This briefing is intended to provide a general overview of some of the factors to be considered by promoters and onshore counsel looking at Jersey as a private equity fund domicile.
ONSHORE OR OFFSHORE?
Promoters and managers have found many advantages, quite apart from the tax-related ones, in choosing offshore over onshore jurisdictions for domiciling their investment funds offshore, including:
- the ability to define investment strategies and objectives without restrictions imposed by onshore regulators in the name of consumer protection, and the consequent absence at the fund level of expensive reporting requirements to onshore regulators such as the SEC in the United States and the FSA in the United Kingdom;
- in relation to certain types of funds (an example being property unit trusts), an offshore fund can be more widely marketed to institutional investors and is often listed on an offshore exchange (for example, the Channel Islands Stock Exchange) to facilitate this;
- if the investment management of a fund is conducted offshore, there may be regulatory advantages for the investment manager and adviser; for example, if management services are provided offshore, so that investment advisory services only are provided from within the UK, this can reduce the regulatory burden on the investment adviser in the UK which may not require full FSA regulation;
- Jersey is home to a concentrated level of private equity fund expertise, including experienced law firms, fund administrators and managers and all of the major accounting firms and private equity fund specialist audit firms.
SELECTION OF OFFSHORE JURISDICTIONS
Once the decision has been made to go offshore, the following key considerations come into play:
Political and economic stability
Jersey is not part of the United Kingdom. It is a self-governing dependency of the British Crown. It has complete autonomy in all matters of internal government, including taxation. The legal system is derived in part from the customary laws of Normandy but is strongly influenced by English law in company and commercial matters.
Jersey's particular constitutional position is recognised by the European Union ("EU") in protocol (No 3) attached to the United Kingdom's treaty of accession to the EU. In general terms, the protocol provides that the Treaty of Rome applies to Jersey only to the extent necessary for the free movement of goods. Accordingly, EU directives on fiscal harmonisation, financial services and company law do not have direct effect in Jersey and, in this respect, the jurisdiction enjoys significant advantages over Luxembourg and Ireland.
Integrity and reputation
Jersey is a recognised jurisdiction for the purposes of the Financial Action Task Force ("FATF") for its antimoney laundering legislation. This provides comfort to investors who may be satisfied that Jersey has adopted standards that are at least equivalent to, if not higher than, those of their own jurisdiction. Such considerations may be important, in particular, for institutional investors and government organisations It can also often be to the fund's advantage that it can demonstrate to the authorities in the jurisdiction where it seeks to invest that it is properly regulated in an internationally recognised jurisdiction. Payments may also be assisted to and from the target jurisdiction due to Jersey's recognition by the FATF.
Modern legislation and regulations
Jersey has a government that recognises the importance of working closely with the private sector to provide legislation that meets market needs.
Absence of direct taxes and exchange controls
Private equity funds can be established in Jersey without the imposition of direct taxes, and Jersey is completely free of exchange controls.
Good communications and access
The communications system in Jersey is first class and the legal and financial services providers operate information technology systems on a par with those available in any other major financial centre.
Jersey is easily accessible by regular direct flights from London and other United Kingdom airports and is in the same time zone as the United Kingdom.
Recognised stock exchange
The Channel Islands Stock Exchange ("CISX") has been designated as a "recognised stock exchange" by Her Majesty's Revenue & Customs and as a "designated investment exchange" by the UK FSA.
European Union Directive on the Taxation of Savings Income
On 3 June 2003, the European Union ("EU") Council of Economic and Finance Ministers adopted a directive on the taxation of savings income in the form of interest payments (the "EU Savings Tax Directive"). Each EU Member State is now required to provide the tax authorities of each other EU Member State details of payments of interest (or other similar income) paid by a person within its jurisdiction to or for the benefit of an individual resident in that other EU Member State. Austria, Belgium and Luxembourg have, however, instead agreed to apply a withholding tax system for a transitional period in relation to such payments.
