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ESSENTIAL ANNUAL INTELLIGENCE AND INSIGHT FROM THE WORLDâ€™S LEADING INTERNATIONAL FINANCE CENTRES Welcome to IFC World 2016. We are very proud to publish this first edition of our yearbook of the offshore world which looks at the place that international financial centres occupy in relation to one another, the ways in which they relate to, and are coping with, the latest important trends and the prospects that they have for survival and prosperity, both singly and together. In this comprehensive annual, we draw on the expertise of some of the foremost authorities on the offshore world and also on our suite of publications: WealthBriefing, WealthBriefingAsia, Family Wealth Report, Compliance Matters and Offshore Red. The earlier sections of this edition contain insights from the leaders in the field, while the latter part contains a directory of the world of international financial centres. We hope that you will find the result informative and of lasting value. Stephen Harris Chief Executive Officer ClearView Financial Media
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© 2016 ClearView Financial Media Ltd publishers of WealthBriefing, WealthBriefingAsia, Family Wealth Report, Compliance Matters and Offshore Red. All rights reserved. No part of this publication may be reproduced in any form or by any means, electronic, photocopy, information retrieval system, or otherwise, without written permission from the publishers.
CONTENTS INTERNATIONAL VIEW
VIEWS FROM THE JURISDICTIONS Bahamas
Isle of Man
JURISDICTIONS IN PROFILE
INTERNATIONAL VIEW: KEYNOTE ARTICLES
THE CHANGING WORLD OF OFFSHORE CENTRES * by Philip Marcovici The world is quickly moving towards transparency, particularly in the area of taxation. The common reporting standards and automatic information exchange, the US Foreign Account Tax Compliance Act, corporate reporting under the Organisation for Economic Co-operation and Development’s base erosion and profit shifting project (BEPS), beneficial ownership registers and much more are quickly falling into place. The road towards transparency is far from a smooth one but the direction is clear and the future of many offshore centres is in serious jeopardy.
The file drawers of advisors will be wide open to the scrutiny of tax authorities What do we mean by ‘transparency’? In broad terms, the word describes a world in which it is not enough for multinational businesses to pay advisors to analyse tax laws and decide what those businesses ought to disclose to various tax authorities. Instead, reforms that are underway at the moment are designed to place far more information in the hands of governments than they need for the narrow purpose of enforcing their tax laws. These reforms, and the ones to come after them, will afford governments a very clear view of structures and strategies that they can only, at the moment, uncover through complex investigations. In the near future, the file drawers of advisors will be wide open to the scrutiny of tax authorities and other government agencies. They will receive the information automatically. Will all existing offshore centres survive? Is there room for new offshore centres to establish themselves in the market or to diversify and offer new products and services that have brought past success to their competitors? Or is being an offshore centre a dying business, with onshore centres and, perhaps, jurisdictions that are evolving into useful ‘mid-shore’ centres becoming more relevant in the new, transparent world that is taking shape? An article in the Guardian in December 2015 was entitled The Fall of Jersey: How a Tax Haven Goes Bust – are we going to see more articles like these as the budgets of offshore jurisdictions come under pressure? If a well-run and reputable financial centre like Jersey is suffering, what of more marginal players, and of the risks that the failure of an offshore centre bring to the businesses and
wealth-owners who maintain companies, trusts and other structures and relationships there? It seems evident that not all offshore centres will survive, and this is probably a good thing. Others, however, will not only survive but thrive. What will it take for an offshore centre to do well under the new world order? And what is a mid-shore financial centre? THE FAILINGS OF OFFSHORE CENTRES AND OF THE WEALTH MANAGEMENT INDUSTRY Some might say that it is not very constructive to apportion blame for the problems that offshore financial centres are facing but there is nonetheless blame to apportion, if only because one has to identify the mistakes that have led us to this point if those mistakes are not to continue. People who govern offshore centres have to stop making decisions according to what the financial industry says. A successful government listens to the financial services industry and its views and takes these views into account when forming its strategy, but it is simply wrong for it to allow well-established and perhaps declining special interests, with their focus on short term profits, to dictate strategy. Again and again, over and over, offshore centres have allowed the financial services industry to determine their fate. Years of abuse of bank secrecy and other privacy regimes by the offshore corporate services industry, banks, trust companies and others have now led to a regime change, and one that is being dictated by the onshore governments whose tax and legal systems have been shown to have been compromised on an industrial scale. Had the offshore world taken charge of the global problem of undeclared money and of the other regulatory failings of the industry, we would be in a very different situation. Instead, the leaders of those offshore centres not only listened to legacy players and the other venerable special interests, but allowed them to fashion their strategies for the future – and in most cases, these have proven to be ineffective. On their own, or together with other financial centres, or as part of a wealth management industry-wide initiative, offshore centres had, over the last years, many opportunities to lead the world in tackling problems that should have been obvious to them. How can privacy be maintained as a human right while ensuring that the people who use offshore centres are not misusing them to break the laws of their home countries (or of other countries) through tax evasion and in other ways? Instead of leading the world on these issues, offshore financial centres took the line of least resistance – they left it to others to take the lead on strategy, doing nothing to change their clearly unsustainable business practices. The users of offshore financial centres – trust companies, banks,
corporate service-providers and others, distracted by easy revenues in the present, also failed to take the lead. “The need for a level playing-field” was one of several mantras: “we will change when others change as well – the US has limited liability companies and little information exchange – let them change first.” As it is now clear, there is no level playing field, and never will be. This was always obvious and anyone who thought otherwise was simply misguided. Offshore centres had a chance to lead the world towards tax transparency and other forms of transparency – to develop strategies and base them on knowledge and training, and to focus on negotiating arrangements with other countries proactively, giving the onshore countries more than they were asking for at a time when those offshore centres still had some collateral with which to negotiate. Today, they have none.
Not all offshore centres will survive, and this is probably a good thing OFFSHORE VS MID-SHORE – CAN THE OFFSHORE WORLD SURVIVE? ‘Mid-shore’ financial centres are those whose tax laws make them attractive as places in which to establish corporate structures, trusts, and other vehicles while also offering the advantages of being in onshore locations. An effective mid-shore jurisdiction has infrastructure and human resources in a broad range of areas and benefits from having long embraced information exchange and effective tax treaties that reduce or eliminate withholding taxes. Mid-shore jurisdictions are part of our world, not outside of it, and offer their users bi-lateral and multi-lateral investment protection agreements and more. Places like Singapore and Hong Kong are good examples of mid-shore centres. They have a top-rate infrastructure that can support the kind of structures that suit a transparent world. Their tax rates are reasonable and in some cases do not apply at all (such as the tax-free treatment of non-locally-sourced income in those two jurisdictions). They have a wide network of tax and investment protection agreements and more. Luxembourg has long been strategic in developing products and services for specific elements of the investment
IFC WORLD 2016
industry, all through good collaboration between its government and the private sector. The onshore countries with which offshore businesses interact are focusing more and more on whether offshore structures ‘have substance’ – in other words, whether they conduct real operations in the jurisdictions to which they allocate income under transfer pricing arrangements. As a result, ‘substance’ is becoming more vital as time goes on and offshore structures are having to conduct real activity to support transfer pricing. This means that the locations of choice for the future will be places where human resources and other infrastructural resources are readily available. Parts of the offshore world have already learnt this lesson fully and the pressure on others to do so can only increase substantially over time. With ‘insubstantial’ locations of choice on the decline, the future belongs to locations where human resources are readily available to meet needs. Have the offshore centres invested in the education necessary to achieve this or have they simply allowed expatriates to exploit their lax regulatory regimes? Have the governments of those offshore centres let their populations down badly by not investing in education in financial services, and leaving training to firms that care more about teaching people how to sell rather than how to think? Onshore centres are increasingly making themselves attractive as ‘mid-shore’ options. The UK, with its low corporate tax rates, and America, with its many state regimes that permit the ‘tax-andreporting-free’ establishment of limited liability companies and trusts, are but two examples. Offshore centres used to offer simplicity and low costs as their main attractions. If, however, it is now virtually impossible to open a bank account for a company in an offshore centre, the simplicity fast goes away. If ‘substance’ is now required for firms that wish to benefit from setting up structures offshore, is it not easier to locate this ‘substance’ in a mid-shore centre with good infrastructure than in an offshore centre with little to provide in terms of personnel or other things? Will it not look better to an onshore tax authority if one runs the structure out of the US rather than if one runs it from an island known for its status as a tax haven and its sunny beaches? GETTING IT RIGHT – WHY COMPLIANCE IS PART OF CUSTOMER SERVICE It is important for anyone involved in financial services today to realise that compliance is a key part of client service. Clients are struggling with pages and pages of small print from their service-providers and with complex questionnaires relating to FATCA, the international common reporting standards of CRS, investment suitability rules, beneficial ownership disclosures and otherwise. Any service-provider who delegates responsibility for dealing with this to the compliance department is misguided – compliance is a client service, and clients need help to guide them.
Offshore centres have much to learn here. One clear lesson is to give up entirely on resistance to change and cease to issue cries for a return to the opaque world that once existed. Transparency is here to stay and offshore centres that fight for a return to yesterday will end up with nothing but beaches and coconuts (and, for offshore centres that do not have the right climate, not even those). A focus on the future means a focus on compliance with global tax and reporting rules and help for clients who live in an increasingly complex world. There is much that an offshore centre can do strategically to help on this front, not least in the way it complies with tax reporting and other regimes and approaches bi-lateral and multi-lateral negotiations. It is late in the day for small IFCs to ‘get strategic’ , but it is not too late for them to change their attitudes and to stop listening to the dinosaurs who claim that transparency is not really going to happen. It is already here.
One clear lesson is to give up entirely on resistance to change
Compliance people can help offshore centres negotiate with the onshore world and strike effective bi-lateral and multi-lateral agreements that help them attract and retain business. Co-operative, voluntary tax disclosure facilities and much more can attract rather than repel business. Centres that focus on particular markets will earn more than centres that try to be ‘one-stop shops’ for everyone. Every offshore centre requires effective marketing to make itself appealing to potential clients. It has to use marketing to make clients more aware of global developments and show them how they can use it to satisfy their needs. Education (in the form of awareness-raising) should be part of marketing, so training departments have to step into the marketing process, educating intermediaries and others who are able to attract business, and training local and expatriate staff to understand the future and how best to communicate with existing and prospective clients. THE DIFFERENCE BETWEEN SUCCESS AND FAILURE Today’s offshore centres can no longer afford to concentrate mainly on the tax-related needs of their prospective customers. Offshore centres ought to be legislating to support well-thoughtout products and services that are tailored to their target markets in a realistic way; in other words, they ought to be thinking and acting strategically.
THE INTERACTION BETWEEN STRATEGY, TRAINING, MARKETING AND COMPLIANCE It is amazing how few players in the wealth management industry actually understand the important links between strategy, training, marketing and compliance. Banks, trust companies, corporate service-providers and offshore financial centres all too often keep these functions separate. The marketing teams run off to host events for clients and, in the case of offshore financial centres, appear at wealth management industry seminars giving away stuffed animals and coffee mugs that bear the logos of the countries they want to promote. Directors responsible for strategy sit around a table and talk about being compliant and how to avoid being on blacklists developed by the onshore world. The trainers zero in on what people are not allowed to do, or concentrate on teaching people how to sell without looking at how sales are affected by regulatory requirements, including those that pertain to cross-border marketing. Meanwhile, the compliance people do their thing, with everyone else trying to avoid them because they say no to every question, to keep everyone safe. This is a self-defeating approach. For an offshore centre, or for a bank, trust company, corporate service-provider or other player in the wealth management industry, the key is to understand the need to link these areas up together. Anyone who wants to develop a strategy in this day and age has to involve himself closely with people who understand compliance and the ways in which the world is changing. These people must be fully aware that compliance is a key component of the needs of the future users of an offshore centre.
INTERNATIONAL VIEW THE CHANGING WORLD OF OFFSHORE CENTRES
‘Substance’ is becoming more vital as time goes on Investment protection agreements are just one example of how a financial centre can think strategically as it tries to ascertain the motivations of customers who are setting up companies and other vehicles. For example, if someone invests in China from outside by making use of a company listed in the British Virgin Islands, what happens if the Chinese Government expropriates that customer’s assets? There is no investment protection agreement between China and the BVI to assure him that he will receive compensation and have access to good dispute resolution procedures. The investor who uses the British Virgin Islands pays no tax there, but has not benefited from the protection that he would have received had he used Singapore, for example, to set up his holding company. This arrangement would still have been tax-free, as Singapore does not tax a company’s non-Singapore-source income if it is not remitted to Singapore, but now there would have been an investment protection agreement that applied. Well-advised users of financial centres, as we have already said, pay far more attention to ‘substance’ when choosing jurisdictions nowadays. A jurisdiction can add to the ‘substance’ that it offers
investors if it has done its homework and realized that effective bi-lateral and multi-lateral treaties and agreements are part of a financial centre’s attraction. Investment protection agreements (providing for compensation in the event of expropriations, among others) and comprehensive tax treaties (providing reduced withholding rates and protection from taxation in the absence of a permanent establishment) that go well beyond an exchange of information are of immense importance.
A managed exit from financial services will be a smart move for some offshore centres Interestingly, many of the offshore centres that are likely to fail are in their current predicament because they refused to bargain away portions of their secrecy when they still had something with which to bargain. They could have thought strategically and signed agreements with other countries that would have broadened the appeal of their products and services to legitimate investors around the globe while offering in return to cease to protect account information from foreign law-enforcers, tax authorities and courts. Now that automatic exchange of information (AEOI) and more in the way of transparency is becoming the international norm, these centres have little hope
of obtaining much from other countries. They have played their poker hands badly.
the future is to understand what is happening, and to anticipate what will come next.
WHO WILL BE THE WINNERS? The issue of wealth and income inequality is on the agenda of virtually every government and policy maker in the world. People are electing populist governments to deal with it and even the most conventional of leaders are recognising the need to address the issue. For this reason, if no other, ‘transparency’ is here to stay. Thomas Pikkety, the author of Capitalism in the Twenty-First Century, was awarded the Financial Times Business Book of the Year Award despite the normally conservative newspaper having criticised some of his findings because of various errors that it had uncovered in Pikkety’s numbers. Pikkety is one of many economists who believe that inequality is increasing, not decreasing, and that governments ought to take action. Many are heeding his message. How many conferences in the offshore world spend time lamenting the move from secrecy to transparency? How many hours are wasted on reveries about the past rather than on plans for the future? Firms might still earn pretty good short-term revenues in offshore centres that have been successful in the past, but this often lulls the people in charge of such centres into thinking that all is well. Are their revenues coming from service-providers who are simply trying to pass compliance costs on to clients, through hourly or other charges, and who charge for the liquidation of existing structures? Are international firms leaving the offshore centres for the midshore and onshore worlds while island governments delude themselves into thinking that nothing is amiss because local firms are ‘consolidating’ by buying up the businesses that those international firms are abandoning? One first step towards victory in
Offshore structures are having to conduct real activity to support transfer pricing In some cases, a managed exit from financial services will be a smart move for an offshore centre, but few will be brave enough to do this. Instead, as offshore business collapses, so too will the offshore service-providers, leaving behind a legacy of fraud, ruined careers and lost reputations. For other offshore centres, a policy of concentrating on excellent conduct, on understanding the future needs of their clients and on building compliance with financial regulations into their strategies and the way they perform their services will bring success. This is a knowledge-related business and knowledge is the bedrock on which investments ought to be made. There will be winners, but only a handful, and there will be many losers.
* Philip Marcovici sits on the editorial board of WealthBriefing and provides business and related consulting services. He can be reached on +852 2866 2525 or at firstname.lastname@example.org
IFC WORLD 2016
THE OFFSHORE WORLD IN TURMOIL – A PANORAMA * by Chris Hamblin, editor of IFC World have sprung up over the last two years (the United Kingdom signed the first one with the US Government in 2012) have no actual basis in American law.
If only the Swiss banks and authorities had been more helpful towards the US Internal Revenue Service in the last decade, so the argument goes, the offshore world would not have had the US Foreign Accounts Tax Compliance Act 2010 (FATCA) to contend with, and if it had not had that, it would not have had the Common Reporting Standard. As it is, Switzerland has had to become a beacon of tax-transparency whether it likes it or not. In May of last year it found itself signing an agreement with the European Union to meet the Organisation for Economic Co-operation and Development’s global standard for the automatic exchange of financial account information (AEOI, of which the CRS is a part). It has recently signed a similar agreement with the Channel Islands. The EU, for its part, has legislated in favour of CRS on behalf of its countries by amending its ‘Directive on Administrative Co-operation.’ The most important jurisdiction that is standing aloof from CRS, in one of life’s ironies, is the very country that started the process, the United States of America.
FATCA takes tax co-operation – albeit not particularly reciprocal – to a new level. As the US Senate Committee on Finance put it: “If the laws were amended to require all American citizens to report all of their bank account balances and financial assets to the IRS every year, America would erupt! Such a law would be an unconstitutional invasion of citizen’s privacy because there is no justifiable government interest in the detailed financial asset levels of American citizens absent probable cause of tax evasion.” Even so, all American taxpayers (living anywhere in the world) with offshore accounts that have contained more than $10,000 at any point in 2014 have still been obliged to submit ‘Fbar’ forms which contain details of the contents. There are stiff penalties for failing to do so that can add up to half of an offshore account balance, or sometimes even more. ‘Model 1’ agreements oblige the firms of signatory countries to send their details to their national tax authorities, which then pass them overseas to the IRS after having a good look themselves; ‘model 2’ agreements oblige the firms in signatory jurisdictions to send reports to the IRS directly. The most compliant ‘model 1’ helper that the IRS has in seeking out American tax-dodgers in the offshore world appears to be the Israeli Government. In theory, the US authorities are supposed to send the details of foreign citizens’ accounts on American soil off to their counterparts overseas, but reports of this have yet come to our attention. A NEW LIFE IN THE OLD WORLD
The most important jurisdiction that is standing aloof from CRS is America FATCA – TAKING TAX CO-OPERATION TO A NEW LEVEL Despite many alarms about FATCA being declared unconstitutional in America, its progress has been unstoppable and now many jurisdictions are complying with it. Part of the argument against its constitutionality in its present form is that it was originally passed to force foreign financial institutions – especially the offshore ones and especially the Swiss ones – to have a reporting relationship with the IRS; the ‘inter-governmental agreements’ that
As it is, findings from a recent survey by Satis Asset Management in the summer showed that more than twice as many US expatriates, many of them with accounts in the offshore world, are trying to renounce their citizenship since FATCA became law. From 2010 to 2012 inclusively, an average of 1,416 people have renounced citizenship each year. For the preceding seven years, from 2003 to 2009 inclusively, the average number was just 581 a year. The tally for the third quarter of 2015 was 1,426, the highest number ever. Many commentators believe these official US Government figures to be gross underestimates as there is a mountain of anecdotal evidence of Americans who live overseas attempting to put their increasingly scary government in the rear-view mirror. ANOTHER DAY, ANOTHER NPA FATCA is not the only American phenomenon to plague Swiss banks in this new, ever-changing environment of global surveillance. It was in 2009 that UBS signed a non-prosecution agreement with the
INTERNATIONAL VIEW THE OFFSHORE WORLD IN TURMOIL – A PANORAMA
US Department of Justice, kow-towing to the extraterritorial might of the world’s only superpower. The bank admitted to having helped American taxpayers hide accounts from the IRS, paid the DoJ a penalty of $780 million and agreed to look for more tax-dodgers on its books. This opened the floodgates of official US hostility to the offshore world, leading to FATCA and to the unilateral US “Programme for Non-Prosecution Agreements or Non-Target Letters for Swiss Banks.” This ‘programme’ has generated headlines every month in the past year since March, when BSI became the first bank to settle with the US authorities by paying a $211 million penalty. Switzerland is the capital of offshore private banking (in essence, banking that takes place at a bank outside the account holder’s country of residence, usually in a low-tax jurisdiction) and about one-third of the world’s private wealth is based there. Swiss banks have traditionally been owned by partnerships or sole owners with unlimited liability, allowing them to tell their clients that they have a personal stake in catering to their interests properly and making the right investments without overstretching resources. With the threat of American prosecutions hanging over their heads, however, some of them have incorporated themselves over the last five years. Pictet and Lombard Odier, for example, have abandoned their unlimited liability models to find greater security and an extra source of funding as stock-listed banks.
Offshore IFCs are usually far better regulated than their onshore counterparts Having dragooned the Swiss Government into passing a ‘model order’ to allow banks to co-operate by using Article 271 of the Swiss Criminal Code, the DoJ imperiously commanded Swiss banks to ‘categorise’ themselves. Banks in category 1 – already under investigation by the DoJ in 2013 – were not allowed to participate. Banks in category 2 – those that had ‘reason to believe’ that they had committed offences – were given a short time to declare their status. Banks in category 3 - those that believed that they had not engaged in activities that could have broken American law, also had to make their declarations quickly. Banks in category 4 were banks that had a ‘local client base’ and therefore, presumably, no offshore business. In excess of 75 banks have now made their peace with America,
drawing criticism from Swiss commentators who believe that they have betrayed those employees of theirs who helped Americans escape taxation by giving the DoJ their names. BSI, for its part, according to the DoJ, helped thousands of US clients use sham entities and bogus financial insurance products as nominee beneficial owners of the undeclared accounts. It accepted and suggested the use of IRS forms that falsely stated under penalties of perjury that the sham entities beneficially owned the assets in the accounts. It provided offshore debit cards to repatriate funds from the undeclared accounts and facilitated withdrawals from those accounts back to the US through nominee unAmerican accounts. It also sidestepped America’s anti-money-laundering laws by ‘structuring’ transfers of funds to go below the $10,000 transaction reporting threshold. The highest volume of assets under management on behalf of both declared and undeclared US customers that BSI had after 2008 was $2.78 billion; the fine was about 7½% of that. BANKING SECRECY DOWN BUT NOT OUT This is not to say that Swiss banking secrecy is dead. The law of 1934 that began the whole story is still on the statute book. If an account-holder has no tax or other issues, and has declared it to relevant authorities, then it remains a severe criminal offence for his or her banker to divulge that information. Swiss bankers therefore are not exempt from the strictures of this law. Another point worth considering is that so-called ‘whistleblowers’ cannot blithely assume that an indiscriminate leakage of client account data is going to win them any favours from the Swiss courts.
