The absence of any local corporate and individual taxes on the sale of real estate in the Cayman Islands is one of the major attractions for both onshore and offshore investors of real estate in the Cayman Islands.
Investors therefore know that when they come to sell their real estate investment in the Islands, they will not be taxed locally in the Cayman Islands on any capital gain, although any such gain may be taxable in the investors’ home jurisdiction.
However, subject to certain limited exemptions, waivers and abatements, stamp duty is payable when you buy, lease or charge real estate in the Cayman Islands.
When a buyer of real estate enters into an agreement to purchase, he has a choice of stamping the agreement for sale with either a fixed duty, which is currently CI$100, or with the full amount of ad valorem duty.
If the buyer opts to stamp the agreement with the fixed duty, he must pay the full amount of ad valorem duty on the subsequent transfer post closing but if he elects to stamp the agreement with the full amount of ad valorem duty, no additional duty will be payable on the subsequent transfer provided the transfer is executed in conformity with the agreement and it relates to the same real estate as the agreement.
Buyers should be aware that where the agreement for sale expressly confers or does not specifically prevent a right of occupation, which would include the right to receive rent), the buyer must stamp the agreement with the full amount of ad valorem duty.
Where a party takes an assignment of an agreement relating to the purchase of real estate, depending upon the terms of the assignment – and in particular the consideration paid- either a fixed duty or ad valorem duty is payable.
The rate of ad valorem duty payable on a transfer of real estate varies from zero per cent to seven and a half per cent depending on the location of the real estate and whether or not the buyer is Caymanian.
The duty is paid on the purchase price recited in the transfer or the market value of the real estate transferred, whichever is the higher as assessed by the valuations office of the Cayman Islands Land Registry, irrespective of any mortgage, charge, lien or other encumbrance to which the real estate is subject.
Tenants of commercial and residential real estate should be aware that leases of real estate in the Cayman Islands, if they are in writing, must be stamped irrespective of their duration and whether or not the lease is required to be registered.
The rate of stamp duty payable on a commercial or residential lease varies depending on the duration of the lease. For example, if the lease is for less than one year, the rate of duty payable is five per cent of the aggregate rent. Where the lease is for more than one year but less than five years, the rate of duty is five per cent of the average annual rent, and if the lease is for more than five years but less than 10 years, the rate of duty is 10 per cent of the average annual rent.
Leases of more than ten years attract duty at the rate of 20 per cent of the average annual rent and if the lease exceeds 30 years, the amount of duty payable is the same as on a transfer of the real estate.
Stamp duty is also payable on any legal charge of real estate. The current rate of stamp duty on a legal charge is one per cent of the sum secured where the sum secured is less than CI$300,000, and if the sum secured is more than CI$300,000, the rate of duty is one and a half per cent of the sum secured.
Subject to the prior approval of the Minister of Finance, certain transfers of real estate only attract a nominal or fixed duty. For example, a transfer that is expressed to be for natural love and affection and made between a parent and a child, or between spouses or between children born of the same parent, or between a grandparent and a grandchild attract a fixed duty of CI$50.
Also, transfers to successors entitled under an estate and transfers which do not bring about a change in beneficial ownership only attract a nominal duty.
Generally speaking, stamp duty in relation to the purchase of real estate is usually paid by the buyer and on the grant of a lease, by the tenant. However, this is a matter of negotiation between the parties and the legal documentation prepared in relation to the transaction should specifically set out who is responsible for payment of any stamp duty.
Investors who buy real estate in the name of a company should note that there is a tax equivalent to stamp duty that is payable on the transfer of the equity capital in a land holding company pursuant to the Land Holding Companies Share Transfer Tax Law (2007 Revision).
For the purposes of the law, a land holding company is a company, other than a charitable corporation, which is the legal or beneficial owner of any land holding or is the legal or beneficial owner of any equity capital (which includes all stock and shares) in a land holding company.
The definition of “transfer” is very wide and includes, not only a transfer of shares but also the issue of shares, the placement of shares, the conversion of shares, the grant or take up of any rights, the exchange of shares, the grant or exercise of an option or other means howsoever whereby equity capital undergoes a change of beneficial ownership or proportion of ownership or a change occurs in the entitlement or potential entitlement of any person to a share in the distribution of the company’s profits or capital.
The law provides that within thirty one days of any transfer of any equity capital of a land holding company, such corporation must deliver to the Minister of Finance,
(a) the instrument, if any, whereby such transfer is effected,
(b) a return in the prescribed form and
(c) a sum for the benefit of the revenue equivalent to either six per cent or seven and a half per cent (depending on where the landed property is situated) of the consideration for or of the taxable value of the transfer, whichever is the greater.
However, not all transfers of shares in a land holding company are taxable.
For example, the law does not apply to transfers effected as a result of an order of the court (unless the court otherwise directs) or a transfer between trustees or nominees which effects no change in beneficial ownership and a transfer for natural love and affection between a parent and a child or between spouses.
In addition, transfers of shares effected as a result of a distribution of property by personal representatives acting in that capacity are tax free as are transfers effected as a result of the distribution of the estate of a bankrupt.
The above is an overview of the duties which may be payable in relation to a real estate transaction and, therefore, it is advisable if you are considering buying, leasing or charging real estate in the Cayman Islands or are considering any other transaction involving real estate to seek the advice of a real estate attorney as to what (if any) duties your proposed real estate transaction may give rise to.