Expat taxes in Cayman Islands

After speaking about expat taxes in numerous countries, including  ThailandSouth Korea and Japan,  GermanySingaporeFrance the Philippines and Switzerland, this article will speak about the Cayman Islands.

Alongside looking at income taxes for individuals, we will also focus on other forms of tax, including for firms and on capital gains taxes.

We also can’t focus on things from the perspective of every nationality, because some countries do apply taxes by citizenship. This is the case for Americans and a few other nationalities.

Whilst this article shouldn’t be considered as tax advice, it is correct as far as we are aware at the time of writing.

Introduction

The Cayman Islands, a group of islands and an overseas territory of the United Kingdom in the Caribbean, comprising Grand Cayman, Little Cayman and Cayman Brac, located approximately 180 miles (290 km) northwest of Jamaica. 

The islands are the outcrops of an underwater mountain range that extends northeast from Belize to Cuba. The capital is Georgetown in Grand Cayman.

The Cayman Islands are located in the western Caribbean, just over an hour’s flight from Miami. Grand Cayman, consisting of three islands, is by far the largest and most famous.

The Cayman Islands were ranked second in the 2016 TripAdvisor Travelers’ Choice Awards in the Top 10 Caribbean Islands category, based on millions of real and unbiased reviews and opinions from travelers around the world.

The Cayman Islands are best known for their excellent diving and beautiful beaches, although the financial services industry is one of the mainstays of the economy along with tourism. 

With the highest standard of living in the Caribbean, the tourism industry is focused on the luxury market. Seven Mile Beach won the Best Beach in the Caribbean and Best Snorkeling and Diving Awards.

The Cayman Islands, with nearly twice as many companies as people and known as a major offshore tax haven, is a popular destination for expats who can afford it. Located between the Americas in the Caribbean, the island is an overseas territory of the United Kingdom and the official language is English. 

As already mentioned, the country includes three islands: Grand Cayman, Cayman Brac and Little Cayman. Each island is known for its own characteristics. 

Grand Cayman is known for its beach resorts as well as scuba diving and scuba diving spots. Cayman Brac is popular with deep sea fishing enthusiasts, especially tuna, marlin and barracuda. Little Cayman, the smallest island, is known for its diverse wildlife. 

The islands, with a population of 60,413, are ranked 22nd on the list of the top 25 destinations in the world. A significant part of the population is made up of citizens of other countries. 

The largest demographics are residents of Jamaica, the United Kingdom, the USA, Canada and Honduras. Although foreign land ownership is readily available, the islands’ immigration laws are strict. 

The level of health care in the Cayman Islands is excellent. With state-of-the-art equipment and well-trained personnel, the Cayman Islands were one of the first countries in the world to introduce compulsory health insurance for all residents. 

The level of education in the Cayman Islands is also very good and education is compulsory for all children. Public school education is free for Cayman Islands children as well as expat children in certain situations, however there are also a number of private and international schools located around the islands to choose from. 

The islands are served by a variety of modes of transport and expats should have no problem getting around.

The Cayman Islands use their own currency (Cayman dollars) pegged to the US dollar. The main economic sectors in the Cayman Islands are finance and tourism, and in the capital, Georgetown, income is not taxed, with the tax added to everyday things that can be prohibitively expensive. Wages are often higher to offset the high cost of living.

Renting is likely to be an expat’s biggest expense. Finding the right accommodation that fits your budget can be difficult. Therefore, expats should try to negotiate a living allowance in their contracts. 

For expats who can afford it, this tax-free haven might be the perfect destination. The Cayman Islands, with their laid-back lifestyle, varied outdoor activities and beautiful scenery, offer one of the highest living standards in the Caribbean.

Speaking about taxes, in this article you will find an in-depth description of the Cayman Islands’ tax system, rates and other useful information for every expat. 

Cayman Islands Tax System

It has been estimated that several thousand Americans live in the Cayman Islands. Life in the Cayman Islands is an incredible experience for a number of reasons, including climate, beaches, local community and quality of life. 

However, as an American expat living in the Cayman Islands, what do you need to know when filing a tax return in the United States (and the Cayman Islands)?

All US citizens and green card holders who earn a minimum of about $ 10,000 (or just $ 400 for self-employed persons) anywhere in the world must file a U.S. federal tax return and pay taxes to the IRS, no matter where they are, they live or receive income.

The good news is that if you pay income tax in the Cayman Islands, there are various exemptions and incentives that prevent you from paying tax on the same income to the IRS.

As a US taxpayer, all worldwide income is taxable and accountable, and for most expatriates, you must file an annual US tax return due on April 15 each year (June 15 if you reside overseas before April 15.). 

The tax regime for different income classes can be very different from the Cayman Islands and the United States. For example, some exemptions may not be taxed or exempt from taxable income in the Cayman Islands, but in the U.S., these benefits are likely to be non-qualified benefits that are subject to being included as taxable income in U.S. 

As such, there are a number of considerations related to the tax on expatriates from the Cayman Islands, and this article will explore some of these considerations.