The offshore world allows benighted countries to benefit from the Rule of Law Some Swiss public figures wish to retain secrecy, even to the point of enshrining it in the Swiss constitution. A group that handed in signatures earlier this year to do precisely that reportedly said in November that the Swiss government’s change of plan did not affect their wish to organise a public vote on the issue. The committee is made up of members of the conservative right Swiss People’s Party, the centre-right Radical Party and Christian Democratic Party, the Association of Small and Medium-Sized Enterprises and the Homeowners’ Association. These organisations want a court to decide whether private banking data should be released to the tax authorities in cases when there is a strong suspicion of tax evasion. When a person kicks a door down, others can run through it after him. This is what appears to be happening with the portal that US litigation (or the threat of it) has unbolted. Russia recently enacted its
long-awaited ‘de-offshorisation rules’ and, according to Vedomosti, the Russian language business daily, the top Swiss banks have been closing their doors to any long-standing Russian clients they may have who do not sign reports to the effect that they are obeying those rules (or that the rules do not apply to them) and that there are no outstanding claims from the Russian Federal Tax Service. Bank managers have been calling up Russian clients and warning them to send their reports in, on pain of having their accounts closed. Some smaller Swiss banks are thinking of following suit. In Switzerland, tax offences committed abroad now qualify as predicate offences to money laundering as long as the requirements of ‘dual criminality’ are met. AMERICA’S BENEFIT, AMERICA’S LOSS The cumulative effect of US pressure on Switzerland and other jurisdictions is, at least according to Bloomberg, causing a massive flow of cash from the offshore world to the United States, just as heavy British pressure on the Crown Dependencies to introduce stringent money-laundering controls in the early ‘noughties caused them to lose some of their offshore business to the City of London. Investors have long known that Nevada, Wyoming and, of course, Delaware, proffer opaque corporate and/or trust structures whose beneficial ownership is not disclosable. They now also know that because the United States refuses to sign up to the CRS, its tax reporting standards are probably going to be lower than the 100-odd countries that have signed. The US is, in effect, a prime ‘secrecy jurisdiction,’ as its own government likes to call many offshore centres. Indeed, Bloomberg reports the managing director at a major bank promising the global elite that they can stash their money away in his country and hide it from their tax authorities. Its report says that London lawyers and Swiss trust companies are moving vast sums from the Bahamas, the British Virgin Islands, the Cayman Islands and even Switzerland to the US. Ironically, as we have already noted, this is happening just as record numbers of Americans are renouncing their US citizenship, overwhelmingly for tax purposes as US federal taxes are high and the US (with only Eritrea for company) has a policy of taxing its citizens wherever they are in the world. BASE EROSION AND PROFITS SHIFTING Many wonder why the onshore world still tolerates many offshore practices and allows its citizens to use offshore financial facilities. The main answer is that huge corporations find offshore structures vital as well, especially for tax purposes. To counteract some of the abuses that they commit offshore, the finance ministers of the ‘Group of 20’ (actually only 19) industrialised countries asked the Organisation for Economic Co-operation and Development in 2013 to recommend changes to the way in which tax works all over the world. It began to assemble a 15-point action plan called Base Erosion and Profits Shifting or BEPS, which it handed to the G20 leaders in November for approval. The whole raft of proposals has, by all accounts, been designed not to require the Americans to pass any new laws.
BEPS aims, among other things, to remove opportunities for ‘double non-taxation’, whereby a part of the income that a multinational company earns is not subject to tax anywhere in the world (or is, but at an unacceptably low rate). The BEPS plan also aims to stop corporations from using shell companies for the purposes of stockpiling profits offshore or unduly claiming tax treaty protection in an attempt to neutralise all schemes that artificially shift profits offshore. Some offshore commentators have noted that this might not end in disaster for the offshore world as a physical presence in an offshore centre with a zero-tax regime (or close to it) is one of the solutions to the problem.
The offshore world is quick-witted, fleet of foot and nimble COUNTRY-BY-COUNTRY REPORTING One of the BEPS reforms is country-by-country reporting, i.e. a rule to make multinationals break down their reported results for each country – a ‘transparency’ measure to make it harder for them to lump revenues from different parts of the same region together. Transnational companies, in other words, are to break down their results (on profits, revenues, taxes, borrowings, etc) for each country and avoid general regional statements. The idea is that tax administrations should obtain a complete understanding of the way multinational enterprises structure their operations, while also stopping commercially sensitive information from being released or falling into the wrong hands – this last being a major worry for the conglomerates. How are preparations for the onset of BEPS coming on? According to a recent survey by Thomson Reuters of 180 corporate executives and tax and transfer pricing directors in 35 countries and more than 20 industries, one-quarter of them believe that their companies will fail to meet the first deadline proposed by the OECD. European companies (including those from Luxembourg, Liechtenstein, Switzerland, the UK’s Crown Dependencies, Cyprus and Malta) are more intensely focused on BEPS planning than their peers around the world. Almost half of European respondents said that they spent between 2 and 15 hours per week on BEPS activity, compared with a quarter for the Americas and the ‘Asia Pacific’ region. The most immediate BEPS-related concern for half of all respondents to the survey at multinational corporations was transfer pricing, most notably document-related and country-by-country reporting requirements. Globally, 74% of respondents said that they would complete their country-by-country analysis by the first due date, 31 December 2017. Many multinational companies, like rabbits trapped in the headlights, seem to be delaying their preparations. They are going to have to report their entire global tax positions, effective rates, employees and IFC WORLD 2016
revenues – information they do not disclose even as public companies today. The data collection process for this is going to be onerous. BENEFICIAL OWNERSHIP REGISTERS – A RATIONAL TREND? Then there is the thorny issue of beneficial ownership registers. The UK is taking the lead in this sphere and its efforts have caused considerable trouble for its financially active overseas territories. The UK has a history of imposing onerous requirements on its colonies (and therefore putting them at a competitive disadvantage with the City of London) before it imposes them on itself. This was the case in the first decade of this century with ‘retrospection,’ the policy that dictated that banks and other financial firms should check the backgrounds and identities of their customers fully, even when these relationships went back to the days of Oliver Cromwell. The financial centres of all British colonies were obliged to go through this onerous exercise more than a year before 2002 when Britain imposed the policy on its own banks, and then only on the top six of them initially.
Many British overseas IFCs have been maintaining registers of beneficial owners for years This is what the UK appeared to be about to do in 2014 with registries of beneficial owners for all corporations (with trusts left out initially, until there was a minor public outcry). The G8 had decided on this policy at Loch Erne in the summer of 2013 and the UK, overdoing or ‘gold-plating’ its adherence to international initiatives as usual, decided that these should be made public and open to all. It then set about applying pressure on its dependencies to do the same. Some critics of its policy in the offshore world surmised at the time that the UK would threaten them with inclusion on some blacklist or other if they did not obey. Indeed, some of them did end up on a blacklist of tax havens that the European Union (of which the UK is a member) compiled in a rather chaotic manner and issued last summer. The list was (and is) based on national blacklists which different governments have compiled in different ways – some purely by noting the absence of a tax information exchange agreement or TIEA, some by nationally-set tax thresholds that differ from each other, some by a combination of factors. Some of the EU countries had outstanding TIEA obligations of their own when they issued their lists. The EU said that it was including all jurisdictions that were on at least ten national lists or more, but some were on fewer and found themsevles included all the same.
In reality, many British overseas IFCs have been maintaining registers of beneficial owners of both companies and trusts for years and making data available from them to the tax authorities of other countries upon request. In doing so they have been complying with the terms of TIEAs, which give contracting parties free rein to ask for such information. The Cayman Islands, according to the head of the local stock exchange, have TIEAs with more European states than the UK does, with a worldwide total of 35. This, however, is a rational observation. Some commentators believe that since the advent of the OECD’s CRS policy, many onshore politicians have developed an emotional attachment to the idea of ever-widening disclosure for the sake of it. Only time will tell if they are right. A VICTORY OF SORTS In the meantime, the UK’s overseas dependencies seem to have won a rare victory for the offshore world. Grant Shapps, the UK’s minister for inte national development, visited the Caymans in September. He said that he thought that his government’s objectives could be achieved with the Caymans’ existing laws, i.e without legislation for a new register, intoning the now-famous phrase, “there’s more than one way to skin a cat.” This apparent climb-down was the result of stout defiance of British policy by the combined ministers of the UK’s overseas territories, notably at a meeting in late 2014 where they reportedly refused to countenance public registers until the G20 countries had implemented the policy first. Around the same time, Bob Richards, Bermuda’s deputy premier and minister of finance, said that “we will adopt public beneficial ownership when the UK, US and Canada do.” These acts of rebellion were unprecedented and aimed ultimately at the United States, which has a long history of protecting the opacity of beneficial corporate ownership in the structures of Delaware. No change is expected in US policy on this point, whatever the US Government signs, as meeting after meeting of the Financial Action Task Force (the world’s anti-money-laundering standard-setter) has proven. Provoked by the policy of the UK towards its territories, then, the offshore world has made something of a stand. As if in agreement, Pascal Saint-Amans of the OECD said this to an audience last year: “The... challenge is about US Delaware. It is the elephant outside the room... and inside the room! [There should not be] a single LLP when you don’t know who the owner is and what’s in the company.” VIRTUAL CURRENCIES AND THE OFFSHORE WORLD It was in 2013 when virtual currencies, and especially Bitcoin (the first of them, which may yet turn out to be the best) came to the world’s attention. Since then, regulators and even parliamentarians have been weighing up their usefulness, hailing them as the ultimate offshore currencies and in-
INTERNATIONAL VIEW THE OFFSHORE WORLD IN TURMOIL – A PANORAMA
deed as an alternative to the offshore banking system. A letter to the London Financial Times in June of that year entitled “Bitcoin as the new offshore banking” had this to say: “the Bitcoin system can facilitate an increasingly large, and anonymous, portion of global trade with little if any interaction with the regulated system. Indeed, it may increasingly come to serve the same function that offshore banking has previously served and is now unsuited to serve because of growing transparency.”
The virtual currency revolution has yet to take the world by storm Looking at why people go offshore in the first place, some have long commented that Bitcoin provides them with financial privacy, protection from asset-theft (although opinions are divided about Bitcoin security), protection from litigation (for divorce or otherwise) on the theory that what litigants cannot find they cannot confiscate, a currency free from inflation by tax-hungry state authorities (although the volatility of the cyber-currency since 2013 has been hair-raising and therefore a source of even greater instability than debasement at this stage in its evolution) and global access to funds as anyone with a laptop and Internet access can deal in it anywhere in the world. Some of these points are misapprehensions. Every transaction in the blockchain, the online ledger where deals take place, is visible to all who wish to see it. Everything is recorded widely and is there in full public view. Bitcoin addresses do not betray their owners’ identities but they can be linked to IP addresses that identify computers and a competent investigator can follow the life of a bitcoin more accurately than he can follow the life of a banknote. The blockchain records ‘blocks’ of transactions, adding a new one every so often. Once a transaction is on it, it can never come off. In November 2014 Alex Biryukov of the University of Luxembourg published a paper on the de-anonymisation of clients, demonstrating that shared funds that had been laundered were easy to trace. It seems likely that money-laundering in virtual currencies will not be the problem that people first thought. Two years ago, countries around the world did not really know what to do with virtual currencies. In 2103 Germany recognised Bitcoin as a legal unit of currency – a breakthrough. Thailand banned virtual currency that year, but its government licenses bitcoin-related businesses, so the ban seems far from watertight. In Vietnam, the authorities still allow it for personal use, but not for use by credit institutions. Bitcoin experienced one of its many crashes after China’s central bank banned bitcoin deposits at banks in December 2013. Today, more jurisdictions have reached decisions in varying detail but
the picture is still mixed. The European Union treats bitcoins as a means of payment but does not apply traditional financial regulation to them, nor has it passed any law that comments on their status. It is advising (but not commanding) EU banks to avoid dealing in virtual currencies until EU regulations appear and is expected to draft up rules for digital currency exchanges and wallet providers by June. In the offshore world, including states that belong to the EU, the picture is mixed. The Central Bank of Ireland does not regulate bitcoins. The Luxembourg financial regulator counts virtual currencies as money, and the Government has issued its first bitlicence. Malta has no regulations for virtual currencies either way. Outside the EU, the onshore-offshore jurisdiction of New Zealand is silent on their use. Some bitcoin businesses in Switzerland have been required to obtain banking licenses and all must obey the national money-laundering laws. The Monetary Authority of Singapore stated in 2013 that it has nothing to say on the subject of businesses receiving bitcoins in exchange for their goods and services, although it announced in March 2014 that it would regulate virtual currency intermediaries to tackle money-laundering risks, treating them in the same way as money-changers or transmitters. Kyrgyzstan has banned the use of virtual currencies. In Hong Kong their status seems unclear; the Hong Kong Monetary Authority does not regulate them. The virtual currency revolution, for all these indications of official interest, has yet to take the world by storm. Bitcoin is still the most traded of the currencies by far, but it had a market capitalisation in mid-February of only $6 billion or so. Litecoin was, at that time, fourth in rank with about $140 million and Maxcoin was 91st with less than $400,000. The total of all 674 currencies was $7 billion. If there were to be another great financial meltdown, with national fiat currencies tumbling as governments print money to pay off their debts, thereby causing inflation, the values of some of these currencies might sky-rocket. Perhaps with this in mind, or perhaps with other objectives in mind, IBM, 30 of the world’s largest banks and HM Government of the United Kingdom are all investing in blockchain technology. The UK is even claiming that it is doing so to help reduce financial fraud, error and the cost of paper-intensive processes – a recognition by at least one great power that the technology is controllable. Meanwhile, the International Monetary Fund is praising it as a route towards faster and cheaper financial services. NEW OFFSHORE CENTRES New international financial centres, against all the odds, are still being born. Latvia is being hailed as the new tax haven of Euroland, having adjusted its tax laws to attract investment and having thrust itself into the limelight as an offshore banking centre. Some call it “the poor man’s Luxembourg.” Its government made the euro its currency in 2014 against the wishes of its population and has passed preferential tax laws for holding companies. Latvia’s low company formation and maintenance costs are another selling-point. Russian oligarchs
and their money are moving from Cyprus to Latvia. Some observers are worried that Latvia will overreach itself and become “the next Cyprus.” Abu Dhabi is another hopeful entrant into the offshore world. Things are still at an early stage there, but its regime plans one day to compete with Dubai – a lofty ambition. Its dedicated financial ‘free zone,’ the Abu Dhabi Global Market, became the newest IFC in the Middle East when it opened for business in October last year. Its rulers want the ADGM to become a centre for private banking, asset management and wealth management in general. This is a more modest vision than the government’s initial one, which envisaged a wide sweep of banking services not restricted to private banking and including Islamic banking, plus insurance and reinsurance, securities and foreign exchange brokering and trading, commodities trading, and perhaps back-office operations for peripheral businesses on the model of the Isle of Man, which started out as an offshore centre by providing a venue for the back offices of the Big Four (then the Big Five) accountancy firms and the ‘magic circle’ law firms.
Alberta is Canada’s internal tax haven; the US has more than one THE USE OF THE OFFSHORE WORLD Nearly all commentators, however, are expecting the offshore world to contract under the accumulated burden of national tax haven blacklists, onerous information-sharing OECD initiatives, EU clampdowns on ‘state aid’ and the like. Many expect tax havens to become a thing of the past, although onshore jurisdictions have internal tax havens of their own. Alberta is Canada’s internal tax haven; the United States has more than one. In the words of Bartlett Cleland of the US Institute for Policy Innovation: “Tax policy is one of the ways in which the states compete to enhance the welfare of their residents. Ideally, states would compete simply based on overall low tax rates, rather than the legislature carving out special areas for favored treatment. But in practice that has never been the case. For example, states commonly use tax credits, which mitigate the harm of high tax rates, to compete against each other. They also use tax breaks to lure capital investment...” Many believe that this makes US tax policy towards lower-tax jurisdictions outside its borders somewhat hypocritical. The economy of Texas, which has no income tax and is therefore attracting talent, may as a result be growing faster than that of California, whose highest marginal income tax rate is 13.30%, but this is no concern of the
US Government’s. Meanwhile, the OECD, of which the US is the most prominent member, has spent the entire 21st century so far clamping down on “harmful tax competition” between one sovereign country and another. Most of the onshore great powers of the world are doing exactly the same things as the offshore world, while attempting to make life difficult for small IFCs. CAUSES FOR OPTIMISM There are some advantages that the offshore world will always have over the rest of the world, and these will probably ensure its survival. One invaluable advantage lies in the fact that (by and large) they provide the onshore world with cheap access to the Rule of Law and ‘due process.’ Corporate structures set up in offshore jurisdictions tend to work well, despite the occasional scandal. This is a luxury that a good half of all countries do not have; it is not always easy to persuade a canny investor in Argentina, Venezuela or China that he should set up a corporate structure in his homeland and trust the local courts to resolve any disputes (perhaps over ownership) that might arise. In Russia in the 1990s, it was possible for sharp operators to steal whole companies by forging documents that referred to shareholders’ meetings and judicial rulings that had never happened, while bribing people to pose as witnesses and raiding offices to intimidate people. It is small wonder that wealthy Russians’ money and many Russian businesses found a welcome domicile in Cyprus, an Eastern Orthodox island with a legal system based on English common law whose courts follow English case-law quite closely and whose statutes that pertain to business matters are all basically British in origin. The offshore world allows many business transactions all over the world to benefit from the Rule of Law. Because of pressure of varying kinds of pressure from the OECD, the FATF (the OECD’s ‘little brother’) and the great powers, offshore IFCs are usually far better regulated than their onshore counterparts – another advantage that many now use as a selling-point. Jersey and Guernsey, according to one commentator who used to work for MONEYVAL (the FATF-style regional body for Europe), are the most compliant of all. FLEETNESS OF FOOT Lastly, the offshore world is quick-witted and fleet of foot in the face of new threats and opportunities. Statutes that take years of gestation in a large country take 18 months in onshore-offshore states such as Ireland and fewer months than that in smaller jurisdictions. In a tiny jurisdiction such as Gibraltar, it takes a couple of days to see the regulator if one has a viable business proposition; in Luxembourg it takes perhaps two months; in the United Kingdom it normally takes far longer and it is more or less impossible even to see an undersecretary. The offshore world’s ability to move quickly and intelligently, with the right kind of skill-set in situ, is probably its greatest asset. In the words of Fiona de Poidevin, the head of the Channel Islands Stock Exchange, “it’s all about being nimble.” IFC WORLD 2016
WHAT THE WEALTH INDUSTRY NEEDS NEXT * by Ray Soudah, the founding chairman and CEO of MilleniumAssociates AG The Wealth Management industry (inter alia its service providers) is in crisis mode. It needs to stop being a mere custodian of third-party financial assets and reinvent itself as a true provider of value. Local, regional and global providers of “wealth management services” (private independent asset managers, private banks, national banks and the like) seem desperate to increase their own assets under management and outsource their technology and operating costs so as to improve their own efficiency ratios and profitability, but in the meantime their clients seem generally and helplessly resigned and destined to face the uncertainties and immense risks of the financial markets, despite entrusting their hard-earned money to their service providers with the original (but now, as has been proven, undeliverable) hope of shielding it against the daily onslaught of risks from all angles.
Service improvements and client wealth protection ought to be the wealth industry’s central purpose This crisis is obvious from the publicly stated desire of most firms to grow by acquisition, or cut costs, or even exit the market totally. Firms are saying this in every market, including established markets like Switzerland and the ostensibly growing markets of Asia. This desire on the part of the industry for volume-based growth, or retrenchment to home markets, is a consequence of declining revenues and margins due to the preponderance of cash holdings, zero or negative rates and a lack of alternative fee-earning products and services. People seem to be paying most attention to attempts to improve or preserve the profitability of service providers rather than the search for service improvements and client wealth protection that is supposed to be the wealth industry’s central purpose. This is analogous to hospitals trying to perform more operations per day more cheaply rather than trying to prevent illnesses and improve patients’ chances of survival.
more volatility in the markets is the continuous withdrawal of the larger service-providers from market-making and investment banking services in favour of the more theoretically stable wealth management business. In reality, the withdrawal of market-making services has indirectly increased volatility and earnings power in the very parts of the market that these investment-banking retrenchments were intended to protect in the first place. This is a zero sum game, where every participant’s gain is balanced by another’s losses. What future, then, for the wealth industry? Should we expect more of the same, i.e. more growth by volume acquisition and cost-cutting, leaving clients’ wealth preservation at the mercy of the volatile markets while wealth managers become mere operating custodians rather than managers of wealth? Or is there a better model with a primary focus on improving the survival rate of the patient (i.e. preserving the wealth of the client) - the official raison d’etre of the industry in the first place? Service providers the world over promise the latter every day (with dozens of pages of disclaimers to shield those service providers from law suits). HISTORY IS NO GUIDE TO THE FUTURE The majority of service providers, especially the private banks, are desperate for greater profitability (i.e. growth in their assets under management) at any cost; this is shown in their search for acquisitions, their desire to outsource even more costs, their exit from unprofitable divisions or regions etc. Now that the industry is regulated like most others (with compliance, tax reporting and the like) the focus is on profit preservation and growth for the service providers, irrespective of the consequences to their client franchise of miserable returns and declining prosperity. This is a flawed and short-sighted approach as it puts the service providers’ profitability first rather than a genuine concern for the underlying clients who are essentially financing the service providers in the first place. Even the firms that have grown through acquisition have found that clients have been deserting them and in turn this has spurred a drive towards even further acquisitions to offset the losses in revenue from those client defections. This viscous circle cannot carry on forever, as it omits the core client in its objectives. The client must be put first if the service providers are to retain loyalty and survive in the longer term. But how? THE ROAD AHEAD
The industry has an efficiency ratio of between 75% and 95%, which leaves little leeway for declining revenues because of predictably volatile margins and the paralytic, frozen behaviour of the underlying clients. Ironically, one of the causes of
The industry faces many obstacles, not least the perceptions of its own shareholders that it is an extremely profitable, safe industry with low capital needs. Nothing could be further from the truth. It
INTERNATIONAL VIEW WHAT THE WEALTH INDUSTRY NEEDS NEXT
is declining in its profitability, costs are rising despite the cost purges that have been taking (and are to take) place, and it is likely to decline in profitability in the years ahead unless it makes drastic changes with the client at the centre. Clients generally pay fees, no matter what the outcome; this is a good model for the service providers in one sense but is ultimately short-sighted because it is not balanced and, in the end, induces the client to view it with distaste and search for alternatives. It is almost analogous to the legal profession earning fees in lost cases. The biggest challenges are really the dissatisfaction of the underlying clients whose wealth is hardly being preserved, let alone expanded adequately. Many clients are finding that it is much more rewarding and justifiable to invest their resources in real industrial or service industry businesses rather than financial assets. To do the former is to watch one’s wealth decline while one pays for the privilege. These challenges are hard to quantify by traditional management techniques as they occur over time and in small increments, but they are profound in their inevitability and certain theoretically. Consequently, another challenge is the short-sightedness of the leadership at private banks and other places in recognising the problem and acting upon it. As they find this problem baffling and see no quick way out of it, they are tempted to go down the road of ‘short termism’ - another unfortunate dead end. If it were publicly known how many patients suffered in a hospital, that hospital would be obliged to improve its performance and systems or shut down. There is little public exposure of the satisfaction level of clients at wealth firms, but anecdotal evidence and trends in asset accumulation suggest that the very core of the business is riven with problems.
Clients have even been deserting the firms that have grown through acquisition The biggest challenge therefore is to recognise the need to be ‘client-centric’ as a fundamental objective and then work towards this goal rather than remaining ‘firm-centric,’ as is the case today. Service-provider firms that realise this will win in the longer term and their shareholders must support such an approach. The only option is to pursue longer-term strategies.
