Guernsey offers a flexible choice of business vehicles for structuring funds and associated management and special purpose vehicles. The types of investment vehicle most often encountered in Guernsey are closed ended or open ended companies and unit trusts and closed ended limited partnerships. Additionally, Guernsey recently introduced its form of limited liability partnership, which has already proved popular as a vehicle to house fund managers and general partners (including of non-Guernsey funds).
TYPES OF VEHICLE
The Guernsey limited liability company provides investors with limited liability to the amount unpaid on their shares. It also has the major advantage of not being subject to any capital maintenance principle.
Accordingly, there are no authorised share capital or minimum issued share capital requirements, and distributions can be made out of capital subject only to satisfaction of the prescribed solvency test. Shares can be issued at par value, denominated in any convertible currency and with or without premium, or with no par value. There may be multiple classes of shares with different rights.
An alternative to having different classes of shares in a standard non-cellular company is to use a Guernsey cell company – either a protected cell company (PCC) or incorporated cell company (ICC). In such a company shares can be issued in separate cells to shareholders who may be different for each cell and different from the shareholders of the 'core' of the PCC or umbrella ICC. Crucially, unlike for share classes in a non-cellular company, the assets and liabilities of each cell are legally segregated from those of the other cells and the core of the PCC/umbrella ICC. Therefore a cell company lends itself well to guaranteed or protected products.
The key difference between a PCC and an ICC is that, in an ICC, the cells are incorporated as separate companies in their own right, thus providing an extra layer of legal segregation of assets and liabilities.
There are clear cost and time savings in using a cell company rather than setting up multiple fund structures – adding a cell to a PCC will be cheaper than forming a brand new legal entity, and the regulatory application and annual fees for cells will be lower than for separate funds. Further, there are reduced operating costs for cell companies, in that there is one board of directors and administrator, and audit fees can be shared across the cells.
Cell companies can also be used as rent-a-cell platforms to white label to multiple investment advisers who each take a separate cell or cells for their separate fund(s). This is more cost effective for investment advisers than setting up a standalone fund structure and helps new investment advisers build a track record in an already established investment vehicle.
The standard rate of Guernsey corporation tax is currently 0%; alternatively a Guernsey corporate fund may apply for exempt status so that it is exempt from Guernsey tax other than in respect of Guernsey source income (excluding bank interest).
2. Unit trust
A unit trust is not a legal entity but a trust arrangement whereby the trustee holds the fund assets on trust for the benefit of the investors who hold units in the unit trust. A unit trust is constituted by a trust instrument entered into between the trustee and the manager of the fund, to which investors adhere upon subscribing for units.
The trustee acts as custodian (having a custodian which is independent from the manager is a requirement for Guernsey open ended funds). Guernsey unit trusts have been commonly used for real estate funds, hence the acronym 'GPUT' (Guernsey property unit trust), but are by no means confined to such use.
Neither the trustee nor the assets of a unit trust will be liable to Guernsey income tax on the unit trust's income arising outside Guernsey (nor on Guernsey bank interest). In certain jurisdictions a unit trust may be treated as tax transparent for income and non-transparent for capital distributions.
3. Limited partnership
Again, a limited partnership is not a legal entity separate from its partners and must act through and be managed by its general partner(s), of which there may be more than one, with different functions. Usually a Guernsey SPV is established to act as general partner, which again may be a company, limited partnership, or since May 2014, a limited liability partnership.
The limited partners have no liability for the debts of the partnership beyond the amount of their investment (provided they do not participate in management), whereas the general partner has unlimited liability for the debts of the partnership. There is no limit on the number of limited partners. A limited partnership is generally treated as being tax transparent and is therefore an attractive structure for various tax planning purposes and particularly favoured for structuring private equity and venture capital investments.
4. Limited liability partnership
The Guernsey limited liability partnership combines the most advantageous features of a partnership and a company. This gives the flexibility of operation of a partnership with reduced regulation compared to a company, combined with the benefit of its being a body corporate that can contract in its own right, with limited liability for its members which is not lost by participation in management. This may be attractive for real estate joint ventures and other investment 'clubs' where investors want to take a more active role.
The LLP is transparent for Guernsey tax purposes. It has been used to act as general partner of a UK limited partnership in light of the changes to the UK's Partnership Accounts Regulations, which impose certain accounting standards and public filing requirements. These requirements do not apply to English or Scottish limited partnerships which have an LLP as their general partner.
It has also been used to house an investment management firm, which is something we are likely to see much more of given Guernsey's thriving funds industry and in the wake of AIFMD, due to which many EU-based fund managers are looking to relocate their operations outside of the EU; the ability to migrate existing LLPs into Guernsey will be attractive in this regard.
FACTORS INFLUENCING CHOICE OF STRUCTURE
There are six main factors to consider:
1. Investment strategy
Whether the fund is to be closed or open ended will be relevant. A limited partnership is not as suitable for open ended funds because it is relatively cumbersome to add and remove investors.
If a proposed fund has multiple strategies, or investments are to be staggered or participated in by different investors, then a cell company, using a separate cell for each strategy, vintage or group of investors, may be the most suitable.
2. Asset type
Illiquid assets are more suited to a closed ended structure, and in the private equity and property fields this will often mean that a limited partnership is chosen.
If the fund is to invest in a diverse range of assets then this could be achieved by using a cell company to segregate assets and associated liabilities by asset class or geography in separate cells.
3. Investor expectation
Investors in particular jurisdictions may be more familiar with one type of structure than another and there may be a preference according to the investor type; for example, institutional investors will be familiar with investing through a limited partnership structure.
If it is intended that the fund will be listed then the mostsuitable structure will be a company. If a cell company isused it is possible to have listed and unlisted cells and havecells listed on different markets.
A company has the option of being self-managed for AIFMD purposes.
6. Tax implications
Tax implications for investors in their home jurisdiction will generally be the determining factor. Whichever business vehicle is chosen, Guernsey does not impose any additional layer of tax on funds or their investors. In addition to income tax neutrality, there is no capital gains tax and no withholding tax or stamp duty is applicable.
An original version of this article was published in HFM Week, Guernsey supplement, April 2015.
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.