Cayman taxes 

The Cayman Islands are famous for their tax haven, and for good reason. There are no direct taxes in the Cayman Islands – income tax, VAT, property tax, capital gains tax, income tax and real estate tax.

The only taxes that could affect Americans living in the Cayman Islands are import tax and stamp duty, which is charged at 7.5% on transfers of property and shares.

Since there are no direct taxes, there is no tax return requirement. If you have any questions about taxes in the Cayman Islands, please direct them to the Cayman Islands Internal Revenue Service, Department of International Tax Cooperation.

US Expat Taxes – What You Need to Know

If you earn more than $ 10,000 (or just $ 400 in self-employment income) wherever you are, you must complete IRS Form 1040. Although any US taxes are due by April 15, expats receive an automatic renewal until June 15, which can be extended on request until October 15.

If you have overseas assets worth more than US $ 200,000 per person, other than your home, if it belongs in your name, you will also need to complete Form 8938 to declare them.

If you had at least USD 10,000 in one or more foreign bank and / or investment accounts at any time during the tax year, you must also complete Form FinCEN 114, otherwise known as Foreign Bank Account Statement or FBAR.

While most expats will not pay income tax in the Cayman Islands, they can reduce their US tax liability by requiring a Foreign Income Exclusion, which excludes the first approximately $ 100,000 of foreign income from US tax if you can prove you are a Caymanian. 

However, remember that even if you do not have to pay taxes to the IRS, if your income exceeds $ 10,000 (or $ 400 if you are self-employed), you still need to file a federal tax return.

Banks in the Cayman Islands transfer account information for U.S. account holders to the IRS, so there is no need to specify or omit anything when returning. The fines for incorrect or incomplete filing of documents for emigrants are, to put it mildly, high.

If you are a US citizen, green card holder or dual US / Cayman Islands citizen and you lived in the Cayman Islands but didn’t know you need to file a US tax return, don’t worry: there is a program called the IRS Optimized Procedure which allows you to catch up without paying any fines. Don’t be put off if the IRS comes to you first.

About US expats living in the Cayman Islands

The Cayman Islands are a safe, clean and friendly place to live for expats and their families. This beautiful paradise is a great place to live for diving fans and beach lovers.

The Cayman Islands used to be considered a tax haven for the wealthy, but with US FATCA, this is no longer the case for American expats. However, the huge advantage is the absence of income tax, capital gains or corporate tax.

Below is a list of the 10 most attractive cities in the Cayman Islands for foreigners to live in (in no particular order):

  • Seven Mile Beach, Grand Cayman
  • Kamana Bay, Grand Cayman
  • South Sound, Grand Cayman
  • Avenue and Red Bay, Grand Cayman
  • Georgetown, Grand Cayman
  • Savannah and Lower Valley, Grand Cayman
  • Cayman Brac
  • Little Cayman

Tax Advice for Cayman Islands Expatriates for your US Expat Tax Return

When dealing with your tax return for US expats in the Cayman Islands, there are a number of preferential tax regimes that can benefit your US expat tax return. In fact, for many US expats, this could bring your US taxes down to zero.

Below you can find helpful short guideline for taxing Cayman Islands expats for your U.S. tax return:

  • If you are a US citizen or US foreign resident and reside in the Cayman Islands, your tax return for US expatriates in the Cayman Islands is based on your worldwide income and therefore you must file a US tax return for all years you have lived in the Cayman Islands. However, as an expatriate from the United States, you may be eligible for a reduction in US taxable income to your overseas income, which is adjusted annually for inflation ($ 99,200 for 2014). In addition, you can exclude or deduct certain amounts of foreign housing. This is known as earned foreign income exclusion and foreign housing exclusion.
  • When it comes to your tax return for American expatriates in the Cayman Islands, most American expatriates worry about “double taxation” – paying taxes to two different countries – the United States and the Cayman Islands. A US taxpayer working overseas in the Cayman Islands may be able to reduce US taxable income and “double taxation” by claiming a Form 1116 Foreign Tax Credit. If any foreign income is not fully offset by the Foreign Income Exclusion, Home Exclusion, or Housing Deduction, A paid or accrued foreign tax credit can be used as a deduction or credit on a U.S. tax return. Taxpayers can choose to either deduct taxes in the form of an itemized deduction in Appendix A or claim a tax credit. In most cases, it is beneficial for you to use foreign income tax as a tax credit.

A common but dangerous mistake is to assume that with zero taxes associated with these tax credits, you do not need to file a US tax return when living in the Cayman Islands. It is not true. 

If you are working abroad, it is likely that you meet the tax filing requirements and must do so. It is important to note that these tax breaks, such as the Foreign Earned Income Exclusion and Foreign Tax Credit, do not apply to the results of your tax liability and tax return until they are reported on the filed tax return. So do not forget to file your US expat tax return.

There are many tax issues to consider when it comes to tax advice for Cayman Island expats, but the tax breaks listed above are by far the most common. With good knowledge of taxes, you can be sure you are paying the minimum amount of US taxes you are legally required to pay.