Helping private banks and wealth managers shape their future With over 15 years focused on corporate finance and M&A advisory services to the global wealth, asset management, private banking and private equity sectors, MilleniumAssociates has become one of the world’s leading M&A firms focused on the global financial services industry. It is a mantle we take seriously and during these demanding times we have been able to support our clients not only in their broader M&A needs but also with innovative new structures and ®
solutions such as our customer focused advisory services and our CATCH programme. In providing M&A and corporate finance advisory services to the customers of select banks, we support banks’ drive for value added customer service by enabling them to offer their entrepreneurial and business owner customers full corporate finance advisory services from M&A and corporate finance advisory services through to IPO, debt and capital market advice irrespective of industry sector or geography. ®
The global CATCH programme supports the numerous market and client segment reviews that are underway in the face of the current market and economic challenges by enabling participating institutions to rapidly and confidentially exit markets and segments that do not meet their strategy in a friendly, cooperative, orderly and profitable manner.
for more information on how MilleniumAssociates can help you shape your future please email us at
or visit us at
www.milleniumassociates.com MilleniumAssociates AG Kreuzstrasse 54 CH-8008 Zürich Tel: +41 58 710 47 00 MilleniumAssociates (UK) Ltd 23 Berkeley Square London W1J 6HE Tel: +44 20 3178 20 30
MilleniumAssociates AG is a member of the Swiss Private Equity & Corporate Finance Association (SECA) - MilleniumAssociates (UK) Limited is authorised and regulated in the UK by the Financial Conduct Authority
POSSIBLE SOLUTIONS AND STRATEGIES Like the low-cost airline industry and certain segments of the financial industry (payments etc.), de-novo enterprises can shed the past and start again.
The industry believes that its high salaries and bonuses are justified; there is no evidence of this at all One of the biggest problems of the wealth industry is its belief that the high salaries and bonuses paid to the wealth management personnel is justified and necessary to preserve and grow and retain the wealth of the clients in their firms. There is no evidence of this at all. In fact, the industry is spoilt for reward at the expense of its clients and ‘client performance’ is not linked to continuing costs, especially personnel costs. The industry is conflicted by nature and design.
One option would be to experiment with a totally new business model that presents itself as a cheap but safe service provider. Superior or inferior fund performances have rarely been linked to higher fees - many times the opposite. One could consider a parallel organisation being set up to attract new and old funds under management with the scientifically hedged purposes of protecting wealth and charging nominal margins for this, as well as for growth. The clients would see their wealth protected (which is possible with the low hedging costs available in most markets) and then reward their providers with a reasonable but not excessive fee for positive growth. The courage needed for such an approach must be derived from a passion for the client and the longer-term survival of the client that in turn will ensure survival for his service provider. Other possibilities include giving full discretion to the clients and becoming a true custodian of assets and exit wealth management and advisory. This sort of ‘brokerage’ approach will shield the providers from high costs and their providers from criticism for lacklustre performance. It would give clients access to all instruments and asset classes with full responsibility for the outcome. The current approach of hybrid risk management between the client and the provider is not only unclear but confused and expensive and has not shielded the providers from criticism in any case.
INTERNATIONAL VIEW WHAT THE WEALTH INDUSTRY NEEDS NEXT
Imagine a low-cost platform that allows the client to perform what he wants, any time of the day or night, anywhere on the globe. This brokerage model can be extremely profitable if well managed. The options we have mentioned here have one thing in common. Let the client be the centre of operations not the service provider. The industry is in crisis. Clients are desperate to preserve their wealth and create more of it. The industry must reinvent itself with new, efficient models that place the client first in reality and not just in words. Clients are intelligent and want results from a fairly priced model. Solutions exist for the courageous and daring; the rest will struggle along with the vagaries of the market and probably die a slow death. Wealth will always have to be managed. If it cannot be managed well by the service providers or their successors, the clients will find alternative ways and cut out the middleman. Long live the new wealth management industry. Long live client power!
* Ray Soudah can be reached at email@example.com. MilleniumAssociates AG is a Swiss and international M&A and corporate finance organisation.
THE IMC INTRODUCES PROFESSIONALISM TO THE INVESTOR IMMIGRATION BUSINESS * by Bruno L’ecuyer, chief executive officer of the Investment Migration Council The Investment Migration Council, based in Geneva, is the worldwide association for investor immigration and citizenship-by-investment, bringing together the leaders in the field and giving the industry a voice. It has already been more than a year since the IMC was formed with the intention of bringing about much-needed change in the industry. The goals we set out back in the summer of 2014 have (for the most part) been achieved, including the launch of the industry’s first Code of Ethics and Professional Conduct, the opening of our four Regional Representative Offices (London, Dubai, Hong Kong, and New York) and the careful selection of the IMC Advisory Committee – a real ‘who’s who’ of the industry. Our membership has spread to over 20 different countries and territories, and we expect to welcome many new members in the year ahead. The secretariat’s agenda for 2016 is now clear, and all eyes are on the Investment Migration Forum which will take place in Geneva on 6–8 June.
papers, research, thought leadership and commentary on relevant industrial issues. This committee is made of various highly regarded professionals working in either academia or professional firms. These include: the Migration Policy Institute, UBS, KPMG, National Bank of Canada, the University of Zurich, Fragomen LLP, the University of Berne, the World Economic Forum, Thomson Reuters and many more.
WHY SUCH MIGRATION IS PREVALENT
ETHICS AND CONDUCT
There are also differences between what different nationalities offer in terms of prestige, rights and protection from various things as well as the duties they require their holders to perform. As long as one passport offers visa-free access to twenty countries and another to two hundred, the interest in investment migration will be strong. Large-scale conflicts such as the rise of the Islamic State and the crisis in the East of Ukraine clearly play an important part too.
THE MAIN PURPOSES OF THE COUNCIL
A PANORAMA OF PROGRAMMES
The IMC was set up in Geneva as a non-profit industry association. It is the worldwide association of investment migration professionals and a self-regulatory body. The purpose of the council is simple and straightforward. It has been created by industry leaders and various governments who have, in the last few years, made repeated calls for the industry to introduce concrete structures to elevate public trust, and introduce transparent and reliable regulatory standards. The IMC has set out its mission which is the result of a global consultation with the world’s leading professionals in this field. Its aims consist of the following. • Setting the global standards in relation to residence and citizenship-by-investment and informing public policy in this field. • Promoting competence, continued professional development and high ethical standards among its members. • Improving public understanding and the transparency of investor immigration and citizenship programmes. • Contributing to the scholarship of investment migration. • Being the trusted partner and the leading platform for professionals, academia and governments.
The IMC is currently working with experts in immigration to compile a thorough analysis of all the different programmes available to investors, but this is a ‘work in progress’ and we do not yet have enough data for a good overall picture. There are around 70 such programmes being offered by different countries right now and the number is growing, as more and more countries become aware of the economic benefits that such programmes bring to their economies.
THE COUNCIL’S RESEARCH ROLE The IMC has created a specialist Advisory Committee whose role it is to support it with advice, working
The council has now completed its ‘Code of Ethics and Professional Conduct’ for its members to follow. The Council sets professional practice standards for members on a global level through this code, creating a culture of professional excellence and ethical practice. This code applies to its members, who are practitioners with proven expertise and experience in investor immigration, a good reputation and clean professional and personal records.
MAIN TRENDS AMONG AFFLUENT INDIVIDUALS The steep rise in demand for migration advice and/ or investment migration programmes has become obvious to all the participants in the market. It is now clearer than ever that investment migration programmes generate a lot of interest. Simply using the term ‘migration’ and applying it to the group of individuals we are dealing with would probably not be correct, however; they do not really ‘migrate’ from point A to point B. What we are dealing with is a rising interest in empowerment and rights, which extremely wealthy individuals benefit from through the establishment of connections with different jurisdictions around the world through investment residence and citizenship-by-investment. Crucially, different programmes run by different countries do not exclude one another, when applied to a given individual. Different programmes come with different strong points and can thus be used side by side.
By contrast with what Francis Fukuyama predicted, history has not ended with the fall of the Berlin Wall. The world is a safer place now, it is true, but it is not a safer and better place for everyone. One of the key factors that boosts investment migration is (potential) instability at home.
There is a great deal of political controversy around migration generally. How does the Council aim to influence public debate? The short answer is that its goal is to demonstrate with all clarity that investment migration (when organised at a topnotch level) is overwhelmingly beneficial for both sides, i.e. both the individuals and the governments concerned. The quality of the people in question and their obvious ability to make important contributions clearly distinguish investment migration from other kinds of migration, which often happens because of intolerance, violence and harship. Investment migration problems are entirely different from the ones we normally associate with other types of migration. To mention but a few, states might not be benefiting enough from the programmes they already have in place - for instance by allowing for an early withdrawal of investments, which can lead to the acquisition of permanent residence. This can have negative implications, as the citizens of the state might ask: ‘what is our benefit’? Another often-cited problem is at the level of implementation: the laws should be transparent, clear and strict in a way that leaves no room for abuse. A well-designed investment migration or citizenship-by-investment programme is crucial and the IMC standards will help all the firms in this industry, as well as the customers, to benefit in the best possible way from their investments. * Bruno L’ecuyer can be reached on +41 22 533 1333 or at firstname.lastname@example.org
INTERNATIONAL VIEW THE IMC INTRODUCES PROFESSIONALISM TO THE INVESTOR IMMIGRATION BUSINESS
THE OFFSHORE WORLD AT ITS BEST: A CLASSIC TALE OF BORROWED STRUCTURES * by Chris Hamblin, editor of IFC World The Cayman Islands are following in the footsteps of Delaware, the Marshall Islands, Antigua and Anguilla by making limited liability companies (LLCs) available. Since 1993, the small US state of Delaware has allowed investors, parties to joint ventures and others to form so-called ‘limited liability companies’ which differ from ordinary ones in that the rules that dictate their structures and the duties of their members are set out in contracts known as ‘operating agreements’ that allow the drafters a much wider latitude than do other corporate vehicles. Other offshore jurisdictions have recently copied the idea but Cayman is the first major one to do so, with its issuance of the much-anticipated Limited Liability Companies Bill in the Official Gazette at the end of last year. It is expected to become law shortly.
Exempted companies will be able to convert themselves into LLCs The limited liability company is popular onshore, but only a few offshore jurisdictions offer it to customers. These are Anguilla, Belize, the Cook Islands, the Marshall Islands, Nevis, Panama, Costa Rica, the Isle of Man and, soon, the Cayman Islands. By all accounts, these jurisdictions have based the law behind these structures largely on the Delaware limited liability statute, so there is little substantive divergence between Delaware’s LLCs and theirs. The main difference seems to be that a series limited liability company is not always an option (for example, not in the Caymans). A series LLC, or SLLC as it is sometimes called, can contain many managers, members and/or business lines and indeed many groups or ‘series’ of these things, all pursuing different objectives and all benefiting from the limited liability umbrella of the overarching structure but with their different liabilities safe from each other’s creditors, at least in theory. When a corporate financier, tax planner or wealth planner asks himself which offshore jurisdiction he would like to choose to form a limited liability company, he therefore has at first sight little variety to choose from. His decision boils down to the features of the relevant jurisdiction when weighed
against the needs of the business he serves. The Caymans, Delaware and the Isle of Man, for instance, are all “creditor-friendly jurisdictions,” i.e. places with good credit ratings to whose entities banks are generally comfortable lending. Many international investors, alternatively, place a premium on stability. One reason why Delaware became so popular was its Chancery Court, an assembly dedicated to hearing business disputes that was (and is) staffed by some very able and respected judges. Not only does the system deal with its case-load well; it gives parties access to case law that has been built up over centuries. PIGGY-BACKING IN THE OFFSHORE WORLD This is not too dissimilar to the situation in the Cayman Islands, though the volume of cases being heard is far more modest. The Privy Council in England is the final court of appeal to legal proceedings that originate in those islands, which represents another selling point. The judges that sit on the Privy Council also sit on the Supreme Court of England. Many international parties over the centuries have chosen to apply English law to contracts, secure in the knowledge that any dispute that should arise will ultimately be determined by impartial experts. One reason why international parties regularly use entities in the British overseas territories of the Caribbean is that although they are offshore, their courts have access to this onshore expertise. This is a common phenomenon in the offshore world: the convenience inherent in being a semi-autonomous possession of a major Western power. Such a status allows the jurisdiction to be free in almost every way that counts while being able to use some onshore infrastructure. As Aki Corsoni-Husain, a partner at the law firm of Harney’s who works in the British Virgin Islands, the Caymans and Cyprus, put it when talking to IFC World: “One thing that counts as a feather in the cap of the United Kingdom’s overseas jurisdictions is that places like the BVI and Cayman Islands can piggy-back off the infrastructure of the mother country. They routinely borrow the UK’s set procedures. For example, if a product provider wants to deal with a sanctioned entity, it applies to the governor. He then refers the matter to the Foreign and Commonwealth Office in London, which has the organisation to deal with it. Any decision then has to be made at Brussels level (assuming that it is an EU thing, as in the case of the anti-Russian sanctions) or perhaps New York level (this is where it tends to go if it is a United Nations sanction) and the FCO acts as a go-between for that. This can be a highly bureaucratic process and the UK has a first-rate bureaucracy to help it along.”
The same is undoubtedly true of the Dutch West Indies as well, although they play no part in the world of LLCs. Legal commentators in the Cayman Islands, incidentally, expect that when their courts judge cases involving LLCs, they will take a look at the decisions of the Delaware Chancery Court, although they are definitely not obliged to do so.
One reason why Delaware became so popular was its Chancery Court STRUCTURE, NOT SECRECY IFC World interviewed Ramesh Maharaj, a partner at the global law firm of Walkers, asking him whether the new Cayman structure would be opaque, shielding its beneficial ownership from prying eyes in the manner for which the state of Delaware is famed. His reply was unequivocal: “We’re not interested in secrecy, although we are in confidentiality! It’s just the structure that’s similar to the Delaware corporations. The internationally accepted compliance demands that Cayman imposes will apply to this new entity. The new limited liability company may benefit a range of parties – both corporations and individuals – for example, it’s suitable for international parties wishing to effect a joint venture. It’s essentially a hybrid between a corporate and a partnership. It ought to reduce costs in terms of maintenance and share capital. “Some jurisdictions such as New Zealand have moved away from the ‘par value share capital’ model and the UK has in the past given consideration to doing so. The Cayman Islands, like many other common-law jurisdictions, have a history of limited liability for corporations of course – the attraction with the new limited liability company is its flexibility.” BORROWINGS FROM DELAWARE – THE DETAILS Melissa Lim, also a partner at Walkers, was on the drafting committee alongside other luminaries from various offshore law firms in the Caymans. She told IFC World that the impetus for the new legislation came from strong demand over the past decade, mainly from American clients who wanted IFC WORLD 2016
to conduct international business. The long delay was a testament to the complexity of the task of transposing the legislation. She said that the Caymans had evolved other structures to cope with the demand for Delaware-type structures in the run-up to the LLC: “Before this, we created an exempted limited partnership vehicle based on the Delaware Limited Partnership Law, and the take-up for that was very quick, but unlike the LLC, such exempted limited partnership is not a separate legal entity; it acts entirely through its general partner. Cayman also introduced a statutory merger regime similar to the Delaware statutory merger regime five years ago. In the recent Integra case considering appraisal rights under the Cayman statutory merger regime, the Cayman courts have said that they will begin to look at Delaware case law, so they won’t be starting from scratch. This will be an enormous help.”
The Cayman courts have said that they will begin to look at Delaware case law KEY FEATURES OF AN LLC The main features of a Cayman Islands LLC, once it becomes enshrined in law, are as follows. 1. It will be a body corporate with separate legal personality, having at least one member. A member is a person who has an interest in the LLC. He can sign up to the LLC agreement (the Cayman version of the operating agreement) without having to provide capital upfront. Melissa Lim thought that this was likely to be useful in a private equity fund or other structure where capital commitments were used: “The LLC can make a capital call on the member later. There’s no need to pay for interests up-front in order to become a member.” 2. The liability of a member to make contributions to the LLC will be limited to such amounts as agreed in the LLC agreement. Melissa Lim explained: “It is possible for a member to agree to make a capital commitment of $1 million. His liability is then limited to $1 million and the LLC cannot call on more than $1 million from him. It is the same with a limited partner of an exempted limited partnership – the general partner cannot call on more.”
3. Registration of the LLC will be effected by the submission of a registration statement to the Registrar of Limited Liability Companies in the Cayman Islands. The LLC agreement need not be sent off to the registrar. 4. Members are free to agree among themselves about the internal workings of the LLC in the LLC agreement. In doing so they can agree on mechanisms such as capital accounting and capital commitments, allocations of profits and losses, allocations of distributions, voting rights (including negative consents) and classes of interests. 5. The management of the LLC shall either vest in its members acting by a majority in number or, if the LLC agreement wills it, by one or more managers. The LLC agreement may provide for classes of managers having such rights, powers and duties for the relevant class as specified therein. 6. Subject to the provisions of the LLC agreement, a manager of an LLC shall not owe any duty (fiduciary or otherwise) to the LLC or any member or any other person except a duty to act in good faith, and such duty of good faith may be expanded or restricted by the express provisions of the LLC agreement. 7. A person who serves on any board or committee of an LLC shall, subject to the LLC agreement, not owe any duty to the LLC nor to any member and may, if expressly permitted by the LLC agreement, act in a manner which he believes to be in the best interests of a particular member or members (even though it may not be in the best interests of all members or the LLC). This is very different from British law, as Melissa Lim explained: “If you are a director of a company, you have fiduciary duties to the company and you have to act in its best interests. On a committee of an LLC, you can have your duties set out in the LLC agreement. It’s possible for a manager (as opposed to a director, which LLCs do not have) not to act in the best interests of the LLC provided that the manager acts in good faith and in accordance with the duties set out in the LLC agreement. This is helpful for joint ventures. It appoints managers to the board who will act in the best interests of the different members. 8. An LLC must not make a distribution or release a member from any obligation to the LLC to the extent that the LLC is insolvent at such time. A member who receives a distribution or is purportedly released and who had actual knowledge that the LLC was insolvent at the time of the distribution or purported release, shall be liable for the amount of the distribution or for performance of the obligation purportedly released.
INTERNATIONAL VIEW THE OFFSHORE WORLD AT ITS BEST: A CLASSIC TALE OF BORROWED STRUCTURES
9. An LLC must maintain a register of its members, a register of its managers and a register of mortgages and charges. 10. Exempted companies will be able to convert themselves into LLCs. These companies, very common in the Cayman Islands, are so called because they are exempted from certain provisions of the Companies Law. In other words, they are exempted from usual requirements such as the need to hold an annual general meeting, their share registers are not publicly available and reporting requirements are minimal. Perhaps 95% of companies incorporated in the Cayman Islands are exempted, because they do international offshore business and are not permitted to carry on business in the Cayman Islands. Melissa Lim recalled: “I don’t think I have ever formed any company except an exempted company.”
British colonies can piggy-back off the infrastructure of the mother country 11. An LLC may merge or consolidate with exempted companies or any foreign entity with separate legal personality. 12. Transfers by way of ‘continuation’ into the Cayman Islands and transfer by way of continuation out of the Cayman Islands are also permitted for LLCs. ‘Continuation,’ by which a company leaves a jurisdiction and travels to another, depends not on treaties between the jurisdictions but simply on whether the laws of each jurisdiction allow an arrival and/or a departure. Melissa explained: “You can transfer out if the law allows you to. When you transfer out, the registrar strikes you off. In the new jurisdiction, he registers you. You can’t have an entity domiciled in two jurisdictions at the same time. When I arrange it, I usually time it so that both things happen on the same day.”
* Ramesh Maharaj is available on +1 345 914 4222 and at email@example.com. Melissa Lim is on +1 345 814 4512 and at firstname.lastname@example.org. Aki Corsoni-Husain is available at email@example.com
VIEWS FROM THE JURISDICTIONS
THE BAHAMAS CHOOSE THE PATH OF INNOVATION AND COMPLIANCE * by Tanya McCartney, the CEO and executive director of the Bahamas Financial Services Board The Bahamas, like other international financial centres, operate in a world of constant change. These changes are caused by international initiatives; more and more competition; the consolidation of various financial sectors into fewer hands; changes in the demographic profiles of clients; the requirements of emerging markets; market stagnation and, of course the financial crisis that erupted only a few short years ago.
The BEE takes an innovative approach to current wealth management needs It has been a period in which some IFCs might say that “survival of the fittest” is the end game. For For the Bahamas, however, the end game has never been one of survival but rather one of adaptation to change, balancing a commitment to meeting its international obligations with a constant desire to tread the path of innovation, reach new markets and serve existing ones better. A BALANCED APPROACH TO INTERNATIONAL INITIATIVES The Bahamas take a balanced approach when responding to and complying with international standards. We are always cognizant of our sovereignty as well as our duty as a responsible member of the international community. We are a democratic country, a full member of the United Nations and one of the only independent financial centres in the region that is consistently ranked as a financial centre of importance. In 2013, as a result of this balanced approach, the Bahamas achieved a ‘largely compliant’ rating in the Phase 2 Peer Review process of the Global Forum – proof that the jurisdiction is discharging its Tax Information Exchange Agreement (TIEA obligations. The Phase 2 review noted that the competent authority in the Bahamas is well-organised, with adequate internal processes in place for handling Exchange of Information (EOI) requests. Surrounding jurisdictions have also praised the Bahamas as an important and reliable EOI partner. The Bahamas have implemented FATCA through a Model 1 inter-governmental agreement with the United States. Its firms began to submit reports to the US Internal Revenue Service in September. The Ministry of Finance, which is responsible for FATCA compliance, has worked closely with the financial services industry to come up with an effective
FATCA compliance mechanism for the islands. The Government takes its policy of always consulting the private sector very seriously when formulating its growth and development plans for the financial services industry. The Bahamas are expected to comply with the OECD’s Standard on the Automatic Exchange of Information by 2018. The Government is determined to ensure that it is ‘appropriate’ in each case for the requesting country to receive the information it is asking for. Before allowing any company to hand such information over, it wants to ensure that the requesting country can safeguard its confidentiality, safety and proper use. This is entirely consistent with the OECD’s own guidance and its drive to review countries and their data-protection and ‘proper use’ regimes by mid-2016. The international body’s efforts in this area are reassuring because they show that the world’s decision-makers still believe in some kind of prohibition against the improper use of financial information. In many cases these regimes uphold the fundamental right of security of person. PRODUCT INNOVATION IN MOTION: THE BEE In the Bahamian financial services sector, private wealth management continues to stand centre stage. The islands boast a diverse suite of products, with banking and trust services at the core. The jurisdiction is not content to rest on its laurels in these areas; it has built on its strength in this crucial area by introducing products such as the Bahamas Executive Entity (BEE), which provides a nimble and innovative approach to the dynamics of current wealth management needs. The BEE solves complex governance issues in fiduciary and wealth management structures, particularly with respect to share ownership in Private Trust Companies and the identification of people or entities willing to play their parts in the governance of any number of wealth structures. In addition to its flexible capital structure, the BEE has other distinguishing features. • It may hold shares, securities or other ownership interests in a legal person whose business is to carry out executive functions. • Executive functions may be performed only in relation to entities, trusts or other arrangements that are domiciled in or regulated by the laws of the Bahamas or a jurisdiction specified in the first schedule of the Financial Transactions Reporting Act. • The Executive Entities Act itself contains anti-forced-heirship provisions that are similar to the ones in the Bahamas Trustee and Foundations Acts.
