On the dark and moonless night of the 8th of February 1794, a navigational error resulted in ten British Royal Navy ships being wrecked on the treacherous coral reefs off East End, Grand Cayman. The local people saved everyone aboard the ships, including, so the story goes, a royal prince. When Britain's King George III heard of this act of gallantry, he is said to have decreed that the people of the Cayman Islands should forever be free from taxes and war conscription. There is no doubt that the Wreck of the Ten Sails actually took place, but there is no documented evidence of the royal decree.
The real reason for the Cayman Islands being a tax-free jurisdiction is rather more prosaic. Until the mid 1960s, the population was less than 8,000, and most Caymanians made their living from subsistence farming, fishing, turtling and making thatch-rope, while many of the men served as merchant seamen on ocean-going ships, usually flying the American or Liberian flag.
This basically meant that most of the residents in Cayman were living on meagre earnings, there were few companies and capital gains were virtually nonexistent, so there was nothing worth taxing. But in 1952, an aircraft runway was constructed and the following year Barclays Bank opened a branch on Grand Cayman.
In fact, Cayman's status as an international financial centre derives from a proactive government who, in the mid 1960s, together drafted and enacted legislation to build on this modest beginning and take advantage of the absence of any form of direct taxation on individuals and corporations based on income or wealth.
In the following decades, more international banks were attracted to Cayman, together with law and accounting firms. When the Bahamas became independent from the UK in 1973, a number of expatriate workers from that jurisdiction were attracted to Cayman as a stable place to do business. It is notable that cooperation between the Government and the private sector has continued to this day. This, combined with a policy of welcoming expatriates with special skills to the Islands and a growing population of well-educated Caymanians, has propelled the Cayman Islands into the forefront of the international financial industry.
To this day there are no income, inheritance, sales, corporation, capital gains or withholding taxes in the Cayman Islands.