Income tax return

Eligible US individuals living and working overseas may be eligible to deduct certain amounts of their overseas earned income from their US taxable income. If a person meets the requirements described below, he should be able to use the following:

  • Eliminate Foreign Earned Income Fixed Amount in Dollars
  • Exclusion of housing due to excess housing cost.

To be eligible for exceptions, a foreign national working in another country must:

  • Have a “tax house” in another country during the entire period of residence or physical presence.
  • Take either the Physical Presence Test or the Bona Fide Resident Test.

Overseas Earned Income Benefit increases every year. For example: in 2011 the benefit was $ 92,900, in 2012 it increased to $ 95,100, then in 2013 it increased to $ 97,600, and in 2014 it was $ 99,200. In 2015, it surpassed the $ 100K mark to $ 100,800, and in 2016 it was $ 101,300, $ 102,100 in 2017 and $ 104,100 in 2018, $ 105,900 in 2019 year and now $ 107,600 in 2020.

A common misconception for US citizens and green card holders residing in the Cayman Islands is that they do not need to file US tax returns if their earned income is less than earned income abroad, and the housing exceptions mentioned higher. 

This is completely wrong. US citizens and green card holders residing in the Cayman Islands must file a tax return and make an affirmative choice for the exemption, even if their earnings are less than the exemption amount.

US-Cayman Islands Comprehensive Social Security Agreement

The United States has entered into agreements, called Accumulation Treaties, with several countries to avoid double taxation of income with respect to social security taxes. 

These agreements must be taken into account when determining whether any alien is subject to US Social Security / Medicare tax or any US citizen or resident alien is subject to foreign welfare taxes. 

As of now, the Cayman Islands have not entered into a Summation Agreement with the United States, so there is no way to avoid double taxation of social security income for the US Cayman Islands expat tax. But alas, that’s okay because there are no social security taxes in the Cayman Islands.

Choose carefully when looking for a tax professional. We recommend that you hire a Certified Tax Professional who is a Registered Agent (America’s Tax Experts) who has experience and knowledge of taxes on expatriates from the Cayman Islands. 

If you are a U.S. taxpayer overseas, we also recommend that you consult a professional with experience in preparing tax returns for expats.

Importance of Taxes

Here was all the necessary information about Cayman Islands tax system. It is the truest haven for everyone, in terms of simple taxation and low fees. 

Now let’s see some of the logical reasons, that all of us have to pay taxes. Governments collect fees from their citizens and businesses as a means of raising revenues, which are then used to meet their budgetary needs. This includes financing government and public projects, as well as creating conditions for doing business in the country, conducive to economic growth.

Importance of taxes in society

Without taxes, governments would not be able to meet the needs of their societies. Taxes are critical because governments collect this money and use it to fund social projects. Some of these projects include:

  • Health

Without taxes, government contributions to the health sector would not be possible. Taxes go to fund medical services such as social health, medical research, social security, etc.

  • Education

Education could be one of the most worthy recipients of tax money. Governments attach great importance to the development of human capital, and education is central to this development. Tax money is used to finance, equip and maintain the state education system.

  • Management

Governance is an essential component of the smooth running of business in a country. Poor governance can have far-reaching consequences for the entire country and seriously affect its economic growth. 

Good governance ensures that the money raised is used in a way that benefits the citizens of the country. This money also goes to pay government officials, police officers, parliament members, the postal system and others. Indeed, with a proper and functioning form of government, there will be no effective protection of the public interest.

Other important sectors are infrastructure development, transport, housing, etc.

In addition to social projects, governments also use tax money to fund sectors that are critical to the well-being of their citizens, such as security, scientific research, environmental protection, etc.

Some of the money is also used to finance projects such as pensions, unemployment benefits, childcare, etc. Without taxes, it would be impossible for the government to raise money to finance such projects.

In addition, taxes can affect the state of a country’s economic growth. Taxes usually contribute to a country’s gross domestic product (GDP). Through this contribution, taxes help stimulate economic growth, which in turn has a ripple effect on a country’s economy; improving living standards, increasing job creation, etc.

Governments also use taxes as a deterrent to undesirable activities such as drinking alcohol, smoking tobacco, etc. buy or sell them.

The importance of tax for business

For business to flourish, a country must have good infrastructure such as roads, telephones, electricity, etc. This infrastructure is created by governments or with their direct involvement. When the government collects money from taxes, it invests that money in developing this infrastructure and, in turn, promotes economic activity throughout the country.

The concept of taxation is also important to business because governments can return this money to the economy in the form of loans or other forms of financing.

Taxes help raise the standard of living in the country. The higher the standard of living, the more likely, the stronger and higher the level of consumption. A business thrives when there is a market for their products and services. 

With a higher standard of living, enterprises will also be guaranteed higher domestic consumption. Taxes are necessary and every citizen should benefit from these taxes. This is why it is important that citizens try to pay taxes and understand that this must be more than just “extorting money” from the government.

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