Originally published in MENA Fund Manager, October 2011

Mark Douglas, Managing Director of Mercator Fund Services Limited, explains why Guernsey remains the premier jurisdiction for property funds.

Over recent years the Island of Guernsey has developed a reputation as the jurisdiction of choice for a wide variety of investment funds. Against a backdrop of extremely challenging global economic conditions, Guernsey's fund industry continues to go from strength to strength, as is borne out by the latest official statistics. As at 30 June 2011, the net asset value of investment funds under management or administration in Guernsey reached a record high of £275 billion, an increase of 23% over the year.

Over the past two decades, the fund industry in Guernsey has experienced a gradual shift from high-volume retail funds to institutional niche funds and service providers now have significant experience in dealing with asset classes such as property, private equity and funds of hedge funds, as well as more esoteric investments.

Whereas traditional open-ended equity and bond funds once dominated, the balance has gradually shifted so that closed-ended funds now account for two-thirds of the value of Guernsey domiciled investment funds. The closed-ended sector encompasses a number of different investment classes but is dominated by private equity (42%) and property (19%).

Guernsey has been at the forefront of the development of offshore property funds over the past 30 years and fund promoters include many household names. A proven route for investing in property, Guernsey funds have tended to outperform onshore funds and produce above average income, largely due to their tax advantages and a flexible regulatory regime.

Guernsey property funds can cater for investors in a number of different regions and the Island is seeing increased flows of business from the Middle East, with Shariah compliant funds also becoming common.

Choice of structure

Closed-ended funds are ideally suited to illiquid asset classes such as property. Liquidity, especially for those funds which do not have a fixed life, can be offered through a stock exchange listing. For a long time Guernsey has been the most popular domicile for investment companies listed on the London Stock Exchange.

Funds can be constituted as companies, unit trusts or limited partnerships. Guernsey law also provides for the incorporation of protected cell companies or incorporated cell companies, where each cell is ring-fenced from the insolvency of the other cells. The choice will largely depend on the needs of the investors, including the tax treatment of income and capital distributions in the investors' home jurisdiction.

The majority of Guernsey property funds are structured as companies, which are often more widely acceptable for marketing purposes and provide greater flexibility for listing on stock exchanges.

Tax advantages

Funds are granted exempt status for Guernsey tax purposes so no income tax is levied and there is no capital gains tax. There is no VAT regime in Guernsey so funds are not subject to this tax either.

There is no withholding tax on dividends paid by Guernsey funds, so dividends are paid gross (other than to Guernsey resident investors). The payment of dividends is also more flexible as they do not have to be paid out of retained revenue and as a result only a basic solvency test must be undertaken.

To mitigate withholding taxes in jurisdictions where the underlying assets are located, special purpose property holding subsidiaries can be established in jurisdictions where there may be tax treaties suited to the location of the underlying asset. Where property is held directly by a fund, tax on rental income in the relevant jurisdiction may be mitigated by the use of a Guernsey property holding subsidiary funded by loans from the Guernsey parent, the interest on which will be exempt from tax in Guernsey.

The absence of income and withholding taxes mean that Guernsey funds can be particularly appropriate for MENA investors who do not tend to pay income taxes in their country of residence, as income is repatriated to investors in a tax efficient manner.


Guernsey features alongside the UK and US on the OECD white list and has recently received recognition from the International Monetary Fund for its high standard of regulation.

Recent high-profile corporate failures around the world mean fund promoters and investors are, more than ever, looking for well regulated jurisdictions in which to domicile funds. Whereas previously certain jurisdictions may have been favoured for their lighter regulatory touch, the focus now is on robust but sensible regulation. This is an area where Guernsey has excelled in recent years due to the willingness of the regulator to engage with industry, whilst keeping investor protection at the core of the regulatory framework. As a result, regulations in Guernsey have evolved to meet the changing nature of the fund industry and Guernsey is at the forefront in terms of developing new fund products.

A streamlined approval process has been introduced in Guernsey in recent years for Registered Funds and Qualifying Investor Funds whereby regulatory approval may be obtained in three business days provided certain conditions are met, thus allowing promoters to bring their funds to market more quickly and with greater certainty.

It should be noted that all Guernsey domiciled funds need to appoint a Guernsey resident and licensed administrator. However, fund managers and advisers can be located elsewhere and do not need to be licensed in Guernsey unless they provide services from the Island. A Guernsey closed-ended fund does not need to appoint a custodian.

Quality of service providers

Guernsey's fund industry has been established for over 40 years and has a range of highly experienced service providers. All the major accountancy firms are represented on the Island and there are also an increasing number of international law firms to supplement the established and well respected local practices. There are over 50 licensed fund administration companies and the workforce is well-qualified with numerous training courses run locally, which are tailored to the needs of the industry.

Promoters need to know that the fund administrator they choose is capable of handling complex arrangements, including corporate structures with multiple subsidiaries in different jurisdictions. In Guernsey they can be confident of finding a competent company secretary with experience in complying with the listing rules of various stock exchanges and the requirements of applicable codes of corporate governance.


Being in a European time zone, Guernsey is convenient for fund promoters and investors from a large geographic area, including the Middle East. Guernsey's proximity to the City of London is also an important factor given the number of Guernsey funds listed on the LSE or AIM, and it allows service providers to maintain close contact with the major London law firms and tax advisers.

For property funds with assets located in the UK or Europe, Guernsey's location facilitates the inspection of these properties by the fund directors. Central London property is particularly in vogue at the moment and these properties can be readily inspected by fund directors and trustees.

However, care should be taken to ensure that a fund is considered tax resident in Guernsey only and, in particular, not considered to be UK tax resident. Guernsey's location makes it easy for directors and advisers to attend board meetings in person, thus consolidating the tax residency of the fund.

The Future

Property has always been considered as an essential element of any diversified investment portfolio and the recent turmoil in global markets has only confirmed this view. While many investors may choose to purchase an individual property (often via a Guernsey company or trust), a property fund provides further diversification.

The strengths that Guernsey's success has been built on are more important now than ever and the latest statistics show an eighth consecutive quarter of growth, indicating that Guernsey is likely to remain a leading jurisdiction for property funds for many years to come.

With a history going back over 30 years, Mercator has developed into one of the leading independent fiduciary companies in the island, employing over 70 people. We recognise that no two funds are the same and we provide a bespoke service rather than a 'one size fits all' solution.

At Mercator we have extensive experience of administering both listed and unlisted property funds, as well as property holding structures for private clients. We also have substantial experience of dealing with investors from the MENA region and handling Shariah compliant property transactions.

For more information about Guernsey's finance industry please visit www.guernseyfinance.com.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.