Cayman Islands trust tax and reporting rules

How the Cayman law treats exempted trusts

The Trusts Act describes registration of an exempted trust as an application process overseen by the Registrar of Trusts. The Registrar may register a trust when satisfied that its beneficiaries do not and are not likely to include a person resident or domiciled in the Islands, subject to the stated charitable exception.^[1]

The Act does not make this registration automatic. It states that the Registrar may decline to approve or register a trust, and may request declarations from existing, ascertained beneficiaries about residence or domicile.^[1]

The tax provision concerns a possible undertaking for an exempted trust. On application by its trustees, the Financial Secretary may undertake that a later-enacted Islands law imposing specified taxes or duties will not apply to the trust property or income, or to trustees or beneficiaries in respect of them. The Act limits such an undertaking to a period of no more than fifty years from the trust's creation.^[1]

That provision contains a residence qualification. A beneficiary resident or domiciled in the Islands remains liable for applicable tax or duty for that period as if the undertaking had not been given. The section also says it does not exempt another person resident or domiciled there from the specified laws.^[1]

The Department for International Tax Cooperation administers Cayman's Common Reporting Standard laws, regulations, agreements and guidelines.^[2]

Registration and trustee duties

Trustees applying for registration lodge the documents that contain or record the trust's terms, powers and provisions, together with a copy. The Registrar retains the submitted documents and certifies a returned copy when applicable.^[1]

When required by the Registrar, trustees must provide accounts and minutes, along with other trust information. The Registrar keeps a file containing the lodged documents and information provided. The Act describes who may inspect that file, including a trustee or a person authorized by the trust provisions and the Registrar.^[1]

The Act also sets a registration fee and an annual fee. At registration, trustees pay a registration fee of CI$500 (Cayman Islands dollars). Trustees of every exempted trust pay an annual fee of CI$500 to the Islands' revenues in March of each year.^[1]

The Act assigns an oversight role to a Registrar appointed by the Cabinet for exempted trust registration and administration under Part VI. It also authorizes the Registrar to share requested information with specified entities for functions under named legislation, including the Tax Information Authority Act.^[1]

Earlier versions of Cayman Common Reporting Standard legislation and regulations are published in the Cayman Islands Gazette.^[2]

Separate U.S. reporting rules

Cayman registration does not determine the U.S. reporting treatment described by the IRS. The IRS explains that a U.S. person includes a U.S. citizen, and that U.S. persons who create a foreign trust or transact with one may have income tax consequences and information reporting requirements.^[5]

The IRS says Form 3520 is generally required for a U.S. person who creates or transfers money or property to a foreign trust, makes a loan to one, receives a distribution or certain use of trust property, or is treated as its U.S. owner under grantor trust rules. The IRS instructions describe Form 3520 as reporting certain transactions, ownership, or distributions involving a foreign trust.^[5]

For a foreign trust with a U.S. owner under the grantor trust rules, the IRS says the foreign trust must file Form 3520-A and provide annual statements to U.S. owners and beneficiaries. If the trust does not file, the U.S. owner files a substitute Form 3520-A attached to a timely Form 3520.^[5]

The IRS describes income treatment separately from filing. In general, a U.S. person treated as owner under the grantor trust rules is taxed on the trust's income. A U.S. beneficiary receiving a distribution from a foreign nongrantor trust generally reports the beneficiary's share of distributable net income, with treatment depending on the trust category and the statement received.^[5]

The Form 3520 instructions state that the form is due by the fifteenth day of the fourth month after the taxpayer's tax year ends, with a sixth-month deadline for qualifying individuals who meet the stated outside-the-United-States conditions and include a statement with the form. Form 3520-A is due by the fifteenth day of the third month after the foreign trust's tax year ends; an owner's substitute is due with Form 3520. When that day falls on a weekend or legal holiday, the due date moves to the next business day.^[6]

The IRS also describes other reporting routes that can apply depending on the person's circumstances. Its foreign trust page identifies Form 8938 and FinCEN Form 114 among information reporting regimes, and says Schedule B, Part III of Form 1040 is required when a person receives a distribution from, was grantor of, or transferred assets to a foreign trust.^[5]

The United States has no income tax treaty with the Cayman Islands, so no treaty rule applies to Cayman trust income.^[4]

The Treasury's FATCA jurisdiction table lists the Cayman Islands as having a Model 1 intergovernmental agreement in force. Treasury describes FATCA reporting by foreign financial institutions about accounts held by U.S. taxpayers; that account reporting framework is distinct from the Form 3520 and Form 3520-A rules described by the IRS.^[3]

Questions and answers

Related resources

Related glossary terms

• Foreign grantor trust: A foreign grantor trust is a foreign trust treated as owned by a grantor, often a U.S. person. Ownership brings Form 3520 and Form 3520-A reporting duties.
• Trustee: A trustee controls trust assets and manages, uses, or disposes of them for beneficiaries or a stated purpose under the trust terms and applicable law.
• Enforcer: An enforcer is a person given a role in relation to certain trusts. Jersey and Cayman law describe how enforcers are appointed, with their duties and rights.

Related articles and guides

• BVI trust tax rules and U.S. reporting: The British Virgin Islands Trustee Act describes income tax treatment for trusts and beneficiaries. IRS rules address U.S. person reporting for foreign trusts.
• Cook Islands trust tax and reporting rules: Cook Islands trust legislation and revenue rules on tax information reporting, with the IRS reporting rules for a U.S. citizen with a Cook Islands trust.

Tools and official documents

• FinCEN Report 114 (FBAR): foreign account reporting: FinCEN Report 114 (FBAR) for U.S. citizens: account definitions, financial interests, signature authority, trust provisions and the filing requirements it sets.
• Foreign trust reporting role finder: Tick the roles that describe a connection to a foreign trust or foreign account to see the forms the IRS and FinCEN instructions discuss. Roles can overlap.

Related pages

• Cayman Islands: overview: Start page for this jurisdiction.
• Types of trusts
• Trustee regulation and licensing
• Reporting and information exchange