Cayman Sandwich: What It Is and Its Advantages

As explained in the previous chapter in this series, the Cayman Sandwich is the most common international legal structure in the Latin American startup world, since most investors seek stable, tax-friendly jurisdictions in which to invest. 

In this article, we’ll take a closer look at this structure to understand how it works, its benefits, and why it is the most common legal structure for startups in Latin America. 

‍What Are the Cayman Islands?

The Cayman Islands are a British Overseas Territory with a jurisdiction that primarily encompasses three islands: Cayman Brac, Little Cayman, and Grand Cayman. 

The Cayman Islands have a well-established legal system, are a politically stable British Overseas Territory, and offer flexible business structures.

Advantages of the Cayman Islands for Startups

As a jurisdiction, the Cayman Islands offer many advantages for nonresidents and offshore companies. Some of the most notable include:

• No income taxes
• No taxes on capital gains (profits, dividends, or an exit) or inheritance taxes.

These features are especially relevant when investing in a startup, since transfers of funds in the event of an exit or when distributing profits will not be taxed 2 times, as they would under another legal system.  

‍What Is the Cayman Sandwich?

The Cayman Sandwich is an international legal structure that gets its nickname from its three layers: the Cayman Islands company is the top slice of bread, the Delaware LLC is the filling, or middle layer, and the Latin American operating company is the bottom slice.

Below, we explain each of the companies involved in detail.

Cayman Islands Company: How It Works and Its Benefits

As the top layer of the sandwich, the Cayman Islands company serves as the holding company. In other words, it is the company that receives investments, holds the intellectual property, and oversees the other intermediary and operating companies. 

This company was chosen as the holding company because of the benefits it offers its shareholders, including:

1. Tax efficiency in international trade
2. Ease of buying and selling shares and trading on international markets
3. Easy management of inheritances and asset transfers
4. Exemption from income and profit taxes
5. Shareholder confidentiality is maintained 
6. No accounting requirements
7. Standard incorporation fee: $50,000 dollars
8. At least 1 director and 1 shareholder are required for incorporation

Delaware LLC: How It Works and Its Benefits

In the middle layer of the sandwich, we find the Delaware LLC in the United States. Its main purpose is to act as a “blocker” between the holding company and the subsidiary companies, thereby preventing potential issues. 

Some of the benefits of using this type of company in the middle layer of the sandwich are:

1. It has fewer formal legal requirements than a C-Corp
2. It provides liability protection for its owners
3. Formal meetings are not required on a regular basis
4. It is ideal for managing businesses or holding assets
5. Tax advantages (depending on the jurisdiction of incorporation)

This company is incorporated through a “Registered Agent” in the United States, with an address in Delaware or in the jurisdiction where the entity is to be incorporated. 

Operating Subsidiary

This is the company responsible for conducting business operations in one or more jurisdictions (for example, Mexico, Chile, Peru, Argentina, etc.). In other words, there may be several operating companies, all connected to the LLC, which is in turn connected to the Cayman Islands company. 

It is important to note that this company must meet the following requirements: 

1. The entrepreneur must retain control of operations
2. The investor must have the right to understand how funds are managed without being involved in business operations
3. The management body must consist of more than one person
4. Internal and external audits must be conducted once a year
5. Corporate governance must be implemented to ensure transparency and accountability to investors

Remember to seek advice from a lawyer who specializes in startups to determine what type of company you should incorporate to operate in the countries of interest. 

Investment Instruments for the Cayman Sandwich

With this international structure, it is important to know which instruments you can use to raise investment. These instruments are:

1. SAFE (Simple Agreement for Future Equity)
2. KISS (Keep It Simple Agreement)
3. Convertible Note
4. Traditional Investment Agreement or Capital Increase

How Do You Receive Investments?

All investments must be received by the Cayman Islands company. Once the investment has been received by the Cayman Islands company, you should “move” the money down to the Delaware LLC, which must then distribute it to the subsidiary or subsidiaries so they can carry out the company’s operations. 

Keep in mind that it is very important to have a lawyer, a tax lawyer, and an accountant who specializes in startups guide you through these transfers so you can file the required returns in each jurisdiction and avoid any type of noncompliance. 

Conclusion

In upcoming chapters, we’ll discuss C-corps and flips so you can learn about all the international structuring options for startups and determine which one best suits your company’s needs.

Always remember to seek advice from lawyers who specialize in these matters. If you need assistance, you can contact SLLM to request their services.