The UK investment manager exemption currently enables certain non-UK residents (including offshore investment funds such as hedge funds and private equity funds) to appoint UK-based investment managers without rendering the fund UK resident or liable to UK tax.
However, the eligibility conditions for the UK investment manager exemption are expected to be reviewed by HMRC which may impact adversely on investment management activities currently carried out from London. In addition, certain changes to the tax treatment of carried interest payable to investment managers on the performance of private equity funds are likely to result in the withdrawal or restriction of taper relief, which may make the UK a less attractive location for managers of private equity funds.
Investment management operators in the UK are liable to UK tax both at entity level on investment management fees and at the level of the investment management personnel in the form of income tax and, possibly, capital gains tax.
Recent changes to Jersey's tax regime mean that investment management vehicles can now be structured to pay Jersey tax at a rate of 0% and this change, combined with developments in Jersey's regulatory policy, makes the Island an ideal location for investment managers considering establishing offshore operations or even relocating from the UK.
If correctly designed, the investment management structure and, if also based offshore, the individuals performing the investment management function, are likely to achieve a significantly reduced tax burden than if located onshore. As a result of recent changes in Jersey's tax regime, a Jersey based entity that is regulated for the conduct of fund services business as an investment manager will be able to reduce its tax liability to 0%. In addition, given many investment funds have to date been established offshore, establishing investment management operations offshore may improve the tax analysis in relation to the tax residence of the fund itself.
The Island's well established and stable political environment combined with high regulatory standards in the finance industry provide investment managers with the advantages of a well-regulated offshore jurisdiction whilst remaining less than a one hour flight from London and close to Europe's other financial centres. Furthermore, the Island's attractive environment, modern infrastructure and high standard of living ensure that it has advantages beyond the financial.
For many years, businesses have established operations in Jersey to take advantage of a beneficial tax regime, but the ability to establish a real presence in the Island has historically been limited to local residents or multinational financial institutions. However, in response to a desire to diversify Jersey's economy and encourage high value, low impact business, such as investment fund management, to the Island, the local authorities have made it easier for certain businesses to establish a presence and for individuals to become resident in the Island.
With the introduction of the "zero-ten" tax regime in Jersey, the profits of a Jersey based business involved in the provision of investment management services to investment funds may be taxed at a rate of 0% provided the investment manager is regulated for the conduct of fund services business as an investment manager, and not as either an administrator or a custodian.
A key advantage of operating offshore is that offshore based investment fund managers can seek to retain and motivate key local and onshore employees using offshore employee benefit trusts or international pension structures. These common methods of providing employee benefits to staff are often easier to implement in an offshore environment as the complex employment tax legislation of jurisdictions such as the UK do not always apply.
Jersey has long been admired for its simple tax regime. There are neither wealth taxes nor capital gains tax or inheritance tax and Jersey residents are subject to personal income tax at a rate of only 20% on worldwide income. However, certain individuals involved in the management of investment funds who become resident in Jersey may (subject to a number of conditions) seek to have a significant proportion of their non-Jersey income taxed at a rate as low as 1%.
Becoming Resident in Jersey
Many investment managers establish operations in Jersey without physically relocating staff to the Island. Where an investment manager is structured without a physical presence in Jersey, many of the regulatory requirements applicable to such a manager may be met by a regulated administrator such as Ogier Fund Administration (Jersey) Limited.
However, we also see a trend for some or all of the principals involved in providing investment management to consider a move offshore.
Jersey residents enjoy a high standard of living and good accommodation in the Island is frequently in demand. The availability of housing stock to new residents is limited to those individuals whose residence in the Island is a result of their being 'essentially employed' or where their residency 'can be justified on social or economic grounds'. It is by satisfying this latter category that high net worth individuals such as investment fund managers may be permitted to become resident in Jersey.
For an investment fund manager to be granted a permanent licence to reside in Jersey, the authorities will consider the individual's business and social background, the number of their dependants and any other noneconomic benefits that Jersey may obtain if residency is granted.
The individual's likely tax contribution is a key factor. To meet current requirements for residency, an individual whose residence in the Island can be justified on social or economic grounds would normally be expected to make an annual tax contribution of £100,000. This represents a reduction on previous requirements.
Individual employees whose residence in the Island is as a result of them being "essentially employed" do not have to agree a minimum income tax contribution. The factors taken into account in assessing whether to grant "essentially employed" status include the expected economic contribution of the employer and the qualifications of the employee. In a significant policy shift, authorities in Jersey have demonstrated an increased willingness to grant "essentially employed" status to new businesses that meet the criteria for establishing a presence in the Island, particularly if it can be demonstrated that the position cannot readily be filled from within Jersey's existing labour force. These individuals are subject to tax on their worldwide income at a rate of 20%.
Ogier has close links with the States of Jersey's Population Office (which administers the residency system) and can also assist in the acquisition of local premises and associated matters.
Jersey Expert Fund Regime
Many investment fund arrangers have taken advantage of Jersey's Expert Fund regime since its inception in 2004. Expert Funds, which are subject to a light degree of regulation, have proved to be popular and suitable vehicles for many types of investment funds, including hedge funds and private equity funds. Expert funds are nil rated for tax in Jersey.
To conduct investment business in relation to an expert fund, and to avail itself of the 0% tax, a Jersey resident investment fund manager will need to be registered under the Financial Services (Jersey) Law 1998 for the conduct of fund services business as an investment manager. The investment fund manager will need to satisfy the Commission as to span of control issues and may be subject to annual inspections.
The regulation of an investment fund manager in Jersey is not particularly onerous and the compliance requirements will be far less demanding in terms of management time and expense than the equivalent regulatory requirements of the United Kingdom, Europe or the United States. The Commission has expressed its desire to be flexible in relation to the regulation of fund managers establishing a business in the Island specifically to encourage the investment fund industry to use Jersey.
Jersey Eligible Investor Fund Regime
Jersey has recently developed an eligible investor fund regime for eligible investors. Qualifying funds are not subject to regulatory control or supervision in relation to set up or ongoing operations. Offer documents issued by eligible investor funds are exempt from the usual requirement to obtain regulatory authorisation for circulation. There are no structural or content requirements imposed in relation to offers made by eligible investor funds. In consequence, no investment restrictions or borrowing limitations are imposed by regulation and such funds can be fully flexible and established on a fast-track basis. Eligible Investor funds are nil rated for tax in Jersey.
To conduct investment business in relation to an eligible investor fund and to avail itself of the 0% tax rate, again, a Jersey resident investment fund manager would need to be regulated for the conduct of fund services business as an investment manager.
Jersey is an attractive jurisdiction in which to domicile investment funds and their investment managers. Given the recent UK developments this proposition may now be even more attractive for the investment fund industry.
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.