Jersey has an unrivalled reputation for financial excellence and professional expertise. The island enjoys political and economic stability, whilst maintaining some of the highest legislative standards of all offshore financial centres. This is achieved by virtue of a well defined legal and regulatory system, which is flexible enough to facilitate the requirements of large and well established firms of lawyers, able to collaborate in the establishment of offshore remuneration planning schemes.
This article will look at the more popular arrangements being offered to the high-earning and/or expatriate executive. In todays competitive employment markets, employers must consider tax efficient ways in which to remunerate their international executives. Jersey, as a centre for services to the multinational employer/employee, not only makes it entirely possible to achieve substantial tax savings and thereby cut costs to both the employer and the employee, but also provides the employer with the possibility of tax efficient structures which may contractually stipulate performance targets and early termination penalties thereby enhancing employee motivation and loyalty. This article will briefly examine the more popular arrangements established offshore.
International Payroll and Employment companies
Where an employer remunerates staff who are distributed around the world (and often working on specific projects that are transient in nature), the centralisation of employment using a single entity in a neutral tax free environment may lead to greater flexibility in terms of remuneration policy. This should result in more efficient and cost effective administration, whilst significant tax and social security savings will often be achievable.
A Jersey employment company allows for the payment of gross salaries to the employee, whilst employers may mitigate salary costs by reducing the incidence of social security levies. Moreover, offshore payroll arrangements will not be subject to the exchange controls that might be imposed in countries where the employee is based. In the event, contracts of employment can be drafted to divide an employee¹s remuneration between a portion of the salary to be used to cover living expenses in the field and a nest egg to be rolled-up in Jersey for the future enjoyment of the employee.
A further area of interest lies in the development of deferred compensation packages. Where an employer wishes to post individuals abroad, it is customary for their compensation to reflect regional variances in the cost of living, housing and income tax. In addition, these executives habitually receive bonus awards intended to compensate them for the inconvenience of living overseas. The income tax associated with these assignments is frequently a significant part of the assignment cost. Clearly, any reduction in this sizeable cost is desirable (especially where the benefit accrues to both employer and employee). It is commonplace for employees to view their bonus awards as a source of savings. Accordingly, the offer by an employer of an attractive savings vehicle, which simultaneously defers tax liability, allows for improvements in expatriate remuneration packages whilst achieving savings in the cost of the overseas appointment.
Once an employer has established a deferred compensation plan for the benefit of expatriate employees, the employer will make income contributions into the plan, which will be neither taxable domestically nor in the host country. However, subsequent distributions to the employee will be taxable in the year that they are paid out to him. Taxation is thus deferred; during the intervening period the settled gross funds are available for investment and grow in their entirety providing the employee with the opportunity to achieve substantially better growth and return overall even after taxation is eventually applied.
The term deferred compensation may be applied to any payment for services not made at the time the services are rendered. These arrangements hinge upon a Jersey discretionary trust. Lawyers and professional trust companies based in the Island are very familiar with the process of formation and the administration of these trusts to provide a versatile mechanism by which to cement the relationship between employer and employee.
Pensions and Savings Plans
Traditionally, these plans have been in the domain of the expatriate ex-colonial community, however, the advent of fast, cheap and efficient air transport and the globalisation of international business has brought increased demand for pension benefits to be administered offshore so as to provide an appropriate solution throughout the career of an international executive, no matter where he is based at any given time.
An offshore savings/pension scheme can provide a full range of pension benefits and will be able to receive contributions from either the employer, employee or both. The retirement benefit arising from these contributions will be computed on the assumption either that there will be stipulated fixed contributions or computed on an assessment of final pay. Either way, the contributions will be invested and administered by the trustees as a discernible separate fund held on behalf of the individual employee. Alternatively, an individualís contributions may form part of an overall fund to be of future benefit to a group of employees as a whole.
Employee Share Ownership Plans (ESOPs)
The principal purpose of an ESOP is to enable employees to participate in the ownership of their employer¹s equity. To achieve this the employer establishes a trust, whose sole purpose is to invest in the equity of the company, or group of companies, for whom both employer and employee work alike. Historically, this has been one of the most successful range of products to motivate and ensure employee loyalty. It represents an incentive working on the principle that the vested interest of the employee in the business to which he belongs will be enhanced by devoting time and energy to it; especially now that it belongs, at least in part, to him!
An ESOP may be devised to benefit as many or as few of the employees as the employer desires. It is commonplace for all employees to participate. However, the plan need not treat all employees as equals. It may be drafted to favour certain groups or individuals over others. The trust deed is invariably discretionary in nature thereby enabling the employer to make recommendations to the trustees on an on-going basis.
To acquire shares in the employing company, the trust must be funded (usually by way of a loan from the company itself). Alternatively, the trust might be the recipient of a back-to-back loan, again funded by the company. In any event, shares will be purchased for the future benefit of the participating employees. These plans will fall into one of three categories, namely, All-Employee Plans, Executive Plans or International Share Ownership Plans.
It is common practice for ESOP¹s to have trustees resident offshore in order to avoid the incidence of Capital Gains Tax (or its equivalent in other jurisdictions) and Jersey has become the most favoured choice of jurisdiction in recent years for the establishment of ESOP¹s.
Considerable expertise in the creation and administration of offshore remuneration and savings arrangements exists in Jersey and Volaw Trust & Corporate Services Limited (together with associated law firm, Michael Voisin & Co.) are ideally placed to assist and advise on the establishment of the type of schemes referred to above.
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.
This article also appears in the 'International Offshore and Financial Centres Handbook 1999/2000'. For further information about this highly informative guide to offshore centres, or to order your copy, please phone +44 (0) 207 820 7733 or send an email to firstname.lastname@example.org