BAHAMAS THE BAHAMAS CHOOSES THE PATH OF INNOVATION AND COMPLIANCE
The advantages of the BEE lies in its ability to remove unnecessary layers of ownership at the top level of wealth structures, to concentrate control in the right people who have the assurance of limited liability and, more generally, to improve the way the structure is governed, especially when it comes to avoiding the risk that family conflict might damage a family’s fortunes. THE SMART IDEA BEHIND BAHAMAS SMART FUNDS Agility is also clearly evident in the Bahamas’ evolving investment funds sector, which is beginning to attract the attention of internationally active fund managers and has added a new dimension to the jurisdiction’s wealth management and advisory capacity. The Bahamas have witnessed a recent upward trend in investment fund registrations; this is indicative of the successful niche fund business that the jurisdiction is building, largely on the back of the investment fund vehicle known as the SMART (Specific Mandate Alternative Regulatory Test) fund. Families, family offices and related investors have been using Smart Fund Models (SFMs) as cost-effective investment fund vehicles. Institutional investors, meanwhile, have been using templates such as the SMART 7. The SMART fund concept was conceived in the true spirit of risk-based regulation, dictating that the people who set up a fund ought to be able to tailor its structure to suit their business objectives. This is justified by the cap on the number of investors that may invest in many of the templates. As a result, the relevant regulation accommodates agreement by the investors to ignore the usual obligation to produce audited financials in favour of semi-annual performance reports. Smart Funds were introduced by the Bahamas more than 10 years ago but, like their name implies, they continue to be wise to market requirements and have evolved over the years in response to market changes. A concept created through an industry think tank, the vehicle provides industry participants with the means to offer clients regulated funds which nevertheless cater to specific solutions, domiciled in a premier international financial centre. The specific requirements for SMART Fund models are designed by means of regulator-approved templates, each of which creates a new SMART fund model. Any institution or person with a business case can submit a template for approval. The number and type of SMART funds remain an open opportunity, effectively creating a mechanism for promoters to approach the regulator for approval of a specific business case and for that fund, if approved, to be allocated a risk based licensing and supervisory regime tailored for its use. This template then is able to be utilized by other
funds, fitting the parameters and requirements of the template. The latest model, formally Smart Fund Model 007 (SFM007), but popularly dubbed the Super Qualified Investor Fund, may be offered on a private placement basis to up to 50 ‘super qualified’ investors who must make a minimum initial investment of USD500,000. The new model allows a greater number of investors achieving greater economies of scale than any other template, and simplifies the qualifying criteria by providing for a minimum investment rather than qualifying on a net worth basis.
The Bahamas have witnessed a recent upward trend in investment fund registrations A NEW ICON FOR FUNDS The Bahamas have taken the lessons learned from the niche marketing success of the SMART Funds product and applied the same innovative approach in creating and introducing the ICON - the Investment Condominium - to meet the specific needs of Brazilian investment managers and advisors, as well as Latin American managers more broadly. Under Brazil’s civil code the condominium was the formalization of the concept of joint ownership and administration of property (in all forms) be-
tween co-owners within an unincorporated entity. The condominium is not a legal entity separate and apart from co-owners and the administrator is empowered to act on behalf of and represent it in all matters.
scale created within such structures and the regulatory regime in the Bahamas is a clear response to the demand for cost effective means of entering into captive or self-insurance for small to medium sized enterprises while satisfying international standards.
It was this commitment to building products that benefit from cultural and legal familiarity that saw the Bahamas introduce foundations law in 2004 and the ICON builds upon this. The Bahamas Investment Condominium (ICON) provides an alternative legal structure for investment funds that, inherently, is familiar to those in Brazil and indeed those in countries which have similar civil law constructs.
Since 2011, after the enactment of the External Insurance Act 2009 and the External Insurance Regulations 2010, which govern the establishment, licensing and business operations of captive insurance companies, the Bahamas have experienced growth in the number of captive cells and standalone captives.
A CAPTIVATING LOCATION
A PRO-BUSINESS ENVIRONMENT
Captive insurance is another area of recent expansion. The Bahamas is not a newcomer to captives. However, captives took a back seat during a period in which the Bahamas focused on developing wealth management, trust and estate planning. This is certainly not the case now as the opportunity for captives to play a role in wealth management is undeniable.
The innovative approach embodied in the BEE and SMART Fund concepts are not only strong assets for The Bahamas in competing for new business, it is also reflective of the country’s overall pro-business environment that welcomes foreign direct investment into the economy. There is recognition that growth and development are contingent on creating economic opportunities for Bahamians whilst capitalizing on inherent and strategically-developed advantages to attract high net worth individuals and their families, boutique firms, independent trust companies and fund administrators to it shores.
Given today’s unpredictable insurance market, historically low interest rates and increased regulations, it is not surprising that captives are coming into their own as an attractive risk financing option. Fortunately, starting and operating a captive has never been more straightforward, particularly in the Bahamas. Segregated cell legislation is a prime example of the Bahamas applying their focus on wealth management to the captive market. The Bahamas’ cell legislation provides robust statutory protection to ensure that the assets and liabilities of each account are truly separate and distinct. Cell captives benefit from the natural economies of
BAHAMAS THE BAHAMAS CHOOSES THE PATH OF INNOVATION AND COMPLIANCE
The existing financial services sector, characterised by a robust toolkit of sophisticated product offerings, a respected regulatory regime evidenced by a commitment to international best practice with respect to due diligence requirements, anti-money laundering legislation and the implementation of mechanisms to facilitate transparency and co-operation – all form the backbone of an inviting and business friendly international IFC that welcomes international business owners and executives.
Invest is a nation with one of the
oldest democracies in the Western Hemisphere
WORK, REST AND PLAY IN BARBADOS * by Ken Campbell, Invest Barbados Barbados is one of the leading international business and financial centres in the Western Hemisphere. The small island-country has earned a well-deserved reputation as a vibrant hub for the conduct of international business of substance and, in 2013, its international business and financial services sector accounted for approximately 10% of the country’s GDP.
in areas such as international insurance, wealth management, financial services, international marketing, information communication technology and niche manufacturing. Consequently, Barbados continues to pursue new treaties with countries that fully recognise the value of the symbiotic benefits of such arrangements and negotiations are at various stages with several countries in this regard.
For decades, Barbados, a low-tax jurisdiction, has been a domicile of choice for investors, particularly from North America and the United Kingdom. In fact, for several years, Barbados has been a major international business partner with Canada, moving from 3rd position in 2013/2014 to become the second largest destination for Canadian foreign direct investment abroad, only after the USA. Canadian foreign direct investment in Barbados stood at C$64½ billion and C$71.2 billion at the end of 2013 and 2014, respectively.
Barbados has and continues to protect its reputation as a preferred international financial centre; one that is keen to attract businesses of substance.
More than 4,000 registered international business entities are operating on the island The jurisdiction’s expanding double-tax treaty network, which currently takes in 36 countries, has convinced many investors to conduct business with it. Such a network guarantees both investors and signatory countries certain benefits and rights not available under tax information exchange agreements (TIEAs). The 36 treaties have accounted, in part, for the more than 4,000 registered international business entities that are operating on the island
BARBADOS WORK, REST AND PLAY IN BARBADOS
The jurisdiction continues to place transparency and best practice at the forefront of its international business strategy. Barbados has signed a Foreign Account Tax Compliance Act Model 1A intergovernmental agreement with the USA and has formally promised to sign the OECD’s Multilateral Convention on Mutual Administrative Assistance in Tax Matters. In fact, transparency has always been a watchword for Barbados. Testament to this is the country’s ranking as the least corrupt in Latin America and the Caribbean in 2014 and the 17th least corrupt country in the world according to Transparency International’s Corruption Perceptions Index. In addition, Barbados places priority on developing ‘right-sized’ regulation to support both new and existing product offerings and markets. In a continuous effort to maintain its pristine reputation, the jurisdiction passed the Money Laundering and Financing of Terrorism (Prevention and Control) Act 2011. The Financial Services Commission, also established in 2011, is responsible for regulating the country’s non-banking financial services sector while the Central Bank oversees the banks. Barbados continues to refresh and diversify its product offering to include, among other opportunities, a regime for high-net-worth individuals. More recently, it enacted legislation to allow the creation of private trust companies and foundations.
It also passed the International Corporate and Trust Services Providers Act which governs the conduct of service providers with respect to international best practice standards. Currently, legislation for the creation of incorporated cell companies is under consideration. A strategy has also been developed for targeting new markets, particularly in Latin America and Africa.
The double-tax treaty network takes in 36 countries Moreover, with a literacy rate of 98%, Barbados has a highly educated and trainable workforce. This has resulted in the availability of a cadre of skilled professionals, well qualified to support the international business and financial services sector and the high level of value-added services that the jurisdiction provides. Apart from the fact that Barbados is a vibrant IFC, one cannot ignore its outstanding natural beauty, its appealing climate and its excellent quality of life. The country offers something for everyone – from sporting and social activities to fine dining and carnivals; from music festivals to heritage tours and much more besides. This is reflected in Barbados’ ranking in the 2014 United Nations Human Development Index as 6th in Latin America and the Caribbean, 8th in the Americas and 59th worldwide in terms of quality of life. Why not let Barbados work for you? It is truly the ideal place to live, work and play.
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ASSET PROTECTION THROUGH A CYPRIOT INTERNATIONAL TRUST * by Adriaan Struijk, MSc, TEP, Chairman Freemont Group Cyprus has a modern trust regime that offers confidentiality while still complying with international money-laundering standards. It protects assets comprehensively and allows individuals to take advantage of the favorable tax regime in Cyprus. People who want to retain some level of control have many opportunities to arrange this in a Cypriot International Trust or CIT. In a world that is becoming ever-more litigious, where assets can be frozen by competitors and frozen by and ultimately forfeited to governments on the basis of unsubstantiated allegations, where governments have deliberately blurred the distinction between tax avoidance and tax evasion, where ever-more aggressive tax authorities retroactively move goalposts, and where pre-nuptial agreements in many countries only have limited effect, it is only prudent to protect one’s assets. In the CIT, Cyprus offers one of the best asset protection vehicles available. Trust legislation in Cyprus contains two main statutes: the Trustee Law 1955, based on the English Trustee Act 1925, and the International Trusts Law 1992. Whenever these statutes do not make an express provision for a particular matter, English common law and equity can be relied on. In 2012 the International Trusts Law was amended to add asset protection features and make the trust regime available to residents as well as nonresidents. The requirements for creating a trust in Cyprus that falls under the CIT regime are that in the year prior to its creation neither the settlor nor the beneficiaries are residents of Cyprus. Subsequent to its creation, though, the settlor and beneficiaries can become residents of Cyprus. Also, at all times at least one of the trustees should be a tax resident of Cyprus. A CIT is taxable only on local source income in case all the beneficiaries are non-residents and on worldwide income in case the beneficiaries are resident (income to be attributed proportionally in case the beneficiaries are both resident and non resident). The trust will be tax-transparent and taxed according to the tax that would be payable by the beneficiaries if they had received the income directly. In July 2015, resident but non-domiciled individuals in Cyprus ceased to be subject to the Special Contribution of Defence, which is a tax levied on dividends, interest and rental income. Capital gains are not taxed in Cyprus, with the exception of gains on real estate located there. BADGES OF INTENT TO DEFRAUD The International Trusts Law, as amended, provides one of the strongest asset protection features available. No claim may be made in respect of the assets that have been transferred to an international trust unless and to the extent that it is proven to the satisfaction of the court that the international trust was made with the intent to defraud the creditors of the settlor at the time of the transfer of his assets to the trust. “Intent to defraud” means the intention of a settlor to dishonestly avoid any obligation that he
owes to a creditor. Moreover, the obligation would have to be known to the settlor at the time of the transfer of assets. The onus of proof of such intent on the part of the settlor lies with the creditors. The law states specifically that neither the reservation of certain powers by the settlor, nor his retention of a beneficial interest in the trust, can be construed as badges of an intent to defraud. Any claim of a creditor on this basis in respect of the assets that have been transferred to a trust must be made within a period of two years from the date on which the transfer or disposal of assets was made to the trust. Cyprus does have forced heirship provisions in its Wills and Succession Law which are applicable to domiciled persons unless these are from the United Kingdom or most Commonwealth countries. However, if one has set up a CIT before becoming resident, one can then circumvent these provisions by transferring assets to a trust. The CIT law states that the laws in force in Cyprus or in any other jurisdiction in respect of any inheritance or succession should not affect the transfer or disposition or validity of any international trust in any manner. Also a trust or disposition to a trust will not be invalidated by the law of any jurisdiction by reason of a personal relationship to a settlor or any beneficiary. So any claims arising out of a divorce case will not be entertained. Finally, to drive home the point that Cyprus takes asset protection very seriously, the new section 12C states that compliance with the CIT is a matter of public order. This would suggest that should there be any ‘conflict of law’ issues, such as those arising out of forced heirship or divorce claims, that the trust law will prevail. Aside from the asset-protection elements of the law, here are some other noteworthy features of the amended law. • Perpetual trusts are allowed. • Trust property can be situated anywhere, including Cyprus. • Purpose trusts, including charitable trusts, are allowed. The requirement that beneficiaries of a trust must be ascertainable is waived when the trust is established for a specific purpose. • Reserved powers, i.e. a specified list of powers that a settlor or protector may exercise (subject to the trust instrument), are provided for in the law. An exercise of some or all of these powers will not in any way affect the validity of the trust, nor delay its execution. A trustee who complies with the exercise of these retained powers can not be held to be acting in breach of trust. • Exclusive jurisdiction applies. Unless the trust instrument states otherwise, the trust will be subject to the exclusive jurisdiction of the Cypriot courts. Subject to the terms of the instrument creating an international trust, the law imposes specific confidentiality provisions on trustees, protectors and en-
CYPRUS ASSET PROTECTION THROUGH A CYPRIOT INTERNATIONAL TRUST
forcers – for instance, the name of the settlor and beneficiaries may not be disclosed. Pursuant to an amendment of the CIT Law as well as the Law on the provision of Administrative Services in 2013, trustees are regulated with the exception of Private Trust Companies (PTCs). The three supervising authorities are the Cyprus Securities and Exchange Commission (CySec; for Administrative Services Providers), the Cyprus Bar Association (for Advocates) and the Institute of Certified Public Accountants of Cyprus (for Accountants and Auditors). Trustees must collect and have at all times available for disclosure to the relevant authority the following information, where applicable: • the identities of all trustees; • the identity of the settlor; • the identities of all beneficiaries or information on the class of beneficiaries; • the identity of the protector (if applicable); • the identity of the fund manager, accountant, or tax official (if applicable); and • the activities of the trust. Moreover, certain limited information ought to be provided to the supervising authorities for the purpose of maintaining a trust registry. The trust registries maintained by each of the supervising authorities contain the following information on CITs. • Name of the trust. • Name and full address of every trustee at all material times. • Date of creation of the trust. • Date of any change in the law governing the trust to or from Cypriot law. • Date of termination of the trust. The trust registers are not available for inspection by the public. The roles of protector and that of enforcer are excluded from the scope of the ASP Law on the grounds that these are people whom the settlor appoints to oversee things in a personal capacity. PTCs are not regulated but still trusts administered by PTCs are responsible for maintaining and reporting certain information to CySec. There are restrictions on the type of trust arrangement for which a PTC can act as a trustee. Specifically, a director of a PTC must be: • a person who is the settlor of the trust; or • a person who is the beneficiary of the trust or the spouse of a beneficiary; or • a family member of the beneficiary or his spouse up to the forth degree of relation. The PTC would need to have at least a secretary who is resident in Cyprus with responsibility for collecting information pertaining to the trust and making it available for disclosure to CySec. The PTC would be responsible for notifying CySec of the information to be maintained in the trust register.
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Ierotheou, Kamperis & Co. LLC is a medium sized law firm established in Nicosia, Cyprus providing high quality, cost-effective services to national and international clients. The firmâ€™s Immigration Team offers citizenship and residence services to foreign clients ever since 2006. Our Corporate and Commercial lawyers, offer expertise that includes tax planning, shipping, trusts and corporate issues, while our highly skilled Litigation team represents clients before the Courts.
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CYPRUS CITIZENSHIP BY INVESTMENT – THE QUICKEST ROUTE INTO EUROPE * by Michail Kamperis, a partner at Ierotheou, Kamperis & Co LLC in Nicosia This jurisdiction is a member of both the European Union and the Commonwealth and offers a safe, low-tax portal into the EU. Cyprus, moreover, is a preferred jurisdiction for investors/entrepreneurs seeking citizenship by investment. The Scheme for Naturalization by Exception of Investors in Cyprus falls under section 111A(2) Civil Registry Laws 2002-15, which provides that the jurisdiction’s Council of Ministers may, under any conditions it determines appropriate, allow the naturalisation of foreign entrepreneurs. The new scheme of criteria and conditions for the naturalisation by exception of non-Cypriot entrepreneurs investing in Cyprus was approved by the Council of Ministers on 19 March 2014, revising a decision of 24 May 2013.
Strict and exhaustive ‘due diligence’ checks always take place The scheme is regulated by the Ministry of Interior, with the Ministry of Finance responsible for checking that each applicant fulfills the financial criteria for citizenship investment. Once applications have been processed and reviewed, the final decision rests with the Council of Ministers. EIGHT STEPS TO HEAVEN When a foreign investor/entrepreneur fulfills one of the following eight criteria, he can use the scheme to acquire Cypriot citizenship. • Investment in government bonds. The applicant must have purchased from the primary market state bonds of the Republic of Cyprus of at least €5 million. • Investment in financial assets of Cypriot companies or Cypriot organizations. The applicant must have purchased financial assets of Cypriot companies or Cypriot organizations (bonds/securities/debentures registered and issued in the Republic of Cyprus) of at least €5 million. • Investment in real estate, land development and infrastructure projects. The applicant must have made an investment of at least €5 million for the purchase or construction of buildings, or for the construction of other land development projects (residential or commercial developments, developments in the tourism sector or other
infrastructure projects). The mere purchase of land is excluded. • Purchase or creation of, or participation in, Cypriot businesses or companies. The applicant must have made an investment of at least €5 million in the purchase, creation or participation in businesses or companies that are based in and operating in the republic. These businesses or companies should have a tangible presence in Cyprus and employ at least five Cypriot citizens. • Deposits in Cypriot banks. The applicant must have personal fixed-term deposits or deposits of privately-owned companies or trusts (in which he/she is the beneficiary owner) in local Cypriot banks or subsidiaries of foreign banks operating in the Republic of Cyprus of at least €5 million. • A combination of the aforementioned criteria. The applicant is required to have a combination of two or more criteria stated in the five bullet points above, amounting to at least €5 million. • Persons whose deposits with the Popular Bank Public Company Ltd have been impaired due to measures implemented after 15 March 2013. The applicant’s deposits with the Popular Bank Public Company Ltd have been impaired due to the measures implemented after 15 March 2013, to a total of at least €3 million. • Major Collective Investments. The Council of Ministers has the right to reduce to €2½ million the amount required to fulfill the first four criteria, as long as investors demonstrably participate in a special collective investment scheme and as long as the total value of the investment is at least €12½ million. This last criterion is the most popular and cost-effective option, enabling the investor to acquire a Cypriot passport on the basis of the purchase of real estate in Cyprus with a value of €2½ million, plus value-added tax or VAT (if applicable). In that case, the investor is not obliged to buy a further privately-owned residence of €500,000. In all the other cases listed in the criteria above, the applicant must additionally hold a permanent, privately-owned residence in the Republic of Cyprus, the purchase price of which must be at least €500,000 plus VAT. The applicant should have concluded the necessary investments during the three years preceding the date of the application and must retain those investments for a period of at least three years after the date of his naturalization. The above-mentioned amounts must be proven to have been transferred to Cyprus from abroad. The applicant must have a clean criminal record and his/her name must not be included on the list of persons whose property is ordered to be frozen within the boundaries of the European Union.
CYPRUS CYPRUS CITIZENSHIP BY INVESTMENT – THE QUICKEST ROUTE INTO EUROPE
A decision of the Council of Ministers, dated 19 March 2014, also provides for the granting of Cypriot citizenship to the investor’s spouse, minor children (under the age of 18) and financially dependent adult children (18 years old or above). Neither the spouse nor the children are obliged to meet any financial criteria. The decision specifies that the adult children of an investor are considered to be financially dependent up to the age of 28, if they are students registered for an undergraduate or master’s degree. A child is also considered financially dependent if he has severe physical or mental disability and is therefore unable to work. No statutory or regulatory amendments to the Citizenship by Investment Scheme have been announced for the near future. There is a possibility, however, that the purchase of state bonds of the Republic of Cyprus will be removed from the list of eligible criteria.
HNWIs around the world are increasingly interested in acquiring dual citizenship and residency The Cyprus Citizenship by Investment Scheme has been a great success, accounting for more than €2 billion in investments by November 2015, according to the Minister of the Interior. Immigration practitioners and real-estate developers in Cyprus have promoted and used the scheme widely. Although some concerns have been raised about this, the Government has repeatedly stated that strict and exhaustive ‘due diligence’ checks always take place before it awards citizenship to successful applicants, with subsequent periodic inspections to ensure that conditions continue to be met. In the case of a breach in conditions, Cypriot citizenship is revoked. WHY CYPRUS? Cyprus enjoys three main advantages over other jurisdictions that offer ‘citizenship by investment’ schemes. • Firstly, speed. In contrast with other citizenship-by-investment jurisdictions, under the Cyprus scheme an applicant acquires a
Cypriot passport within three months, as from the date of submission of his application. • Secondly, unlike other citizenship-by-investment programmes, the Cypriot scheme does not involve any donation of funds on the part of the applicant, only an investment that can be liquidated after three years, with the exception of a permanent, privately-owned residence in the Republic of Cyprus, which the successful applicant must keep up at all times. • Thirdly, the applicant acquires a European Union passport without a residence prerequisite attached, meaning that he is not obliged to reside in Cyprus before he submits an application for citizenship. The successful applicant obtains exactly the same type of Cyprus passport as a native citizen. Visa-free travel is widely available to Cypriot citizens. Cyprus ranks 14th on the Henley & Partners Visa Restrictions Index 2015, with 157 countries around the world that do not require visas for Cypriot citizens.
