Unit Trusts

INTRODUCTION

A unit trust is a special kind of trust which, in addition

to being subject to the laws governing trusts, is also subject

to the laws governing mutual funds. A unit trust may be

registered as a mutual fund if the trust units are redeemable

at the option of the investor. Units trusts may also be

registered as exempted trusts under the provisions of the

Trusts Law (as amended) provided that none of the investors

are, or are likely to be, resident or domiciled in the Cayman

Islands. A unit trust can also be created as a STAR trust, a

statutory purpose trust.

The Mutual Funds Law 1993 was introduced to the Cayman

Islands on 26 July 1993 and was consolidated and revised to

become the Mutual Funds Law (as amended) (the

"MFL"). The MFL regulates all mutual

funds established in or operating from the Cayman Islands, and

those who administer mutual funds in or from the Cayman

Islands. A unit trust is a type of mutual fund defined by the

MFL to mean a trust established by a trustee which, for

valuable consideration, issues trust units in profits or gains

arising from the acquisition, holding, management or disposal

of investments by the trustee of the trust, the proper law of

which is the law of the Cayman Islands or the law of any other

jurisdiction.

With one exception, the MFL requires all mutual funds other

than closed ended mutual funds, to be regulated. The exception

is for a mutual fund in which the equity interests are held by

not more than fifteen investors, the majority of whom are

capable of appointing or removing the trustee. A mutual fund of

this type escapes regulation altogether.

ADVANTAGES OF A CAYMAN ISLANDS' UNIT

TRUST

No taxation

There is no taxation in the Cayman Islands in relation to

income or capital gains, in respect of a unit trust, or in

relation to distributions to unitholders or capital gains on

redemption or sale of units. In addition, under current

legislation, upon application to the Cayman Islands'

Government, the Governor will ordinarily grant a guarantee of

freedom from such taxation for up to 50 years in the case of an

exempted trust.

No exchange controls

There are no exchange controls in the Cayman Islands and

thus investments may be made and realised in unit trusts

without any governmental consent.

Worldwide investments

Provided the trustee is permitted to do so by the trust deed

governing the unit trust, investments of any type may be made

anywhere in the world, subject always to the restrictions of

local laws of any applicable jurisdiction.

Local regulations and legislation

Other than the requirement outlined below relating to

managers, there are no governmental approvals or consents which

need to be obtained, nor any statutory requirements to be

complied with in relation to the issue of units by a Cayman

Islands' unit trust or the circulation of offering

documentation, provided the offer is not made to the public of

the Cayman Islands nor to persons resident or domiciled in the

Cayman Islands.

TYPES OF UNIT TRUSTS

What is a unit trust?

All assets of a unit trust are vested in a trustee under a

trust deed or declaration of trust which divides the beneficial

ownership into a number of units which are usually (but not

necessarily) freely transferable and redeemable. The rights and

obligations of the trustee and the unitholder, the terms of

redemption and valuation rules are all set out in the trust

deed.

A subscription agreement will contain the contractual

provisions between the trustee and the unitholders. The

contractual provisions governing the relationship between the

trustee and other advisers to the trustee will be set out in an

agreement between the trustee and the service provider.

There are two basic types of unit trust: open ended mutual

funds and closed ended mutual funds. A unit trust is

established by a trust deed, or often a declaration of trust by

the trustee. Most mutual funds are established as "open

ended" and this memorandum primarily concerns that type of

unit trust.

Open ended unit trust

In an open ended unit trust, the fund is divided into a

number of units, each unit representing a proportion of the

assets held by the trustee. Units may be issued and/or redeemed

from time to time as required by the provisions of the trust

deed and offering document at their then net asset value.

Closed ended unit trust

Closed ended unit trusts have a fixed capital and therefore

the prices are determined by supply and demand. The units may

be issued at a premium or a discount to the net asset value but

the capital remains the same and the units of the trust fund do

not expand or contract.

Registration of the trust as an exempted

trust

If the trust is registered as an exempted trust, the trustee

is entitled to apply for an undertaking that no law enacted in

the Cayman Islands for a period of up to 50 years after the

date of creation of the trust which imposes any tax or duty on

income or on capital assets, gains or appreciation, or any tax

in the nature of estate duty or inheritance tax, will apply to

the assets or income arising under that unit trust or to its

trustee or unitholders.

In order to register a unit trust as exempted, the Registrar

of Trusts has to be satisfied that the unitholders under the

trust do not and are not likely to include any person (which

for this purpose includes a company) at any time resident or

domiciled in the Cayman Islands. A company incorporated in the

Cayman Islands as an exempted or ordinary non-resident company

is statutorily deemed not to be domiciled in the Cayman

Islands. In our view, such a company would also not be

considered resident in the Cayman Islands provided that it:

does not conduct business in the Cayman Islands;

does not have its central management and control located

in the Cayman Islands; and

is not owned by Cayman Islands' residents.

Consequently it is perfectly possible for a Cayman

Islands' company to own units in an exempted unit

trust.

Once a unit trust is registered as...