Jersey has introduced a withholding tax system in respect of payments of interest, or other similar income, made to an individual beneficial owner resident in an EU Member State by a paying agent situate in Jersey, as appropriate (the terms "beneficial owner" and "paying agent" are defined in the legislation implementing the EU Savings Tax Directive in Jersey). The withholding tax system applies for a transitional period prior to the implementation of a system of automatic exchange of information regarding such payments between Jersey and the EU Member States. During this transitional period, an individual beneficial owner resident in an EU Member State will be entitled to request a paying agent not to withhold tax from such payments but instead to communicate the details of such payments (via the Comptroller of Income Tax in Jersey) to the tax authorities of the EU Member State in which the beneficial owner is resident.
The ability of offshore investment funds to offer participation interests directly to investors in the United Kingdom is restricted under the Financial Services and Markets Act ("FiSMA"). Section 270 of FiSMA does, nevertheless, provide a procedure for the recognition of investment funds established in designated territories whose laws afford investors in the United Kingdom protection at least equivalent to that provided under FiSMA. Jersey has obtained 'designated territory' status and a number of Jersey funds have been recognised under section 270.
European Union Code of Conduct on Business Taxation
On 3 June 2003, the European Union Council of Economic and Finance Ministers reached political agreement on the adoption of a Code of Conduct on Business Taxation (the "Code").
Jersey is not a member of the European Union. Nonetheless, the Treasury and Resources Department of the States of Jersey has announced that, in keeping with the States' policy of constructive international engagement, Jersey will introduce legislation to replace the "exempt company" regime by the end of 2008 with a general zero rate of corporate tax.
The Borrowing (Control) (Jersey) Law, 1947 ("COBO") and the Collective Investment Funds (Jersey) Law, 1988 (the "CIF Law") together with the regulations made thereunder govern the establishment and regulation of investment funds in Jersey. Although the scope of the two statutes overlaps, in practice an investment fund with a limited number of investors which is not to be listed will be governed by COBO whereas a more widely distributed or listed fund will be regulated under the CIF Law.
In general, if shares, units or limited partnership interests are to be offered to 50 or fewer persons and are not to be listed it is necessary only to obtain consent of the Jersey Financial Services Commission ("JFSC") under COBO. If, on the other hand, shares, units or limited partnership interests are to be offered to more than 50 persons or are to be listed, permits under the CIF Law will also be required. It is important to note that for these purposes it is the number of offers made which dictates whether a fund is to be regulated under COBO or the CIF Law. Accordingly, it is possible for a "red-herring" offering document to be distributed to more than 50 prospective investors without this giving rise to regulation under the CIF Law, provided the red-herring document makes it clear that it is not intended to constitute an offer of shares, units or limited partnership interests. Where permits are granted under the CIF Law, any COBO consents that are required will be issued automatically.
Jersey has adopted a streamlined approval process for Expert Funds. An Expert Fund will be subject to a very light degree of regulation. In particular, the promoter of an Expert Fund will not be subject to any regulatory review or approval and an Expert Fund will not be required to adopt any prescribed investment restrictions or risk diversification strategy. Self-certification as to compliance with the Expert Fund requirements means that an Expert Fund can be approved by the JFSC within days.
An Expert Fund must appoint a Jersey resident administrator, manager or (in the case of a closed-end unit trust) trustee. An open-ended Expert Fund must appoint a Jersey-resident custodian (unless it is a hedge fund, in which case a prime broker with a credit rating of A1/P1 is required). A Jersey open-ended fund (not being an Expert Fund) must appoint a Jersey resident manager and a Jersey resident custodian.
Jersey has also recently adopted a streamlined approval process for closed-ended collective investment funds listing on a designated exchange. A listed fund will be subject to a very light degree of regulation. IN broad term, a listed fund must satisfy the same criteria as an expert fund, and will need to follow similar guidelines.
For additional details on the Expert Fund or the Listed Fund regimes, see our briefings entitled "Expert Funds in Jersey" and "Listed Funds".
Different structures are available to be used for private equity funds and a combination of structures may also be permitted.
- The Companies (Jersey) Law 1991 is a modern statute, based upon internationally familiar English company law principles.
- There are no minimum authorised or issued share capital requirements imposed.
- A number of different types of company are available (see our briefing entitled "Companies in Jersey"), and no par value shares and cell companies are also available.