The scheme accounted for more than €2 billion in investments by November 2015 As regards tax issues related to the investment, it is important to stress that as a reputable financial centre for the past 40 years, Cyprus is a tax-friendly country with a low-tax burden on foreign and local investors. As noted above, Cyprus imposes no inheritance tax, while the rates of corporate tax (12½% on net profits) and personal income tax (imposed on earnings above €19,500) are among the lowest in the EU. JOINING THE NON-DOM MARKET In July 2015 the Government introduced a series of measures aimed at making the Cypriot tax system even more attractive to prospective investors and Citizens by Investment. Fees for the transfer of real estate were halved for transactions completed before 31 December 2016, while no capital gains tax is imposed on the future sale of immovable property in Cyprus acquired between 16 July 2015 and
31 December 2016. Furthermore, the introduction of a non-domicile tax residency regime, exempting non-domiciled individuals from tax on dividends, interest and rent, attracts high net-worth individuals who may be interested in combining a Cypriot passport with Cyprus tax residency. CONSTANCY IS THE BEST POLICY The major challenge for the future of the Cyprus Citizenship by Investment Scheme is, strangely enough, to preserve the way the scheme works without any amendments. The simple reason for this ‘standstill’ proposal is that the scheme has in the past been repeatedly amended by the government. While these amendments were instrumental in crafting the scheme’s current successful form, successive changes may have deterred investors. Cyprus now offers a straightforward and cost-effective citizenship-by-investment scheme that produces excellent results and appeals to highnet-worth individuals aiming to invest in Cyprus and acquire EU nationality. The challenge for the Cyprus government is to run the scheme as it is, while continuing to apply the scheme’s financial and ‘due diligence’ criteria strictly in an effort to ensure that Cypriot/EU passports do not fall into the wrong hands. Cyprus has operated as a reputable, low-tax financial services center since the early 2000s, shedding its reputation as an offshore tax haven. The speedy recovery of the Cypriot economy after the bank bailouts in March 2013 has astonished European and international organizations. A fiscal policy report published in August 2015 revealed growth of 1% for two consecutive quarters of 2015, exceeding original projections of 0.4%. According to government figures, the economy is expected to continue this positive trend through to end-2015, to the relief of both the public and the business community. The financial services sector, including the shipping sector, accounts for approximately 7% of Cypriot GDP. The combination of a positive macroeconomic environment and foreign investment ensured that Cypriot banks successfully passed EU and European Banking Authority (EBA) stress tests in the autumn of 2014. This was because the Cypriot Government had stuck to the terms of the memorandum of understanding that it signed with the Troika in 2013, also passing measures in the fields of fiscal policy and tax, guaranteeing that deposits in Cypriot banks will not be nationalised. Offshore banking is still attractive in Cyprus, given the considerable number of foreign business people
operating there. There are currently more than 30 subsidiaries and branches of EU and non-EU banks operating in Cyprus, licensed and supervised by the Central Bank of Cyprus. The above-mentioned corporate and personal tax measures are only part of the comprehensive business-friendly tax regime that has produced a thriving international business sector in Cyprus. The incorporation and management of Cyprus-based companies, as well as the creation of Cyprus International Trusts, remain at the forefront of international business sector services. In 2012, the provision of fiduciary and administration services to entities was regulated under the aegis of the long-awaited Law Regulating Companies Providing Administrative Services and Related Matters. Beneficial tax measures and a business-friendly environment have attracted a significant number of undertakings for the collective investment in transferable securities or UCITS, alternative investment funds and foreign exchange companies to Cyprus. The Cyprus Securities Exchange Commission regulates these entities which are mainly Russian- and Ukrainian-owned, although various other nationalities are also represented.
Offshore banking is still attractive in Cyprus The Cyprus Immigration Permit Scheme is another government initiative for which our firm, which has offered citizenship and residence services to foreign clients since 2006, is particularly active in performing services. Here the Government has set up a ‘fast track’ procedure, allowing entrepreneurs and/or investors to acquire immigration permits as long as they have, among other things, a secure annual income of at least €30,000 and have purchased a residence with a total market value of at least €300,000 (VAT not included). High-net-worth individuals around the world are increasingly interested in acquiring dual citizenship and residency in order to allay safety, environmental, educational and tax concerns. Our specialised immigration team is supported by our corporate and commercial lawyers and administration staff, offering expertise that includes tax-planning, shipping, trusts and corporate issues, while our litigation team offers clients experienced representation before the courts.
IFC WORLD 2016
THE BEST PLACE IN THE WORLD TO DO BUSINESS * by Adriaan Struijk, MSc, TEP, Chairman Freemont Group The United Arab Emirates, and Dubai in particular, is one of the best places in the world to do business. Dubai has followed a long-term pro-business policy under the banner of “what is good for the businessman is good for Dubai”. The government sees business and entrepreneurship as essential to the emirate’s success. Long before oil was discovered in the UAE, Dubai had established itself as a regional trading port. For more than a 100 years the things that it offered remained remarkably unchanged: free trade, largely free competition, no capital controls, fixed fees for doing business, and –except for low import duties – no taxes. Foreign businessmen and guest workers have always been welcome and subject to few restrictions. Dubai has always been a place that attracts doers, not paper-shufflers. While most of the world is piling new administrative burdens on businesses, in Dubai the operating environment for businesses has been remarkably stable. Basic policies have never really changed much over time. Dubai provides a shining example to the world of what a country can achieve if its lets businesses create, compete and thrive and lets entrepreneurs and employees keep every single penny they earn.
Dubai has always been a place that attracts doers, not paper-shufflers Some pundits have predicted that the current fiscal model for the UAE is not sustainable as a result of the collapse of oil prices from about $110 per barrel in the middle of 2014 to $40 a barrel at the end of 2015. International organisations such as the International Monetary Fund, the World Bank and the OECD, never hesitate to volunteer advice about how to run an economy and government finances while constantly putting pressure on the UAE to ‘normalize’ its tax system. However, the UAE’s governmental finances compare favourably with those of others. • The UAE’s federal government, which accounts for only 14% of total government spending in the country, has run a budget surplus every single year except in 2008 and 2015. 2008 saw a severe financial downturn, while 2015, despite the collapse in oil prices, only saw a budget deficit of about 2% of GDP. • The federal government was quick to curb spending. Public spending is down by 12% on
2014 and spending on subsidies has fallen by more than 90% on the 2014 figure, the Government having abolished most fuel and electricity subsidies and having slowed down spending on projects that it considered to be non-essential. The predicted budget for 2016 is the same as 2015 but with no budget deficit.
• Federal government debt as a percentage of GDP was only 16% in 2014 (the last year for which figures are available). • Dubai’s government debt and debt guaranteed by it as a percentage of GDP is around 32% of its GDP. If the debt obligations of government related entities (GRE’s) are included the debt to GDP ratio is 132%. The emirate of Dubai booked budget surpluses since the last financial crisis too and for 2016 has forecasted an operating budget surplus of 7%.
the above list the federal government does not have taxing powers. If any legislation is desired on a federal level in areas which are not specifically delineated as being with the remit of the power of the federal government, such as taxation, then the consent of each emirate’s government is required. A new commercial companies law (Federal Law No. (2) of 2015 on Commercial Companies) came into effect July 1st 2015. It modernizes the previous commercial companies law. Some of the most significant provisions: • LLC’s can have one shareholder (previous minimum was two). • Pure holding companies can now be established (previously all companies needed to be licensed for a specific line of business). • Investment funds shall have their own legal personality, legal form and financial position.
LEGAL DEVELOPMENTS The UAE has a federal system of government with 7 emirates. The constitution enumerates only specific powers for the federal government, all other powers are retained by the individual emirates. The federal government has delineated legislative powers in areas such as foreign affairs, security and defence, nationality and immigration issues, education, public health, currency, postal, telephone and other communications services, air traffic control and licensing of aircraft, labour relations, banking, delimitation of territorial waters and extradition of criminals. And, perhaps surprisingly to those from other federal states, the federal government actually exercises its powers within the authority assigned to it by the constitution. The authority given to the federal government derives it legitimacy from the ruling families in the individual emirates and these remain protective of their autonomy.
The emirate has experienced budget surpluses ever since the last financial crisis This decentralised system of government has served the UAE well. It assures a healthy amount of competition between the emirates and keeps a check on runaway government spending and counterproductive legislation. As is apparent from
DUBAI THE BEST PLACE IN THE WORLD TO DO BUSINESS
• A companies registrar which will maintain a companies and trade names register will be introduced as per specific regulations by the minister of economy. Documents will be available by concerned parties for inspection. • Companies shall apply IFRS accounting standards, when preparing interim or annual accounts and determining distributable profits. • Accounting records must be kept for 5 years. • Annual audits are now required. • Shareholders may pledge their shares as security. • Provisions covering mergers. • Non-pre-emptive issuance of shares to strategic partners (partners whose contribution to the company provides technical, operational or marketing support for the benefit of the company) is permitted, subject to certain conditions, including a 75% shareholder resolution. There has been increasing talk recently about the possible implementation of VAT in the UAE. Most other GCC governments are coping with severe government deficits, and since the aim is to introduce VAT simultaneously throughout the GCC, this might trigger its implementation in the UAE. All 7 emirates would have to consent to this since the authority to levy taxes has not been delegated by the emirates to the federal government. The introduction of VAT, with a probable rate from 3-5%, would mean a fundamental change to the business landscape in the UAE, undermining exactly one of the tenets of the UAE economy which attract business here: the lack of administrative burden. It will deter the doers, but the paper shufflers love it.
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A long-awaited insolvency law is in its final draft. It is expected to contain provisions for corporate bankruptcy modelled on Chapter 11 proceedings in the US allowing companies to renegotiate the terms of their debts with creditors. The insolvency law was passed by the cabinet in July 2015. It now needs the ratification of the consultative Federal National Council and of the Supreme Council, the country’s highest legislative body. In October 2015 Abu Dhabi launched its new financial freezone, Abu Dhabi Global Markets (ADGM), and started accepting its first applications. Like Dubai International Financial City (DIFC) it is a separate jurisdiction, with its own registration authority, financial regulations and regulator and courts. It will initially focus on private banking and wealth and asset management, but has been designed to accommodate the full spectrum of the financial services industry. The foundation of the civil and commercial law in ADGM is provided by the Application of English Law Regulations 2015. Those regulations make English common law (including the rules and principles of equity) directly applicable in ADGM and they adopt specific UK statutes. ADGM Courts do not have jurisdiction in criminal matters. Accordingly, relevant references in the English statutes to criminal offences have been amended to refer to breaches of the ADGM Courts Regulations or Rules only, punishable by a monetary fine. In addition to the UK statutes adopted the ADGM shall additionally deploy its own set of rules and regulations in certain areas such as companies law and employment law. And, just as statute prevails over case law in England, so the ADGM regulations will prevail over the common law provisions adopted therein. Ras al Khaimah Investment Authority’s (RAKIA) and Ras al Khaimah Free Trade Zone’s international business company registries are set to be merged into a new entity: Ras al Khaimah International Corporate Centre (RAKICC), owned by RAKIA. The regulations applicable to companies that will be registered there (“Companies Regulations”) have been published in January 2016. These regulations provide a vast improvement over the current
applicable regulations. They provide much more flexibility in how the company will be constituted. New legal forms have also been introduced: companies limited by guarantee, companies limited by guarantee and by shares, unlimited companies, segregated portfolio companies. The statutory right of pre-emption has been abolished. Re-domiciliation in and out is allowed. The new regulations are similar to those of long-standing financial services centres such as the BVI.ht of pre-emption applies on all share transfers.
The introduction of VAT would cause a fundamental change in the business landscape WHAT’S NEXT Dubai has been growing at a healthy rate of 4.5 to 5 per cent in real terms and its future growth is expected to be within the same range for the foreseeable future. Its economy has diversified almost entirely away from oil. Its economy has also bounced back, buoyed by its perceived status as a safe haven and benefiting from a boom in trade, logistics and tourism. Dubai has become an international logistics and services hub used by companies to move goods or command regional operations. It has become a hotbed for tech startups recently and due to its proximity and large Iranian expatriate population is set to profit from the resumption of trade with Iran and investment into Iran. Many companies targeting Iran will prefer to operate out of Dubai or have its regional hub in Dubai, rather than in Iran. Dubai’s economy is becoming more diverse by the year, as are the facilities on offer for residents and visitors.
DUBAI THE BEST PLACE IN THE WORLD TO DO BUSINESS
To give a few examples of recent developments and what 2016 has in store for Dubai: • New freezone “d3” started operations, aimed to attract artists and designers. In its own words: At d3, state of the art offices are home to global brands while studios and ateliers house local businesses. Creative, customizable spaces are ideal for up and coming entrepreneurs and are designed to forge an active design community that is tailored to contemporary business needs.” • The Mohammed bin Rashid Library is set to open at the end of 2016. It will hold more than 1.5 million volumes, 1 million audio books and 2 million e-books, making it the world’s largest electronic collection and the biggest library in the Arab world. • Dubai Opera is a 2000-seat, multi-format theatre. Due to open in 2016, Dubai Opera will accommodate opera, theatre, concerts, ballet, art exhibitions, orchestra, film, and sports events. • Three massive Florida-style theme parks being built on the border with Abu Dhabi will be open for the public in October 2016: Hollywood-themed Motiongate Dubai, Legoland Dubai and Bollywood Parks Dubai. The 50 or so cafes, restaurants and shops which will make up its 220,000 sq ft Riverland dining area at the entrance to the park had also been leased. The licensed dining area close to the park gates, which will not require a ticket for entry, will be based around a 1-kilometre stretch of manmade river. Part of the venue will be designed to look like a medieval French village, part will be designed to look like 1950s America, part like India in the 1930s and another part like France at the end of the 19th century. • 850km of bicycle tracks in central business district areas and newly developed localities are being laid to provide suitable transit alternatives for cycling enthusiasts.
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GIBRALTAR’S PLACE IN THE WORLD OF FINANCE * by Albert Isola MP, Minister for Financial Services, HM Government of Gibraltar Gibraltar continues to develop dynamically as an innovative EU onshore financial services jurisdiction. Its key components are the many firms that are either licensed in Gibraltar or that avail themselves of European Union passporting rights and settle all or part of their business on the Rock. The global financial services industry continues to evolve, creating both challenges and opportunities. The sector is a key element of private enterprise and contributes greatly to the economic success we enjoy in Gibraltar. We work tirelessly to ensure that we only attract operators of good quality and to provide them with a well-regulated environment, an excellent and zealously guarded reputation and the option of accessing markets at speed. Compliance with international standards is important to us. Gibraltar has signed the equivalent of 130 tax information exchange agreements through the different mechanisms that we currently have in place – namely the multilateral convention, the EU directive and bilateral tax information exchange agreements. We have also signed up to the United States’ Foreign Account Tax Compliance Act and ‘UK FATCA.’ In October 2014 the Hon Fabian Picardo, our Chief Minister, signed the Berlin Accord, which is the common
reporting standard of automatic and spontaneous information exchange with 55 countries as part of the first phase; we were one of the early adopters. Gibraltar is innovative. It needs to be so if it is to continue to enjoy its notable standard of success and prosperity. Innovation is a very important component of our makeup. In 2015 we entered an area of the global insurance market that we had not explored previously. We added a new product (insurance-linked securities or ILSs) to our already successful insurance sector portfolio. Lottoland Group’s €100 million lottery-winning risk collateralised reinsurance deal was Gibraltar’s first ILS transaction and we expect more to follow as we establish our proposition further on the world stage. The Government supports and values a close working relationship with the private sector for the purposes of raising the jurisdiction’s profile and seeking out new initiatives. Testament to this is a recent increase in resources for the Gibraltar Finance team in the Finance Centre Department. This allows them to be proactive in taking the ‘Gibraltar message’ to both our traditional markets and those where we perceive opportunities to create something new and exciting. We continue to explore other areas of interest including financial technology and to refresh our existing
stock of products, as can be seen with the creation of a working group to review our tax residency schemes. We have invested significantly in renewing and creating financial services legislation to meet the demand of local practitioners. This includes laws that relate to Private Trust Companies, Purpose Trusts, Anti-Forced-Heirship measures, amendments to the Perpetuity Period, Limited Liability Partnerships and (to come shortly) Private Foundations. This work continues as we strive to create excellence in all that we do and equip practitioners with the best possible toolkit. The establishment of the Gibraltar International Bank has been a source of great pride to us. It was created in a remarkably short space of time and is now performing banking services for personal and corporate customers in our local community. In late 2014 we welcomed the launch of the Gibraltar Stock Exchange – another important milestone in the development and maturity of our jurisdiction. There will be more to come as we work relentlessly and at a brisk pace to make positive changes and create further opportunities. We have already created an environment in which firms can truly call Gibraltar home and grow and develop with a sense of partnership and belonging.
GIBRALTAR’S PRIVATE TRUST COMPANY LEGISLATION - A FINE ADDITION TO THE JURISDICTION’S TRUST OFFERING * by Peter Thomson and Isabella Linares, Fiduciary Group, Gibraltar Last year, Gibraltar passed the Private Trust Company Act 2015, which will no doubt prove an especially attractive proposition for family offices. The new law is a valuable addition to the jurisdiction’s trust offering, providing greater regulatory protection which is sure to attract prospective clients who want to benefit from a higher level of control in the management of a trust, while safeguarding it against fiduciary risk. Previously, it was possible for any limited company to act as a trustee as long as it was not engaged in licensable activity. The new Act sets out rules within which the PTC is formally recognised and can operate. The Society of Trust and Estate Practitioners has told the Gibraltar Finance Centre that it is ‘delighted at the steps Gibraltar is taking’ in this respect.
The appointment of a Private Trust Company as a trustee of a trust, or a group of trusts under the same family, can lead to numerous benefits – especially, but not exclusively, for family offices. A Private Trust Company is, for example, easily integrated with other family entities such as an existing company or philanthropic organisation, with a view to: • consolidating several family trusts under one umbrella to manage assets and protect them more efficiently; • retaining more family control over a trust’s investment and distribution decisions; • ensuring ‘continuity’ for families by resolving any trustee successor issues that may arise over the lifetime of a trust; • providing better protection from fiduciary risk,
GIBRALTAR GIBRALTAR’S PLACE IN THE WORLD OF FINANCE
thereby easing concerns about liability for individual family members named as trustees; and • allowing for long-term structural and administrative flexibility, as a Private Trust Company can adapt to the changing circumstances and wishes of a family. The Gibraltar Finance Centre has assured everyone that the registration system will remain voluntary, so as to avoid unfairly disadvantaging those Private Trust Companies in respect of which the associated registration and renewal fees may be disproportionate to the size of the trust. This provision, the Finance Centre has asserted, “fills in a gap in Gibraltar’s offering as an international finance centre without prejudicing those who may have felt caught by a mandatory system of registration.”
We’ve grown in line with people’s confidence in us.
Iberis gibraltarica – Gibraltar Candytuft
Gibraltar, posting 10% GDP growth and consistent budget surpluses, is the onshore success story in Europe. Together with our partner firms across the various disciplines in the Gibraltar Finance Centre, we have as our foundation three main virtues; regulation, reputation and speed to market. For more information visit the Gibraltar Finance website:
Within the European Union Single Market
The benefits of registering a Private Trust Company will certainly prove attractive for many but there are, however, requirements to be met if an application is to be successful. For example, the company can only provide trustee services to the ‘designated individual’ and his nuclear family – this includes his spouse, or his civil partner, his children and other remoter issue. Also, crucially, the PTC must appoint a Gibraltar-registered administrator and hold at least one board meeting each calendar year at the registered office with the ‘registered administrator’ in attendance.
It is important to note that the registered administrator must: • hold a valid class VII or class VIII licence; • hold the ‘designated instrument’ that identifies the designated individual; and • submit a declaration of compliance to the registrar every year. In respect of these requirements, Fiduciary Trust Limited, part of the Fiduciary Group of companies, is able to act as the registered administrator for a Private Trust Company and can also provide accounting services and prepare financial statements. Cients
can also avail themselves of our associated law firm, Isolas 1892, for any relevant Gibraltarian legal services that they might need. At Fiduciary Group, our highly qualified team have been providing expert financial services and tailored solutions to an international clientele for over 30 years. Whatever your financial needs, Fiduciary Group are here to help.
You can contact us at firstname.lastname@example.org or visit our website at www.fiduciarygroup.com
THE ROCK OF FINANCE * by Emma Lejeune of Ramparts European Law Firm Gibraltar is a popular jurisdiction for high-net-worth individuals who wish to move to a new place, evolve ‘succession plans’ and/or structure their affairs in a reputable European financial centre. Gibraltar offers personal tax incentives to individuals who benefit from a net worth in excess of £2 million sterling and wish to relocate and take up residency in Gibraltar. In addition, Gibraltar levies a corporate tax rate of 10%. There is no capital gains tax, gift tax, wealth tax, inheritance tax or value-added tax (VAT) in Gibraltar. Furthermore, tax is not levied on passive income and income accrued and derived outside Gibraltar is not taxable in Gibraltar (as is further defined in the Income Tax Act). All of the above makes Gibraltar an attractive jurisdiction in which to structure the holding in an international business or otherwise, make use of the opportunities offered to create an asset-holding structure through which assets can be held, preserved and grown in an efficient manner. Gibraltar is also part of the European Union (although outside the EU’s customs union and therefore not part of the VAT regime). European laws such as directives and regulations are often transposed into Gibraltar law and Gibraltar is able to take full advantage of all the freedoms afforded by the European Union including ‘passporting’ rights in all the nations that belong to that governmental club. FAMILY CONSTITUTIONS Gibraltar is becoming increasingly trendy in the eyes of high-net-worth families who are looking for an attractive jurisdiction in which to locate their family offices. It offers families good structuring opportunities and is able to provide them with sufficient substance in order to create robust structures through which they can manage and develop their wealth. Wealthy families often run their affairs and those of their family businesses badly. They often overlook the importance of having a detailed constitution when setting their family offices up. GIBRALTAR THE ROCK OF FINANCE
Although at present Gibraltar does not have any legislation to govern family constitutions specifically, it is common for families to use them. The family constitution ensures that the family office carries out the family’s objectives in a coherent manner. Gibraltar has recently finalised new legislation to govern foundations, allowing such vehicles to be used for the holding of interests in either a family office or general asset-holding structures linked to that family office. A family office normally takes the form of a company through which the family employs qualified administrators who are responsible for creating consolidated reports of the family’s wealth (taking into account the jurisdictional spread of assets) and also for co-ordinating all other administrative tasks between the various asset-holding structures or international trading businesses (if any).
Gibraltar takes full advantage of all the freedoms afforded by the EU, including ‘passporting’ rights The family office is also able to accommodate communal investments and ensure that everything in its care observes the family constitution and conforms to the family’s values and objectives. When a family establishes such a constitution it must consider various crucial things, especially the opportunities that it should give its members to opt out of the arrangements. It should also, among other things, evolve rules for communal investment and the education and transition of wealth to succeeding generations.
The involvement of the family in this (albeit in an informal and peripheral manner) is vital to the success of such arrangements but it should happen through a family council with regular meetings which the family office arranges. The council should be able to revisit policies and make recommendations on matters pertaining to the family’s wealth. The council’s primary objective is to encourage communication between family members and ensure the growth and preservation of the wealth for future generations. WHAT GIBRALTAR HAS TO OFFER Gibraltar has a sophisticated infrastructure and many qualified individuals who are available for employment in such offices. This makes it a good platform for the setting-up of family offices. It is also able to offer opportunities for families to ‘structure’ their wealth and various assets – perhaps through Gibraltarian vehicles or as part of a multi-jurisdictional structure, all of which can be co-ordinated by the family offices set up in Gibraltar. As mentioned above, Gibraltar offers opportunities for people who wish to enjoy a Mediterranean lifestyle by relocating to a cosmopolitan jurisdiction with a solid infrastructure and English as its spoken language. Young families that move to the Rock are able to benefit from public or private schooling, both of which follow the curriculum set in the UK. The fact that Gibraltar is a peninsula with a border with Spain also allows individuals to travel there, and possibly have second homes in that country. Gibraltar has regular flights to London, Manchester and elsewhere in the United Kingdom and is only a one-hour drive from Malaga Airport, which offers a wide variety of international flights.
