debt securities to raise funds to cover the purchase price. The Cayman SPV will typically be established as an off-balance sheet vehicle with its share capital held by an offshore trust company on charitable trust, in order to be bankruptcy remote. The trustee holds the shares in the SPV for the benefit of the owners of the debt securities. There are no restrictions on the SPV issuing debt securities, as this does not constitute banking business requiring the SPV to be licensed as a bank.
Cayman has been a popular domicile for companies seeking listing of their securities on stock exchanges in London, New York, Hong Kong and Singapore. A Cayman Islands exempted company is normally used for listing. Listings on the Cayman Islands Stock Exchange are often sought because they will qualify from a UK and Irish tax perspective for the quoted Eurobond exemption from withholding tax on interest payable on bonds as the securities will be listed on a “recognised stock exchange”.
Cayman Islands law recognises limited recourse arrangements and non-petition covenants. Section 95 (2) of Cayman Companies Law (revised) provides a requirement for the court to dismiss a winding up petition on the grounds that the petitioner is contractually bound not to present a petition against the SPV. Cayman companies are simple to maintain and operate. For example, there is no requirement to hold an annual general meeting (unless the articles of association so provide) or to conduct an annual audit, which provides significant cost and administrative savings. Cayman offers simple incorporation procedures with low registration fees and annual maintenance fees. Incorporation of a Cayman company can usually be completed within the same day. There is no minimum capital requirement. Typically, Cayman companies are incorporated with initial authorised capital equivalent to US$50,000 for approximately US$731.71 in fees which are payable to the Registrar of Companies in Cayman upon incorporation.
In light of some of the negative press that has surrounded the offshore world in recent time, Cayman is still an ideal location for the establishment of offshore vehicles. Its modern courts system, compliance culture and adherence to international standards in terms of tax transparency makes Cayman the go-to jurisdiction for investment into Africa.