- In contrast to an investment company, a unit trust is not a separate legal entity as such, but a trust arrangement whereby legal ownership of the fund's assets is vested in a trustee who holds the assets of the fund on trust for the benefit of the unit-holders.
- The unit trust will generally be constituted by means of a trust instrument made between a trustee company and an independent manager. Typically the manager will promote, manage and administer the scheme. Subscription proceeds will be paid to the trustee which will act as custodian of the investment assets of the fund. In addition, the trustee will generally supervise compliance by the manager with its obligations under the trust instrument.
- The trust instrument will generally contain provisions regulating the issue, redemption and valuation of units, the appointment and removal of the trustee and the manager, their duties and remuneration, borrowing powers, investment restrictions and for the winding-up of the trust.
- Jersey has a modern statute-based trusts law.
- For most practical purposes a unit trust scheme will operate and be regulated in the same manner as a corporate investment fund.
- Limited partnerships may be established and operated in each jurisdiction under comprehensive and modern legislation.
- A limited partnership may be an appropriate structure for a number of different purposes. A principal use will be to provide an additional form of investment vehicle for mutual funds, in particular for the venture capital industry. A limited partnership can also be an attractive structure for various tax planning purposes as the partnership is generally treated as being fiscally transparent.
- There is no maximum imposed on the number of limited partners of a limited partnership.
- The general partner will manage the business of the partnership and have unlimited liability for its debts. The liability of investors taking interests as limited partners (and who do not participate in the management of the business) will be limited generally to the amount of their investment.
SELECTION OF INVESTMENT STRUCTURE
The prospective investor at whom the investment product is targeted will be an important consideration in determining the selection of the appropriate form of investment vehicle. Where, for example, a retail fund is to be offered to the public in the United Kingdom, or to Japanese investors, a unit trust may be the most familiar structure, whereas if the fund is to be marketed in Europe or in the United States, an open-ended mutual fund company may be the more appropriate form. For complex investment products with high minimum investment thresholds to be offered to investment institutions, limited partnerships may be the appropriate form.
While regulatory and marketing considerations are important in selecting whether the corporate, unit trust or limited partnership form is used, the fiscal implications for investors will generally be the determining factor. The promoters of the investment fund will generally wish to ensure that, at the least, the investment fund achieves tax neutrality, whereby an investor will be in the same tax position whether he makes his investment directly in the underlying assets or through the medium of the investment fund.
In most tax jurisdictions the corporate form, by virtue of being a separate legal entity, is treated as being fiscally non-transparent, the fund's tax position being determined without regard to its shareholders. However, it has been possible to structure companies as entities that satisfy the relevant conditions within other jurisdictions for fiscal transparency. A limited partnership, on the other hand, will generally be treated as being transparent for tax purposes and the total tax take will be determined by the partners' individual circumstances. For fiscal purposes, a unit trust has mixed tax characteristics. In certain jurisdictions it may be treated as being transparent for income and non-transparent for capital gains distributions. The revenue authorities may regard income in the hands of the trustee as the income of the unit-holder.
Accordingly, for certain types of investments in certain jurisdictions it may be advantageous for investors to use a trust vehicle. However, by virtue of the greater flexibility provided by the corporate form for listing on stock exchanges and the wider acceptability of companies for marketing purposes, the majority of the investment funds established in Jersey in recent years have been open-ended investment companies.
Master-feeder structures are also frequently used, and enable both domestic investors and onshore investors to participate in the same investment programmes. Using the United States as an example, this is normally achieved by having the US taxable investors invest directly in a limited partnership domiciled in the United States, and having the offshore investors and US tax exempt investors investing in an offshore company (or, occasionally, a limited partnership). Each feeder will then invest all of its assets in the master fund, which is typically an offshore company that has elected to be treated as a partnership for U.S. tax purposes under the U.S. "check the box" rules. The investment manager will then manage the portfolio at master fund level. One of the advantages of the structure is administrative ease, since the investment manager will only need to maintain one set of books for the investments at master fund level.
This memorandum is intended to provide an outline of the legal regime governing private equity funds in Jersey, and is not intended to be comprehensive in its scope. It is recommended that clients seek legal advice on any particular matters.
British Virgin Islands
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.