GIBRALTAR: VISION + STRATEGY + IMPLEMENTATION = RESULTS * by Paul Astengo, Senior Executive, Gibraltar Finance Gibraltar is a British Overseas Territory and a self-governing and self-financing parliamentary democracy within the European Union. Gibraltar is physically part of Europe; it is not an island and is located at the southernmost tip of Spain, allowing easy access to Spain, Portugal and beyond.
viduals must earn more than £120,000 per annum and have experience that will promote and sustain activity that is considered of economic value to Gibraltar and is not generally available there.
With a state-of-the art international airport, Gibraltar offers flights to and from a number of destinations in the United Kingdom every day. It offers a vibrant property market with an excellent choice of high-quality housing. Gibraltar provides diverse marina facilities capable of berthing large luxury yachts. It is a Mediterranean territory and as such enjoys excellent weather and lifestyle.
Under the Private Trust Company Act 2015, the private trust company’s sole purpose is to act as trustee to the trust (or group of trusts) belonging to the group; these trusts may be to help in family succession, or might be commercial or philanthropic in their goals. Typically, PTCs seek to use a private trust company to achieve some or all of the following:
EU membership provides passporting rights in banking, investment services, insurance, insurance mediation and reinsurance across all EU and European Economic Area (EEA) countries and access to a market of in excess of 500 million people. The economy of Gibraltar was forecast to grow to £1.8bn by 2015 and the Government has maintained a budget surplus throughout the global economic slowdown that has affected much of the developed world. GDP continues to grow in excess of 10% per annum.
• privacy; • control and influence; • reductions in costs; and • improved protection from fiduciary risk.
GDP continues to grow in excess of 10% per annum Gibraltar’s legal system is based on English common law. Its investment firms are well supported by professionals and the ‘big four’ audit firms, international banks, lawyers and fund administrators all operate there. HIGH-NET-WORTH TAX RESIDENCE SCHEME Gibraltar operates a low tax regime including a tax residency scheme for individuals with net assets in excess of £2 million (conditions apply), capping the maximum personal income tax at £29,880. Gibraltar has no value-added tax, no capital gains tax, no inheritance tax and no wealth taxes. Its currency is the Gibraltar pound, which is at par with the pound Sterling.
The Private Trust Company Act 2015 will be a great addition to Gibraltar’s trust offering – especially, but by no means exclusively, in the context of family offices. The Purpose Trusts Act 2015 is also important. Ordinarily, a trust contains identified or identifiable beneficiaries and the duties imposed upon trustees are owed to those beneficiaries. Charitable trusts established for one or more charitable purposes are a long-standing exception to this principle. With regard to non-charitable purposes, however, the law has been slow to recognise that trusts have a part to play. A number of finance centres have therefore changed the law to permit the creation and enforcement of trusts, whereby the trustees hold property on trust to carry out specific purposes which do not qualify as charitable. This type of trust is usually referred to simply as a purpose trust. There are a number of purposes for which a purpose trust can be useful, such as to fill the ‘charity gap.’ That is to say, to label purposes that cannot strictly be said to be charitable, but which equally do not require beneficiaries – for example, a request that a trust fund should be used for the promotion of peaceful relations between nations. To maintain control over family assets, as in times when there is an aim to benefit the family but also to ensure the continuance of a business. A purpose trust might make certain that the benefit of the business is retained without interference from the beneficiaries and the beneficiaries could still receive dividends from the business without having any right to interfere.
HEPSS The Government introduced HEPSS (High Executive Possessing Specialist Skills) to attract the right kind of executives to Gibraltar. This tax residency status is aimed at individuals with specialist skills who come to work and live on the Rock. These indi-
The Trust (Private International Law) Act 2015 was also passed last year. The trust industry worldwide is a large, mature and increasingly competitive one. In this marketplace, many jurisdictions have enacted so-called firewall legislation, designed to attract substantial investments and deposited trust funds
by providing a secure environment in which ‘local law’ trusts are free from attack by foreign laws and foreign courts. Typically, firewall legislation does two things. Firstly, it sets out rules that limit the circumstances under which any foreign law can affect a local law trust; and secondly, it prevents the enforcement of foreign judgments that undermine these principles. The Cayman Islands were the first major financial centre to enact such legislation in 1987. In response, other centres have reformed their laws and many have since extended the scope of their firewall legislation beyond that of the Cayman Islands. Jersey has amended its trust law several times in recent years and Guernsey and Cyprus have also amended theirs.
Gibraltar has more than 80 exchangeof-information agreements In the Act, I believe we have struck the right balance between, on the one hand, too little protection, such that the legislation is unlikely to prove attractive in the global marketplace and unlikely to attract meaningful investment, and on the other hand so much protection that we would run the risk of appearing to be a haven for shielding assets. Gibraltar’s position is, at the same time, unique. We are bound by EU regulations in the field of private international law, and in particular we are bound to recognise and enforce judgments from fellow EU member states, according to Regulation EC442001 and EC4 2009. SPV PCC – INSURANCE-LINKED SECURITIES Gibraltar has established a new category of protected cell company specifically tailored for the insurance-linked securities sector. The new category of PCC, to be known as an SPV PCC, will be regulated under Gibraltar’s Insurance Companies (Special Purpose Vehicles) Regulations 2009. SPV PCCs will only be permitted to establish cells that are 100% collateralised and as a result the solvency capital requirement for the core capital of the SPV PCC will be £500. This is yet another example of how we can innovate and work with the private sector and the regulator to drum up new business for our jurisdiction. The launch of SPV PCCs is the next step in our ambition to become the premier ILS jurisdiction in the European Union.
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FATCA HM Government of Gibraltar is pleased to announce that regulations were published on Thursday 12th November 2015, bringing into effect the inter-governmental agreement (IGA) that it signed with the United Kingdom in November 2013, colloquially known as UK FATCA. The IGA is a reciprocal one and is intended to improve international tax compliance as regards the relationships between residents of both countries and the respective income tax authorities of the United Kingdom and Gibraltar. The regulations outline the information that financial institutions are to gather, along with a timetable for effective automatic exchange of information in September 2016 and thereafter. These regulations follow those published earlier this year in respect of the IGA with the United States; effective automatic exchange of information under this latter agreement took place at the end of September 2015. TRANSPARENCY The following mechanisms for the exchange of information to the Organisation for Economic Co-operation and Development’s standard apply in Gibraltar: • Bilateral tax information exchange agreements (TIEAs) with 27 countries, including the USA. • Directive 2011/16/EU on administrative co operation in the field of taxation, which was transposed in Gibraltar’s Income Tax Act 2010 with effect from 1 January 2013 and which is effective between Gibraltar and EU member-states.
• The OECD and Council of Europe Convention on Mutual Administrative Assistance in Tax Matters, which was extended to Gibraltar with effect from 1 March 2014. This provides for tax information exchange between Gibraltar and all countries and territories that have ratified the it. Consequently, and pursuant to the various agreements and the Convention, Gibraltar has exchange-of-information agreements to the OECD’s standard with more than 80 countries and territories around the world, a small number of which have still to be ratified.
Moneyval will soon subject Gibraltar to AML evaluation processes MONEYVAL HM Government of Gibraltar is delighted to announce that Moneyval, the European Financial Action Task Force-style regional body, by which it has wanted to be evaluated for more than five years, has now accepted its application and will soon subject it to a round of mutual evaluation processes and procedures. The Committee of Ministers of the Council of Europe established Moneyval in Septem-
GIBRALTAR GIBRALTAR: VISION + STRATEGY + IMPLEMENTATION = RESULTS
ber 1997 to conduct self-assessments and ‘mutual assessments’ of the anti-money laundering measures in place in Council of Europe member-states and territories that are not members of the FATF. Moneyval encourages jurisdictions to improve their AML measures in keeping with the FATF’s recommendations and to improve international co-operation. So far, Gibraltar has not been a member of the Financial Action Task Force but has instead been part of a quasi-FATF regional body that its Government has regarded as unsatisfactory. Article 2 of the MONEYVAL Statute required a formal application by the United Kingdom in its capacity as a Council of Europe member-state with respect to a territory for whose international relations it was responsible. AN MOU WITH ISRAEL The Gibraltar Financial Services Commission signed a memorandum of understanding with the Israel Securities Authority in June 2015. The MoU between the two organisations underlines a shared commitment by both organisations for mutual assistance and sharing of information. The GFSC has already signed MoUs with other jurisdictions, and this new MoU with the ISA adds to that network. The GFSC has also been pleased to sign MoUs with both the Securities and Futures Commission of Hong Kong and the Hong Kong Monetary Authority regarding consultation, co-operation and the exchange of information related to the supervision of entities to which the EU’s Alternative investment Fund Managers Directive applies.
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GUERNSEY LOOKING STRONG * by Dominic Wheatley, Chief Executive, Guernsey Finance Dominic Wheatley, Chief Executive of Guernsey Finance, believes Guernsey’s financial services industry is in a good place to grow and evolve.
approved by the European Commission, Parliament and Council in 2016, will reinforce Guernsey’s position as a distributor of funds into Europe.
At our industry update event on 1st December I was very pleased to announce our plans to open a representative office in Hong Kong during the first quarter of 2016. This followed a particularly active 2015 for Guernsey’s financial services sector.
Guernsey has had its own opt-in equivalent AIFMD regime fully operational since 1 January 2014 but if the various organs of the EU take up ESMA’s recommendation, they will allow Guernsey to operate on a level playing field with its European counterparts.
The office, to be located at Three Pacific Place in Admiralty, is Guernsey Finance’s second overseas outpost in addition to an office in Shanghai which opened in 2008. It is ideally situated at the heart of Hong Kong’s financial district and will strengthen our developing relationship with Hong Kong and its business community.
Our representative in China, Wendy Weng, who is based in Shanghai, will use the office as a base from which to carry out further promotional activities throughout the wider South East Asia market. The Guernsey Financial Services Commission (GFSC) will also use it to provide regulatory advice to anyone in the region who might be considering Guernsey-specific ventures. The Hong Kong initiative follows the appointment in the autumn of Zoë Cousens as our first Middle East representative. Zoë, who is based in Dubai, is now helping to promote Guernsey’s financial services industry in the Middle East as a contact ‘on the ground’ for Guernsey. She is now a vital conduit for Middle Eastern firms and clients interested in Guernsey and will help to host and arrange meetings, seminars or events for Guernsey businesses that visit the region. There are positive stories to tell about 2015 that involve all parts of our financial services industry.
More positive news for the funds sector came in the last quarter of 2015 with confirmation that two funds were re-locating to Guernsey. VinaCapital Vietnam Opportunity Fund moved its domicile to Guernsey from the Cayman Islands, while SafeCharge International Group Limited relocated its fund domicile to Guernsey from the British Virgin Islands. Both funds explained their decisions by saying that Guernsey’s well-established infrastructure for the administration of funds listed on the London Stock Exchange was a key factor, as was the fact that the companies could enjoy freer access to potential investors by being domiciled in Guernsey.
GUERNSEY GUERNSEY LOOKING STRONG
A FIT FOR FINTECH Guernsey is also jockeying for position to take advantage of digital opportunities. In July PwC and Guernsey’s Commerce and Employment Department published a ‘strategy document’ which, they hoped, would help to shape the future of Guernsey’s fintech sector. The paper analysed the fintech sector both on the island and abroad, identifying the main attributes and future direction of the market. Guernsey is so well-connected with the rest of the world, sitting at the centre of a hub of subsea fibre cables linking the UK with the Americas, Europe, the Middle East and Africa, that it is bound to benefit further from the digital age. Guernsey already possesses the highly secure data connectivity, resilience and cyber-security that the global finance sector and e-gaming industries require. INSURANCE
Guernsey has a well-established infrastructure for the administration of funds listed on the London Stock Exchange
ESMA’S RECOMMENDATION One of the best pieces of news came in July when the European Securities and Markets Authority (ESMA) announced that it wanted the European Union to grant Guernsey a ‘third country’ passport under the Alternative Investment Fund Managers Directive (AIFMD). Guernsey is one of only three jurisdictions to receive such recommendation, which, if
This was then followed by ABN AMRO’s announcement at the end of September that it was to move its offshore private banking business into its Guernsey operation.
NEW BANK Guernsey’s banking sector also welcomed a new arrival. FNB Channel Islands (FNBCI) officially opened for business in July and is the Guernsey branch of FirstRand Bank Limited – South Africa’s largest bank by market capitalisation.
During the year 2015 the island’s insurance-linked securities business continued to grow. It attracted new reinsurance capital, once again demonstrating the twin strengths of its financial security as an economy and its robust and effective regulation. OUR CONTINUING SUCCESS What is clear from this small snapshot of news from the recent past is that Guernsey’s finance industry continues to thrive and develop. This is most definitely an exciting and challenging time. Modern finance requires a combination of effective regulation, a robust anti-money-laundering regime, global standards of transparency, and an industry that provides customers with excellent advice and performs services of high quality, within a stable political, financial and legal environment. Our continuing success is testimony to our ability to deliver consistently on all of these.
THE EVOLUTION OF PRIVATE WEALTH STRUCTURING – WHAT GUERNSEY HAS TO OFFER * By Andrew Walters and Michael Betley of Trust Corporation International Despite wider macroeconomic difficulties, Guernsey continues to attract new and ever-more complex private wealth and institutional clients. The obvious attractions are well known; the island has a stable system of government, an elected parliament, an enviable constitutional position, a neutral tax regime and a mature and sophisticated legal system. However, it is the flexibility and continuing refinement of the island’s laws and regulation, alongside its range of first-class professional service firms, that sets it apart from its peers in the eyes of professional investors and their advisers. Investment in the island’s wealth management infrastructure is the bedrock of its continuing success. This investment includes an obvious rolling programme of legislative updates, but also rests on the less visible interconnecting relationships between government, the regulator and the financial services industry. One theme (which is not unique to Guernsey) is that the number of private wealth clients being serviced is declining while the value of assets being managed is increasing substantially. Guernsey’s appeal to the market is well suited to the more sophisticated multi-jurisdictional sector of the private wealth market. This naturally leads to the establishment of specialist hubs such as family offices and bespoke investment clubs. Wealth has never been more global or mobile, which is also true of ultra–wealthy individuals. Private banks used to provide these families with full wealth management services, but the families have changed their attitudes because of costs, performance and conflicts. Similarly, the risk appetites of private banks have changed and they are, in many cases, no longer ‘one-stop shops’ and are becoming more geographically selective. As a consequence of these dynamic changes, many families with substantial assets are developing home-grown ways of doing things. Guernsey is perfectly suited to meet the needs of this segment of the private wealth market as a result of its ability to evolve and be flexible. There is no universal definition of the phrase ‘family office,’ but in essence it is a dedicated team of employees whose sole employer or ‘client’ is a single family. Family offices therefore come in all shapes and sizes and will manage all or part of the personal needs of the family in question, ranging from treasury and accounting functions to the management of homes, aeroplanes, yachts, collections and wider investment assets and portfolios. This dedicated team will often outsource functions that are either beyond their skillset or have to be located or performed in a particular jurisdiction. Subject to the needs of the family, the private office function will be based either in a location convenient to the principal or in a ‘tax-benign’ environment, especially if the activities being undertaken might be deemed taxable.
Increasingly, high-net-worth families’ globalised interests create a need for an accessible central hub to help co-ordinate, structure and manage their assets. Guernsey’s 40-minute flight time to London, coupled with its convenient time zone and English-speaking community, makes it a perfect location to have a family office. More often than not, however, the family office will be located elsewhere with specific functions relating to the ownership or management of assets being undertaken in jurisdictions like Guernsey and, very often, one of Guernsey’s 155 regulated trust companies will be chosen to undertake these functions.
A new law has made the administration of companies significantly more flexible
a client is dissatisfied with its service providers, the management of a PTC can be moved elsewhere without the need for the retirement of existing trustees and the appointment of new ones in respect of each trust it manages. Ownership of such vehicles can, where necessary, be detached from the family through a purpose trust or foundation while retaining some degree of family involvement through representative directors. In 2008, the concept of the purpose trust was introduced into Guernsey law. It proved popular among family and institutional investors alike, adding to the many benefits the island offered. This permits the creation of a trust to fulfil a specific purpose other than simply benefiting the beneficiaries. In fact, a purpose trust does not require any beneficiaries. Examples of possible purposes include the furtherance of a particular cause or the holding of shares in a particular vehicle. It is unsurprising, therefore, that purpose trusts have been used for the specific purpose of owning shares in PTCs, thereby effecting a separation of ownership between this-or-that PTC and the family it is formed to benefit. The introduction in 2013 of the Foundations (Guernsey) Law added more to the ownership and structural options of a PTC.
Guernsey also offers a flexible regime within which to establish and operate private trust companies (PTCs). A Guernsey PTC can be established for the exclusive use of a single family and can act as trustee to existing and newly-formed trusts, including those established under the laws of other jurisdictions. Assuming it is not remunerated for the provision of trustee services, a PTC is unlikely to be viewed by the Guernsey regulator as conducting a regulated fiduciary activity and should not require licensing. A family might like the idea of creating its own corporate trustee (a PTC) because it can influence the management of the PTC and the administration of the underlying asset base. Typically, institutional trustees will not act as trustees of assets other than tradable securities. In other words, a family will have to make alternative arrangements if the asset base includes operating businesses or other esoteric or highly risky assets.
In the light of Guernsey’s pioneering introduction of cellular structures, the protected cell company (PCC) has been used in the most innovative ways in both commercial and family wealth planning contexts. The PCC allows for the creation of any number of cells inside a single corporate entity, each cell being statutorily ring-fenced from the core and other cells. Guernsey PCCs have, among other things, been used for the purpose of allocating assets, by means of separate cells, among different family strands and have thereby avoided liabilities attributable to one contaminating the assets of another. Guernsey’s incorporated cell company structure provides a further layer of flexibility in that individual cells can be detached from the cellular structure to become independent entities. This provides a convenient means of disposing of family assets without the need to ‘de-envelop’ the asset itself from its existing corporate home.
A PTC board can determine its investment policy and the assets it is prepared to own and manage; this is why such arrangements continue to be so attractive. In places (including many civil law countries) where practitioners do not easily understand the concept of a trust, the use of a PTC which may be populated, in whole or in part, by family representatives allays any fear the family may have of losing control to a foreign, often faceless, institution. PTCs have become popular with wealth creators, who are trying to establish increasingly portable structures for their assets. To the extent that
Since the introduction of the Companies (Guernsey) Law in 2008, the States of Guernsey have continued to consult people in the financial industry to identify ways of refining and enhancing this regime. After a lengthy and detailed industry consultation, the States of Guernsey adopted the Companies (Guernsey) Law, 2008 (Amendment) Ordinance in July 2015. This came into effect on 3 September 2015 and has made the administration of companies significantly more flexible. It has improved a variety of older provisions in relation to the disclosure of directors’ interests, the issue of shares in multi-share-class companies, share-
IFC WORLD 2016
holder correspondence notice requirements, director report requirements and the redemption of partially paid shares, among other things. Furthermore, Guernsey companies can now take names in non-Roman scripts, something that is expected to appeal to clients in the Middle East and Asia. Similarly, government and industry representatives are working on reforms to the island’s limited partnership law with a view to maintaining its international position as a leading provider of private equity solutions. Precise details of the proposals have yet to be released but an early policy letter indicated that the consultative process would include a consideration of protected cell partnerships, amalgamations, a migration mechanism and more. Guernsey’s corporate and commercial insolvency regime has benefited from various improvements
over recent years, including the introduction of an administration regime and the ‘solvency test protections’ of 2008. In 2014 the States of Guernsey launched a detailed and wide-ranging consultative exercise about further improvements to the island’s commercial insolvency regime and the allocation of ‘business failure risk’. The consultative paper sought opinions from the financial industry on a range of options, including the introduction of a combined personal and corporate insolvency regime, an ‘official receiver,’ variations to the existing preferences regime and the introduction of fixed and floating charges. The consultative paper floated the idea that reforms should build upon Guernsey’s ‘creditor-friendly’ underpinnings in order to make Guernsey vehicles more appealing to lenders and other market counterparties. The first stage of this consultative process
is now complete and the States of Guernsey are analysing the responses. Guernsey’s reputation for managing private equity structures has spawned the growth of unregulated private funds or ‘investor clubs’ established by wealthy entrepreneurs and corporate investors unconstrained by the need to raise money publicly. Growth in this area has also led to new ‘business-to-business’ opportunities, particularly in lending and venture capital funding. It is by virtue of these never-ending efforts to innovate and improve that Guernsey retains its appeal in the institutional and family office sectors. By consulting interested parties about which innovations and improvements it should back, the States of Guernsey has made both its business structures and regulatory arrangements robust, user-friendly and ‘fit for purpose.’
GUERNSEY – A CENTRE OF EXCELLENCE FOR ESTABLISHING AND ADMINISTERING FUNDS * By Matt Sanders, Group Partner at AO Hall £204,000,000,000 is the sort of number for which Dr Evil might well be proud to demand as a ransom in an Austin Powers movie. Certainly, by anyone’s standards, it is an enormous sum of money. It may well come as some surprise that £204 billion is, in fact, the gross asset value of open and closedended funds established in Guernsey, according to the latest statistics (published for Q3 of 2015). Certainly not bad for an island of 65,000 people!
It should be added that this is despite the introduction of the Alternative Investment Fund Managers Directive in the European Union. The types of fund in which Guernsey specialises, including private equity funds, which have dominated Guernsey’s closed-ended fund market for a number of years, are often ideally suited for continuing to use the national private placement regimes in the jurisdictions that matter in Europe, and without the need for full compliance with the directive.
One of the phrases regularly used to describe Guernsey as an island is that it punches well above its weight – and indeed, when it comes to funds, that description is a massive understatement. This naturally begs the question; why is Guernsey such a centre of excellence when it comes to establishing, managing and administering investment funds? In my view, there are three key reasons.
Furthermore, the European Securities and Markets Authority (ESMA) has confirmed that Guernsey stands at the head of the queue of jurisdictions allowed to access the third-country passport regime when this becomes available. When extended, the passporting regime will allow Guernsey funds and locally-based managers to market their funds across the EU. While the decision as to the activation of the third-country passport regime remains with the Council of the EU, it is hoped that further news will be forthcoming in the early part of 2016.
The use of Guernsey fund vehicles to access European capital, or to invest into European assets, is a common phenomenon and remains viable, notwithstanding the AIFMD. A recent KPMG report highlighted that almost 58% of capital invested in Guernsey funds comes from European investors, split between 28% from the UK and 30% from Continental Europe. Further, it highlighted that approximately 68% of assets of Guernsey funds are located in Europe, with 22% allocated to the UK. The clear implication from the report is that Guernsey is an ideal jurisdiction from which to attract European or global capital, for investment into assets located in or outside Europe.
Perhaps not surprisingly given the figures above, Guernsey has a large number of fund administration providers who are ‘best-in-class’, and who are very experienced at establishing and successfully administering funds. These range from providers with a global footprint to those who specialise in Guernsey. In terms of accounting and audit, funds have the pick of all of the ‘Big Four’ accounting firms who have offices in Guernsey, in addition to a number of the well-known UK ‘challenger’ firms. The legal market is equally competitive and diverse, and the banking and custody side continues to attract and retain major players.
GUERNSEY A CENTRE OF EXCELLENCE FOR ESTABLISHING AND ADMINISTERING FUNDS
The result is a competitive marketplace which ensures that Guernsey is not only attractive to those who wish to establish Guernsey funds, but also to those who want to use a Guernsey service provider for funds established in other jurisdictions. Although statistics are not kept for closed-ended schemes, the latest figures record that Guernsey service providers have attracted the custom of 225 non-Guernsey open-ended schemes, for which a Guernsey service provider provides management, administration or custody services. There are many factors that make a jurisdiction a good place in which funds can do business. To name but a few: • Guernsey is politically stable; • Guernsey is tax neutral, with investment funds generally being exempt from Guernsey tax; • Guernsey is responsible and co-operative with foreign regulators and tax authorities, both in Europe and elsewhere; • Guernsey’s finance industry is prudently regulated by the Guernsey Financial Services Commission, which is respected as being an accessible and flexible regulator, whilst at the same time ensuring that Guernsey’s reputation as a well-regulated jurisdiction is maintained; • Guernsey has a robust AML framework; and • Guernsey has the natural advantages of being just a 45-minute flight from London and in the same time zone, meaning that the connections with and access to London’s vast finance industry are extremely strong. All in all, even Dr Evil might be impressed. He isn’t welcome, though!
GUERNSEY’S FIDUCIARY SECTOR – ALWAYS LOOKING TO THE FUTURE * by Kerrie Le Tissier, Collas Crill Guernsey As one of the first places in the world to regulate the provision of trust services, and indeed to recognise the crucial significance of the fiduciary sector plays in the wider finance world, Guernsey has always been well ahead in the game of wealth management. There are approximately 200 fiduciary licensees in Guernsey, ranging from small and very private family offices that administer limited numbers of family trusts, foundations and companies for one or two families to very large trust and corporate service providers with very many international clients. Many of the latter group are owned by banks or, increasingly, private equity houses that recognise the investment opportunities inherent in such businesses. The trust business of Guernsey is therefore rich in variety.
Trusts are not registered, so there is no public record of their settlors, beneficiaries, or even existence The sector’s experience and dynamism has stood it in good stead since Guernsey’s finance industry began more than 50 years ago. Back then, people set up private wealth structures for significantly different reasons. Tax-planning is no longer the most important factor. More and more nations are criticising lawful tax avoidance and/or tax mitigation and anyone who is involved in setting up structures to take advantage of favourable tax loopholes. This is good for Guernsey because its fiduciary sector has moved with the times and evolved to offer much more than tax-neutral structuring options. It is now very rare for our clients’ reasons for considering Guernsey to have anything to do with tax. ESTATE AND SUCCESSION PLANNING Our clients’ motivations for setting up a private wealth structure in Guernsey usually have sensible and robust estate and succession planning at their heart. Typically, the family’s wealth-creator is looking for certainty and peace of mind and wants to plan ‘succession’ to family wealth, assets and businesses before a ‘succession event’ (such as his own death, or a marriage or even a divorce) occurs. A simple, but common and effective, example of this is the practice of putting assets such as shares, real property or family heirlooms into a Guernsey trust (whose assets are legally owned by the trus-
tee) so that they fall outside the settlor’s personal estate, the better to exclude them from the terms of his will or the forced heirship rules in his place of domicile. Guernsey has tough ‘firewall’ legislation which, amongst other things, protects Guernsey trusts, and any disposition of property to them, from claims made under foreign forced heirship rights (and other claims made under foreign law by reason of a personal relationship with the settlor or a beneficiary). This was upheld triumphantly in a recent Guernsey case. Another strategy is to hold family businesses in a Guernsey foundation (which has no owner and may or may not have beneficiaries, as well as purposes). The Guernsey foundations legislation also contains ‘firewall’ provisions that protect foundations’ assets from foreign claims. This usually reassures the founder (i.e. the person who sets up the foundation in question) that the business will continue beyond his death without anyone in the family being able to claim ownership of it or its assets. Guernsey trust structures are popular with clients from all over the world. Middle Eastern clients use them to hand wealth onto the next generation in compliance with Sharia’h principles or, as is often the case in the experience of our Middle Eastern practice, to sidestep these principles by keeping a proportion of family assets outside the Islamic world. Sometimes they do this to distribute wealth equally between male and female family members. Clients from the Far East who have generated wealth outside that region and do not want to bring it home can use a Guernsey trust to preserve it and hand it on to the next generation. Guernsey trusts are also useful to people from outside the United Kingdom who are thinking of moving there at some point in the future. These people can set them up as excluded property trusts that hold non-UK assets. This prevents those assets from becoming subject to UK inheritance tax should their original owners move to the UK. It also protects those assets from the forced heirship rights in the settlors’ countries of domicile and allows them to segregate their assets in the UK from their assets elsewhere so that ‘succession’ to them can occur in different ways. We expect to see an increasing number of such structures being set up towards the end of 2016 in advance of changes to the UK tax regime. These changes are going to affect non-domiciled residents from April 2017 onwards and many are reviewing their structures as a consequence. CONFIDENTIALITY Discretion is another good reason for setting up a structure in Guernsey. Clients often have good
reason to worry about their privacy because, for example, they are high profile individuals (such as well-known entrepreneurs, politicians or celebrities) or because the size of their wealth would put their security at risk if details of the identity, location and nature of their structure were made available to the public. Trusts are not registered in Guernsey, so there is no public record of their settlors or beneficiaries (or even their existence). Although companies and foundations are registered, and a limited amount of information in respect of each is available publicly, the identities of their shareholders/beneficial owners (in the case of companies) and beneficiaries or purposes (in the case of foundations) remains confidential. Regulated service-providers in Guernsey that manage and administer the structures record the identities of beneficiaries (of trusts and foundations) and shareholders and beneficial owners (of companies). They also hold information that verifies their identities and sources of wealth. They have a legal duty to disclose such information to law enforcement agencies and tax and regulatory authorities, both locally and internationally (for example, in line with Guernsey’s own regulatory laws, FATCA, the Common Reporting Standard or the 58 Tax Information Exchange Agreements to which Guernsey is party) but, all these things aside, they have a duty to keep the information confidential.
‘Firewall’ legislation protects trusts, and any disposition of property to them, from claims under foreign forced heirship rights A breach of that duty has serious regulatory consequences and also gives service providers’ clients the right to sue them. In a small island, such events have serious reputational ramifications for service providers. As a consequence, confidential information is in very safe hands with the Guernsey service providers who manage and administer structures. FLEXIBLE AND ROBUST LEGISLATION Another very good reason wealthy families and individuals go to Guernsey to set up their private wealth structures is that Guernsey has modern, robust and flexible laws that govern trusts,
IFC WORLD 2016
foundations and corporations. These laws allow wealth managers to tailor private wealth structures to their clients’ requirements, no matter how unique they might be. Even a fairly simple trust structure can be put to a number of uses. A discretionary trust can give its trustee the widest discretion over investments and distributions, with perhaps the settlor giving the trustee a non-binding letter of wishes offering guidance. In a fixed trust, by contrast, the proportions in which distributions are to be made to beneficiaries are specified in the trust instrument and investments are dictated by the settlor, with investment powers being reserved to him. In Guernsey, a solution can usually be found even for the most complex and bespoke requirements. For example, a family that has generated significant wealth from its business might want to set up its own private trust company (PTC) or private trust foundation (PTF) to act as trustee of several trusts, with one or more family members sitting on the board or council in order to retain a measure of control. (PTFs are gaining in popularity at the moment, as there are no shares for which an owner has to be found.) It could set up a trust for one of its members, or groups of them, adding a separate charitable trust or foundation to pursue its chosen causes. Below each trust or foundation could sit various assets (which could be held in a holding company or holding companies) such as the family’s principal residence, cars, artwork and shares in its business, the income from which would flow up to the trust or foundation and then onwards to the family or charity in accordance with the terms of
the trust or foundation. As long as this is carefully planned according to sound legal and tax advice, the possibilities for such a structure are vast.
The sector has moved with the times and evolved to offer much more than tax-neutral structuring options INNOVATION Private wealth structuring is becoming more and more sophisticated with structures such as protected cell companies (PCCs) (which were pioneered in Guernsey), limited partnerships and unit trusts being used and many structures looking more like investment fund structures than traditional private wealth structures. Terms such as ‘private family funds’ and ‘investment clubs’ (where the participants may not necessarily be family members but rather friends and associates) are frequently used for these structures which draw on the expertise and flexibility of the industry.
GUERNSEY GUERNSEY’S FIDUCIARY SECTOR – ALWAYS LOOKING TO THE FUTURE
Our private funds practice (which comprises members of our fiduciary and corporate teams because of the cross-over in what have traditionally been more distinct areas of practice) have seen a rise in such structures in recent years. LOCATION AND ADAPTATION Other key reasons for setting up a private wealth structure in Guernsey include its long history of political stability and good governance and its independence in legislative and fiscal matters (it is not part of the United Kingdom or the European Union). It speaks English, shares the same time zone as London and it is easy to travel to London and other parts of the UK and continental Europe from the island. Indeed, Guernsey service providers are used to the Middle East and further afield to meet clients or prospective clients. The island’s fiduciary sector has always been innovative and forward-thinking and continues to thrive. By adapting to change and continuously evolving and diversifying, it is well-placed to meet the changing needs of the world’s wealthy individuals and families.
* Kerrie Le Tissier can be reached on +44 1481 734818 or at firstname.lastname@example.org
• Stable economy – over 30 years of economic growth
ISLE OF MAN. WHERE YOU CAN
• Effective relationship between public and private sectors • Competitive tax regime
• World-class regulatory environment
• Advanced telecoms and power infrastructure
IN INTERNATIONAL BUSINESS CENTRES
• World-class professional services • Strong, direct links to the City of London • Excellent quality of life
Department of Economic Development St George’s Court, Upper Church Street Douglas, Isle of Man IM1 1EX, British Isles Tel: + 44 (0)1624 686400 (General Enquiries)
ISLE OF MAN
ISLE OF MAN GOVERNMENT FOREWORD * by Laurence Skelly MHK, Minister for the Department of Economic Development May I welcome you to the Isle of Man supplement in this edition of IFC World, which aims to showcase the Isle of Man as a leading International Business Centre with an outstanding reputation for professionalism and service.
The Isle of Man’s Government is working hard to help and support business to allow it to thrive. Among the most important aspects of our support are the strong relationships that exist between the Government and the financial industry.
We have enjoyed more than 30 years of sustained economic growth, boosted by the increasingly diverse nature of our island’s economy. We are no ‘one trick pony’; instead, we host a range of successful business sectors in which we are among the best in the world.
Ministers and senior Government officials are easily accessible and receptive to innovative ideas. As a consequence, Government help is speedily available in the right circumstances.
Companies based in the Isle of Man are succeeding in the global marketplace because they operate in an entrepreneurial and business-friendly environment.
Government help is speedily available in the right circumstances These companies serve blue-chip clients all over the world and do not restrict their activities to financial and professional services – they also perform maritime and business aviation services, conduct e-business and manufacture goods for the aerospace industry. As well as a successful and diversified economy, we offer a proactive and collaborative regulatory regime and a simple system of taxation.
Entrepreneurs and new businesses are being attracted here not simply because of our business environment but also because of the excellent quality of life for residents, characterised by very low crime rates, short commuting times, high-quality public services and a strong sense of community. 2016 promises to be an exciting year for the Isle of Man. Our objective is to encourage entrepreneurship, innovation and enterprise through a range of complementary initiatives aimed at creating the right ecosystem for businesses. It is vital for any jurisdiction that wants to attract new businesses and to help existing businesses grow to provide them with access to capital, and the Isle of Man is embarking on some exciting new initiatives in this regard. Its new £50 million Enterprise Development Scheme is a loan and equity investment scheme that is destined to help new and successful businesses to develop and to create many jobs on the island. An alternative banking regime will come into being in the spring and ought to encourage new banks – in particular new private banks and foreign banks that may wish to establish branches or enter the
market through representative offices – to set up operations in the Isle of Man. It will also extend alternative banking facilities to businesses in a range of sectors. The intent is to open up more flexible banking opportunities for corporations, wealthy individuals and entrepreneurial businesses. A new crowdfunding regime will also be launched in the spring. This will enable businesses to raise finance while ensuring that appropriate regulation to protect investors is in place. The Government is introducing a Manx Enterprise Investment Scheme to encourage resident entrepreneurs to invest in businesses that will then create local jobs. It will offer income tax relief to investors in small-to-medium-sized enterprises resident in the Isle of Man. Business infrastructure is always important and the Isle of Man Government is planning key developments such as a technology park, more regeneration in the centre of Douglas, the capital, and a ‘masterplan’ for the area around the Isle of Man Airport to help satisfy this need. We are also working with businesses in a number of sectors to encourage the necessary skilled workers to move to the Isle of Man to help our economic grow. We are trying to produce home-grown talent with various initiatives as well. By facilitating investment in our future and responding dynamically to the needs of business, we are certain that we are bolstering our position as a technology/science park and an International Business Centre of choice.
THE FINAL PIECE IN THE PRIVATE CLIENT JIGSAW * by Lesley Johnston, Abacus The Isle of Man continues to be recognised as an international finance centre of excellence and has recently won such awards as ‘Best International Finance Centre’ at the Professional Advisor International Fund. It has also won product awards, fending off strong competitors such as Jersey, Guernsey and Luxembourg. Through the deliberate and successful diversification of its economy over the years, the island is now home to a number of high-performance sectors, one of its biggest and most successful being financial services. ISLE OF MAN GOVERNMENT FOREWORD
This can be attributed to its proactive government, its meticulous regulatory framework and its innate knowledge that consulting interested parties at all times and forming positive relationships with professional service providers (such as Abacus) makes for a successful business environment in which all can flourish and where all of the pieces to the private client jigsaw are available…well almost!
however, let us say that our private client is a nonUK ultra-high-net-worth individual with a family business involved in property development in the UK, who owns a private jet and is now thinking of purchasing a yacht.
So what is the private client jigsaw and what does it look like? It is important to remember that there is no ‘typical’ private client; each has his or her own bespoke needs and requirements. For our purposes,
A HOME FROM HOME
In this case, what does the Isle of Man have to offer? And where does Abacus fit in?
The Isle of Man is a perfect jurisdiction for the establishment and operation of property-holding structures.
With the right advice and structuring, it can help investors acquire all sorts of properties using many types of vehicle efficiently and cost-effectively. The Isle of Man has a number of advantages for corporate structures, including its favourable tax regime and its quick and a straightforward incorporation process. Its company law is derived from English law and it offers time-efficient local registration for value-added tax (VAT) which is equivalent to a UK VAT registration. Likewise, the island is a good jurisdiction in which to establish a trust and can offer investors ways of managing many and varied assets in many jurisdictions. It can help them cope with regulatory and tax-related problems. In short, it can help families to plan for both their wealth and their businesses. Fiduciaries and/or trust service providers hold positions of trust and must perform to the highest ethical standards. The Isle of Man is home to a comprehensive range of highly professional corporate and fiduciary service providers, which makes the independence of a service provider (like Abacus) all the more important as it is a pre-requisite for flexibility, quick decision-making and the freedom to choose from a network of professionals. A HIGH FLYER Over the years, the Isle of Man has become a renowned aviation jurisdiction. Leading aviation lawyers from around the globe have voted the Isle of Man Aircraft Register ‘best in the world’ because of its well-known high customer service ethos and its insistence on safety and good service. But why choose the Isle of Man to register your aircraft? Aside from having the largest dedicated private and corporate aircraft register in Europe, it offers other benefits that include: • a neutral nationality registration prefix; • a secure mortgage register; • high regulatory standards; • a competitive scheme of charges; • no insurance premium tax; • a professional infrastructure; and • a place in the European time zone. Furthermore, an Isle of Man company offers noteworthy advantages when set up as an ownership structure for the purchase of an aircraft. It can manage risks and maintain confidentiality. For people who want to use their aircraft predominantly for business, the use of an Isle of Man company can also allow them import their aircraft into the EU fully and it also allows for full and free circulation. The Isle of Man is the only international centre that allows people to register for EU VAT/IVA, and also has a zero direct tax regime for Isle of Man businesses. A SMOOTH VOYAGE Then there is the island’s maritime industry – home to one of the fastest growing ship registers in Europe, with a significant number of yachts currently waving the Isle of Man Ensign.
The Isle of Man register for yachts remains popular because of its high-quality and responsive customer service ethic and its low cost scale of charges. It is also favourably placed on the much -envied ‘white list’ of the Paris Port State Control Memorandum of Understanding, which reduces a vessel’s potential for being targeted for inspection by Port State and Customs officials, thus reducing the increasing threats of yacht seizure by foreign authorities. When anyone purchases a highly valuable asset such as a yacht, it is essential for him to consider whether there may be wider implications for financial liability, either at outset or perhaps in the future. This will vary according to the intended use of the yacht. Whether for pleasure or commercial use, a yacht is a significant investment made up of time, effort and money, so in an age of endless litigation, experts recommend that the ownership of such a valuable asset that moves from country to country, exposing itself to differing jurisdictions’ tax and other laws, is not owned in an individual’s name but by a corporate structure. This arrangement segregates the inherent risks involved, makes ownership private and might even lead to a number of other benefits, including tax and VAT savings. Experienced and knowledgeable service providers (such as Abacus) who have established relationships with their local ship registries can make the experience of navigating through the potentially choppy waters of yacht ownership and registration a great deal smoother. With their help, the custody and management of a prized vessel can stay on an even keel.
family’ vehicle, where it is not offered to the general public but where a privately controlled investment ‘company’ is used for groups of connected parties. This type of fund does not fall under the special income tax regulations applicable to other types of scheme.
The island’s well-established fund sector is supported by a range of professional service providers including investment managers, fund administrators, legal firms, custodians and fiduciaries, allowing it to offer a compelling and cost-effective domicile for investment funds.
The Isle of Man is a perfect jurisdiction for the establishment and operation of property-holding structures A PLACE TO SETTLE Last but by no means least, there is the Isle of Man’s residence and citizenship opportunities. Although the Island’s immigration rules are not identical to those of the United Kingdom, they are very similar.
A GOOD INVESTMENT The Isle of Man’s close proximity to London and the other key markets of Europe also makes it ideal for private clients and the requirements they have for investment, fund management and administration. It is home to a variety of schemes such as open- or closed-ended companies, unit trusts, limited partnerships and contractual arrangements that target retail, institutional and sophisticated investors. Available fund types include: • an Authorised Scheme which targets retail investors and protects them against sharp practice to a high degree and can be promoted to the general public; • a Regulated Fund which offers flexible regulations and is suitable for listing on a stock exchange – normally sold through independent financial advisors; • funds that target the more sophisticated and professional investor, such as the Specialist Fund which has no regulatory restrictions on asset classes and the Qualifying Fund which can be marketed to institutional and experience non-retail investors; and then • the popular Exempt Scheme – a private offering and an attractive proposition for a ‘friends and
Aimed at high-net-worth individuals and their families who are looking for alternative residences and citizenship by injecting money into the Isle of Man through ‘qualifying investments,’ the UK Tier 1 (Investor) Visa provides successful applicants who meet the necessary eligibility and ‘due diligence’ requirements with the opportunity to obtain British citizenship. The initial period of entry is granted for three years and four months at which the applicant can ask to have his visa extended for another two years. After that, he may qualify for, and apply for, indefinite leave to remain. THE FINAL PIECE? Now that our jigsaw puzzle is nearly complete, where does a service provider such as Abacus fit in? To put it simply, we are the final piece. As one of the longest-established and reputable service providers on the Isle of Man, expanding into Europe a few years ago through the establishment of an office in Malta, we have a lengthy track record of more than 40 years in providing a range of financial and professional administration services. * Abacus is a fiduciary and fund services group with offices in the Isle of Man and Malta. Its experts can be reached on +44 1624 689 600 or at email@example.com IFC WORLD 2016
INNOVATION, CHANGE AND DIVERSITY * John Garland, Head of Corporate Financial Services, Department of Economic Development The Isle of Man is famous for its sound financial services sector and its decades of experience and success in the front line of corporate and retail finance. However, against a backdrop of intoxicating global change and shifting attitudes, the face of finance has changed, leading the isle to reconsider its objectives and assess its future. This has convinced the Government that it should shift away from concentrating on finance as an industry and towards making financial firms support local business and entrepreneurs in general. Our Government understands the barriers that businesses face all the way through their growth cycle, from the initial investment in a concept right through to the multi-million sale of a corporate success. Our island itself often works as an incubator, offering entrepreneurs and industries the chance to experiment with new ideas and innovate. Our large pool of financial capital is attractive to new businesses that are looking for somewhere to expand and develop.
start-ups the necessary financial support, training and business acumen to get their businesses off the ground. The Small Business Grant Scheme offers start-ups and existing small businesses a higher level of grant support up to a maximum of £25,000. We especially want to use these funds to support businesses that undertake certain approved research and development. Accelerator. At this higher level the Government might advance a loan (of up to £100,000) or make an equity investment (of up to £250,000) in small-to-medium enterprises (typically with 5-20 employees) as they enter their next phase of growth. ‘The Accelerator’ is also available to businesses new to the island that want to grow and develop. Relocator. This next level of support offers loan and equity investment (of up to £1million) for the establishment of medium-to-large firms on the island, or for firms of that size that are relocating there.
This year we are introducing new financial initiatives and laws that will allow us to expand our financial offering and diversify our population of businesses even further. Our objective is to encourage entrepreneurship, innovation and enterprise and to create new jobs. However, if we are to help existing businesses to grow and attract new businesses we must give them access to capital and, in this regard, there are a number of exciting new initiatives in the pipeline.
A regulated and experienced third-party scheme manager will manage the EDS
THE ENTERPRISE DEVELOPMENT SCHEME Our flagship initiative for 2016 will be the Enterprise Development Scheme (EDS). A total of £50 million will be available over a five-year period to invest in businesses that are likely to create jobs on the island, with funding including grants, loans and equity. The Isle of Man knows that every diverse and successful economy is good at encouraging the development of businesses through all phases of the business growth cycle. The scheme will provide support to small- and medium-sized businesses, and is also designed to help with the expansion of businesses that are both well-established and new to the island, particularly those that provide their goods and services to off-island customers. This will also complement the parallel work within the department to create two grant support packages and make them available to individuals who want to take their first steps into self-employment or small businesses that want to expand. The scheme consists of three different levels of funding. Micro and Small Business. At this level there are to be Government grants for start-ups on the island (typically with 1-10 employees) that can rise to £25,000. The Micro Business Grant Scheme has been designed to give budding entrepreneurs and small
This level of investment is aimed at encouraging industry leaders and entrepreneurs to expand businesses on the island, establish new ones, or relocate existing ones there. This is aimed largely at businesses that are entering the ‘commercialisation phase’ of their growth cycle, the phase when they are introducing a new product or service to the general market.
It will expand the existing class 1 (deposit taking) banking licence to include: • class 1(1) – for the typical existing bank and any institution that takes retail deposits; • class 1(2) – for non-retail deposit takers, i.e. the ones that perform services for a very limited class of individuals, and corporations; • class 1(3) – for the representative offices of foreign banks, which will not be able to take deposits on the island; The class 1(2) non-retail (or wholesale) banks (including private/merchant banks), if and when they appear, will create a new banking sector on the Isle of Man. Class 1(2) licences will only be available to corporate depositors and a very limited class of individuals (with a high minimum entry criterion that is still being discussed). Participants in the consultative process are weighing up the pros and cons of describing an eligible depositor as “an individual depositor who certifies that they have a minimum of £500,000 net worth.” The standard licensing policy requirements for competency, solvency, integrity and the need for a real presence on the Isle of Man will still apply to class 1(2) licence holders. We see the greatest potential for new operators in the ‘representative office’ option as this would allow foreign banks to set up operations quickly and cheaply with the eventual aim of seeking approval for classes 1(1) or (2) licences. The general characteristics and requirements of class 1(3) might be very similar to those for representative offices in Australia and Canada and the licence fees might be much lower than for classes 1(1) and 1(2). The ABR holds many benefits for both banking operations and customers who are looking for new finance options. It offers up the possibility of existing companies, such as family offices and international e-gaming businesses, using banks in new ways to develop and expand their businesses.
The different tiers of funding will enable us to support development in these three stages of business growth. As a vital safeguard, a regulated and experienced third-party scheme manager will manage the scheme, investing the funds impartially and for the greatest benefit to the island.
By offering two new sub-classes of Class 1 banking operations, we are diversifying opportunities for banking operations and non-retail customers to choose options outside of the Depositors’ Compensation Scheme. The high minimum entry criteria for Class 1(2) and the low licence fees for Class 1(3) demonstrate a tailored approach to banking rather than the traditional ‘one size fits all’.
AN ALTERNATIVE BANKING REGIME
A NEW CROWDFUNDING REGIME
Alongside the new EDS we have also been working on an Alternative Banking Regime (ABR) which will be in place by the spring. The ABR aims to encourage new banks to set up in the Isle of Man and widen the variety of banking facilities for many sectors.
We are also developing a new crowdfunding regime. We have been working with the Isle of Man Financial Services Authority (FSA) to develop a suitable regulatory environment for both equity and debt crowdfunding platforms that will be launched later this year.
The ABR, when it appears, will be the result of months of consultation and collaboration between the Government and the financial services industry.
ISLE OF MAN INNOVATION, CHANGE AND DIVERSITY
Investors and companies the world over have turned to crowdfunding to support the growth and
development of SMEs. The Isle of Man wants to evolve a regime that will be beneficial to entrepreneurs, platforms and investors alike. The Isle of Man can fill the void for those who wish to operate in an efficient marketplace with the appropriate balance of protection and ‘freedom to flourish.’
vestment-based crowdfunding within carefully set limits. There are also detailed proposals regarding website disclosure and the display of crowdfunding opportunities.
Crowdfunding also fits naturally with the island’s continued growth in the e-business and financial technology arena because it allows people to take a truly autonomous approach to funding and opens up opportunities to a wider audience of entrepreneurs and investors.
Our objective is to encourage entrepreneurship, innovation and enterprise The FSA consulted interested parties on the subject of crowdfunding throughout 2015, with the third consultation closing in January 2016. The details of our bespoke regulatory regime are still being finalised, yet essentially the legislation will allow licenceholders to facilitate loan-based and/or in-
AN ENTREPRENEUR-FRIENDLY ISLAND
At the same time as it strives to attract new business and investment, the Isle of Man is also nurturing existing talent and business through a range of initiatives. This includes a proposal for a scheme to offer relief from income tax to investors in growing island-based businesses. The Manx Enterprise Investment Scheme will aim to encourage investment in SMEs resident in the Isle of Man, by offering such tax relief to investors who subscribe for new shares. The island’s courtship of entrepreneurial talent also takes the form of business incubation and angel investment. The Department for Economic Development is planning to offer more of this kind of help to firms at various stages of the business cycle. Tier 1 Immigration The Isle of Man Government has been gearing up for some time to attract more high-net-worth individuals and is proactively seeking so-called Tier 1 entrepreneur and/or ‘investor immigrants’ to its
shores. In the Isle of Man, we use the British Home Office’s online system and mirror the UK’s rules to a very large degree, with the same points-based system. We are also part of the so-called Common Travel Area, so there are no border controls between the Isle of Man and the UK. Our immigration office has speedy turnaround times for Tier 1 applications of around 10-14 days.
There are no border controls between the Isle of Man and the UK A Better Way of Life On the Isle of Man we are not just looking at developing our financial options and business incentives, we are also investing in our quality of life and developing our proposition for relocating businesses and individuals. The island has one of the lowest crime rates in Europe, a free property market and excellent schools and other facilities. Together we are building a place where both businesses and people want to be.
IFC WORLD 2016
KEEPING JERSEY AT THE CUTTING EDGE * by Geoff Cook, the chief executive officer of Jersey Finance Having focused its resources on maintaining the competitive environment that international investors are seeking, while meeting the global standards required of all modern, leading international finance centres (IFCs), Jersey’s finance industry continues to thrive. The industry, supported by the Government of Jersey and the regulatory authorities, has evolved continually during its 50-year history to meet the demands of the market, adapting all the while to the growth in global trade, shifting wealth patterns from west to east and the ageing population explosion. Alongside these developments, Jersey shares the global commitment of major governments to encourage greater transparency and the exchange of account information for tax and other purposes between states.
There has been a steady climb in the number of single-family and multi-family offices With globalisation, shifts in wealth patterns, and volatility in international markets all prompting changes in people’s approaches to private wealth management, the demand for the wide-ranging specialist expertise in cross-border wealth planning that high-quality IFCs such as Jersey offer is rising. Jersey Finance’s current strategy takes stock of global trends, especially the huge acceleration of industrialisation and urbanisation in emerging economies that has, in recent years, powered economic development to an unprecedented degree. The intention is to ensure that Jersey remains a high-quality jurisdiction with the appropriate regulatory and legislative armoury, while helping it to penetrate new markets. The financial services industry continues to focus primarily on banking, fund services and wealth management, including specialist sectors such as Islamic finance and capital markets. Its partnership with the City of London, which enables it to act as a gateway to Western markets, is a further attraction to investors, especially those based in the emerging economic powerhouses. In the meantime, Jersey’s authorities are making long-term investments in order to meet new global standards of compliance. Jersey has repeatedly earned an AA+ rating from Standard & Poor’s, one of the leading rating agencies, and its political and economic stability is proving particularly appealing to international investors. Through effective and collaborative con-
JERSEY KEEPING JERSEY AT THE CUTTING EDGE
sultation with the regulator, the industry continues to offer more services. BUILDING ON SOLID FOUNDATIONS At the same time, innovation remains key and there are some significant projects on the horizon for Jersey, including a fresh approach to banking. The ‘Future of Banking’ project will hopefully help Jersey to establish itself as the go-to location for innovative global banking. The project is looking at how cooperation between Jersey’s finance industry, regulator and government combined with the jurisdiction’s unique advantage of a stable banking sector and commitment to a digital economy could help it create a sustainable, highly digitised banking model. It is a testament to the quality of its drafting that the Trusts (Jersey) Law has been amended only a few times since its enactment in 1984 and that many other jurisdictions have used it as a blueprint. The clarity of the language, the balance it strikes between the interests of settlors, trustees and beneficiaries and the supporting role played by thirty years of world-class jurisprudence have all contributed to its success. However, it has never been a rigid piece of legislation and, because of global trends and changes in the needs of private clients, recent years have witnessed amendments that have introduced such innovations as trusts of unlimited duration, the ability for settlors to reserve powers and the introduction of non-charitable purpose trusts. The arrival of the Jersey Foundation on the statute book in 2009 provided a Civil Law alternative to traditional trust structures. To date, more than 270 Jersey Foundations have been formed, a significant proportion of those being used for philanthropic purposes. Practitioners might also recall the latest amendment in 2013 rendering into statute Jersey’s law on mistake and the ‘rule in Hastings-Bass’, which was welcomed as an exciting development in the global trust industry. Against that backdrop, Jersey’s trusts law will shortly come under scrutiny again as the Government of Jersey prepares to consult interested parties about some new proposals. It will be asking questions about beneficiaries’ rights to information and the availability and appropriateness of mechanisms designed to bring about the variation of trusts. Meanwhile, the new Charities (Jersey) Law has created a robust and modern legal structure to support all types of international philanthropic and charitable enterprises, whilst recent amendments to pension legislation have also helped Jersey to meet the ever-more sophisticated demands of the private client investor. The last couple of years have also seen a steady climb in the number of single and multi-family of-
fices, and advisers to wealthy families, that have relocated to Jersey. That growth can be attributed to the appeal of the jurisdiction’s sophisticated private client landscape, its international outlook, its proportionate approach to regulation, its strong rule of law, its mature professional infrastructure and its political and economic stability. The 2015 World Wealth Report, for instance, suggests that the attitudes of high-net-worth individuals (HNWIs) are changing. It finds that they are allocating increasing amounts of wealth, currently around 36% of their asset allocation, outside their home regions with HNWIs in Asia-Pacific and Latin America investing the most in opportunities in other regions. The real attraction for using Jersey, particularly amongst families in the emerging markets, is its ability to manage diverse family assets securely across borders. With the average family office having total assets of $806 million, according to the Global Family Office Report 2015, the implications for Jersey’s globally focused and growing family office sector are significant. Moreover, as the landscape continues to evolve with family offices and HNWIs looking not only for asset protection and estate planning services but also increasingly to further their investment strategies into new sectors and markets, Jersey’s holistic offering right across the alternative investment arena and knowledge of the emerging markets is standing it in good stead. With decisions being made by wealth advisers and family offices being driven now not by tax but by a need for very specific expertise, knowledge, strong case law and the availability of a range of structures, there will be increasing opportunities for jurisdictions that can demonstrate substance on all of those factors to play a key role in meeting the needs of a growing family office business. CO-OPERATION Jersey believes firmly in international co-operation in tax matters, while also striking a vital balance between transparency and confidentiality. Having introduced anti-tax-evasion legislation in the 1990s, Jersey has received endorsements from the OECD and IMF, and has a raft of co-operation agreements in place. Whilst Jersey has tax agreements with more than 40 countries, with both Romania and Rwanda added to that list during 2015, it has also signed a number of Double Taxation Agreements in recent years, not least with the authorities in Hong Kong, Singapore and Luxembourg. Alongside co-operation agreements, Jersey has one of the most advanced systems that can track the beneficial ownership of companies. It has held such information centrally since 1999 and makes it available to overseas law enforcement agencies in
Private Wealth For more than 50 years, Jersey has delivered private wealth management, trusts and estate and succession planning, and more recently foundations, to clients around the world. With highly-skilled financial service providers and a robust, modern and sophisticated legal framework, Jersey leads the way in delivering private client services.
From simple trusts and underlying company structures to high-value and more complex structures involving trusts, companies, limited partnerships, and foundations, there are solutions to every requirement. Virtual family offices are also available for ultra-high net worth families. For further information, please visit www.jerseyfinance.je or call +44 (0)1534 836000
accordance with information exchange protocols. A World Bank report has cited Jersey as a model of good practice in the processing of details of beneficial ownership of corporations and trusts. The latest significant move in the global drive for ever-more transparency is the introduction of the OECD’s Common Reporting Standard (CRS). Planned as a means of improving cross-border tax compliance, the CRS has the support of 90 countries. Jersey is one of a group of ‘early adopters’ which will begin reporting in 2017 with other nations to follow in 2018. THOUGHT-LEADERSHIP Jersey Finance has commissioned a series of independent, evidence-based reports from economists
and leading academics in recent years. The resultant body of academic work has been informative in and of itself but has also revealed the great financial benefit that Jersey brings to the UK through its financial services. It has also, by pure weight of evidence, revealed the ways in which IFCs help to increase international financial flows and facilitate trade and investment. Some analysis has brought the role that Jersey can play in facilitating foreign direct investment (FDI) in Africa to light; other published research has revealed, among other things, Jersey’s wider contribution to FDI in global markets through its range of investment vehicles.
structure of developing countries. General current wealth management trends are presenting Jersey with a real opportunity, thanks to the jurisdiction’s ability to show investors that its regulation is strong, that it is very interested in transparency, and that it is keen on appropriate innovation.
When taken all together, these reports have shown that top-quality IFCs such as Jersey can help spread knowledge, solve problems and provide some much-needed investment in the infra-
With this in mind, Jersey is always striving to offer more and better services and to widen its global appeal while placing great emphasis on innovation, high regulatory standards and quality of service.
In the private wealth management business in Jersey’s target markets in the Far East, Gulf, India and Africa, and to a lesser extent in the more mature markets of Europe and the United States, it is clear that a need for services of good quality is increasingly important.
NEW MEASURES CONTINUE TO ADD TO JERSEY’S APPEAL * by Geoff Cook, the chief executive officer of Jersey Finance Jersey’s enduring status as a leading international finance centre (IFC) spans more than 50 years. Having weathered the impact of the global recession very capably, Jersey remains one of the world’s pre-eminent providers of world-class, robustly regulated cross-border financial services to the asset and wealth management industry. Furthermore, it is meeting the evolving demands of the market, having introduced new measures in recent years to develop its industry offering further. By modernising its legislation and making regulation more onerous, it has broadened its appeal as a centre for wealth management and cross-border investment funds activity. Statistics collated by the financial regulator, the Jersey Financial Services Commission (JFSC), are indicative of the scale and diversity of Jersey’s financial services. In addition to the long-established banking industry, where deposits held in Jersey total circa £130 billion (September 2015), there are 108 Jersey companies listed on stock exchanges all over the world with a market capitalisation of £159 billion – a testament to Jersey’s prominent role as a centre for international banking, capital markets and listings activity. The industry is also experiencing growth. The alternative asset classes in the funds sector, which form around 70% of Jersey’s total fund business (which itself is valued at £218 billion and is growing by 12% annually), continue to stride ahead. Hedge funds, private equity funds, real estate funds and infrastructure funds are all present. There are also more than 33,000 live companies on Jersey’s company register – the highest figure for six years. The financial workforce of Jersey increased to 12,820 in 2015,
the highest figure in the last four years and another signal of business growth. The world’s population is growing more slowly with every passing year, resulting in an ageing population, while its trade is continuing to grow briskly. Commentators believe that these two trends will change wealth patterns around the world profoundly and cause demand for investment in infrastructure to sky-rocket. Taken together, these trends are expected to lead to demands for safe and efficient international financing and capital management. As a stable, secure and highly regarded IFC which has the experience and expertise to tap into increasing cross-border trade flows, Jersey is bound to benefit. Meanwhile, the continuing rise of economies in the Far East, the Gulf of Persia, India and Africa are opening up a range of new opportunities for Jersey’s finance industry. Mindful of the accelerating accumulation of wealth in many of these growing economies, Jersey Finance has extended its international links. Having successfully hosted conferences in London for many years, it recently held a series of ‘roadshows’ devoted to private-client cross-border structures and services and the international funds market in crucial locations in the Gulf and Asia. In 2015 it extended its efforts further, adding important locations in Africa to the itinerary of its representatives. These efforts are paying dividends. For example, the growing ultra-high net worth population in Asia is demanding more and more help from Jersey practitioners for complex multi-generational and multi-jurisdictional family and estate planning, often involving a combination of Jersey trusts, foundations and other corporate vehicles.
JERSEY NEW MEASURES CONTINUE TO ADD TO JERSEY’S APPEAL
Jersey’s authorities, however, are not complacent. They continue to concentrate on improving Jersey’s laws and regulatory efforts, including the all-important trust law, which has been at the heart of Jersey’s wealth management offering for more than 30 years. STANDARDS Having worked closely with the Government of Jersey and the JFSC, Jersey’s finance industry has helped ensure that the jurisdiction remains at an advantage in meeting new global standards of regulation and co-operation in matters relating to tax and compliance. In particular, Jersey has invested in the resources necessary to become one of the first adopters of the new Common Reporting Standard (CRS), the Organisation for Economic Cooperation and Development’s new global standard for automatic exchange of financial information in tax matters. The way in which Jersey regulates alternative funds received the European Securities and Markets Authority’s seal of approval last year. This ought to be of help when the European Union decides whether Jersey deserves a ‘passport’ as described in its Alternative Investment Fund Managers Directive (AIFMD). As a result of the measures it has taken, Jersey is in an excellent position to develop business in both its traditional markets and in the newer, emerging ones in 2016. The island’s political and economic stability, its sophisticated legal and fiscal infrastructure, its long-standing partnership with the City of London and its aggressive courtship of new markets is balanced by its effective response to the challenge of tax-transparency and an increasing volume of regulation in its dealings with other countries.
dependable Getting it Right Malta’s financial services centre offers financial institutions a combination of the essential ingredients for success: convenient location, rapid access to market, effective regulation, rocksolid legislation, accessible authorities and a pool of highly competent, experienced professionals. Many internationally recognised financial institutions have already experienced the merits of operating out of Malta and their continued growth and success stands as testament to Malta’s strengths and potential. The jurisdiction already hosts hundreds of international finance companies, credit and financial institutions, insurance companies, fund managers, insurance managers, pensions, trusts and treasury companies, all attracted by Malta’s unique and well-balanced recipe for success. Success depends on getting it right - Malta is getting it right.
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FinanceMalta is the public-private initiative set up to promote Malta’s International Financial Centre
A SUCCESSFUL IFC OF RECENT VINTAGE * by Ivan Grech, the head of business development at FinanceMalta The financial sector in Malta has been growing on average by 25% per annum, with the latest available figures showing that its contribution to Malta’s GDP has grown from 3% in 1988 to 13% in 2015. It employs more than 10,000 people. The sector has seen some remarkable and steady growth over recent years and is now a major force in the country’s economy. Recent figures from the National Statistics Office show that financial and insurance activities accounted for 98.1 % of foreign direct investment during the first six months of 2015, with an estimated flow of €5.2 billion during the period – an increase of €3 billion over the first six months in 2014. In June 2015, the stock position of FDI in Malta amounted to €148.2 billion, an increase of €11.8 billion over the figure for that month a year before. As in previous years, financial and insurance activities dominated the scene, accounting for 97.9% of FDI stocks, i.e. the value of the share of capital and reserves (including retained profits) attributable to overseas parent enterprises, plus the net indebtedness of their affiliates to them.
PCC legislation allows a company to establish its own cell in an existing PCC and ‘write risk’ through it Despite the fact that it is a small island, Malta has become a leading international banking centre and today accounts for a significant share of global banking activity. The sector suffered no systemic shocks or banking failures at the beginning of, or at any stage of, the current European debt crisis. This is attributable to firm prudential regulation and the sound policies and practices of participants in its financial sector. Capital buffers retained by local banks are among the highest in Europe, and Maltese banks are ranked among the safest and best-run financial institutions in the European Union whose solvency ratios have consistently stood at almost double the EU average. The World Economic Forum’s Global Competitiveness Report 2014-2015 ranked the Maltese banking system among the top ten in the world for its soundness, also ranking its auditing and reporting standards 13th out of 144 economies. The country has attracted some of the most highly respected names in institutional finance to its shores. The number of financial institutions in
MALTA A SUCCESSFUL IFC OF RECENT VINTAGE
Malta has grown from 38 in 2006 to 67 in 2015, of which 28 are credit institutions and 39 are financial. These new entrants to the Maltese market benefit from a regulatory regime that is suited to their needs, passporting rights that open the door to the whole EU, lower licensing fees than in other European jurisdictions and a network of more than 70 double-tax treaties. Many new entrants are using the country as a strategic launch pad for future expansion into Europe, Africa and the Middle East. Substantial infrastructural investment in information technology and telecoms has also spurred the growth of Malta’s e-business, with e-money institutions making up 20% of all financial operations. This has, in turn, prompted several hundred gaming and IT companies to set up on the island, with more than 250 companies requiring services such as payment gateways. The combination of Malta’s tax system and its extensive double-tax treaty network allows investors, with proper planning and structuring, to achieve considerable fiscal efficiency when they use Malta as a base. The European Commission has stated that Malta’s tax system complies with EU non-discrimination principles and the Organisation for Economic Co-operation and Development has also approved of it. Malta is the only EU state with a full imputation tax system. Although all companies pay tax at a rate of 35%, there is a refundable tax credit scheme that is available on revenues as dividends to shareholders. It is also an ideal place of tax-residency for highly qualified foreign professionals, who pay a flat tax rate of 15%. Malta’s excellent reputation as an emporium for international business rests partly on the impartiality of its regulatory regime and its recent introduction of the EU’s fourth anti-money-laundering directive. It subjects new companies that want to operate from its shores to a very thorough screening process and subsequent supervision. The Maltese authorities take any allegations of irregularity very seriously and enforce the applicable rules efficiently and effectively in such instances. Although Malta is a relative newcomer on the international insurance scene, it has recently proven very attractive to companies in the insurance and reinsurance business, including captive insurance companies passporting their services throughout the European Union. The sector has increased from 8 operators in 2004 to 62 in 2015. A number of Fortune 500 companies have set up captives in Malta, among them multinationals such as BMW, Peugeot, Citroen, Vodafone and Virgin. Much of this success can be attributed to The Malta Financial Services Authority which, by working in consultation with the local market, has created an atmosphere in which innovation flourishes. Some types of protected cell company (PCC) and reinsur-
ance special purpose vehicle are unique to the island. Malta is the only full EU member state with PCC legislation that allows a company to establish its own cell in an existing PCC and ‘write risk’ through that cell. The PCC set-up allows the regulatory burden of an insurance company to be spread among all the owners of the various cells (and throughout its core) without putting the assets of any cell owner at risk from the liabilities of any other. Cells are particularly attractive to medium-sized corporate groups that want to establish their own singular insurance vehicles. Malta is an attractive jurisdiction for the establishment of international corporate holding structures. These are not only useful to multinational groups; owner-managed companies set them up and they are also used to hold the assets of high-net-worth individuals (HNWIs) in a wide range of investment vehicles including trust companies. Trusts include discretionary, maintenance, charitable, fixed-interest and unit trusts that cater for asset protection, estate or tax planning, or are used as a commercial tool, or for testamentary purposes. Trust law amendments in Malta in 2014 saw the introduction of the Private Trust Company (PTC), which offers interesting opportunities to HNWIs and families who favour tailor-made trustee solutions. Malta has specific legislation for foundations and allows for the set-up of two types – private and purpose foundations – which have particular uses and benefits for named persons or classes of persons or for the fulfilment of specified purposes. Another innovative and important legal instrument relating to wealth management is a recent white paper that pertains to family businesses. This emerged in October 2015 and will soon become law. This is the first piece of legislation of its type in Europe (and probably in the world) and aims to help family businesses survive after the founding generation has departed by encouraging their regulation and ‘governance.’ HNWIs are also attracted by the favourable conditions for the registration of their aircraft and yachts, with more than 450 ‘superyachts’ listed on the Malta Ship Registry. The fund industry is one of the Malta financial centre’s main engines of growth and is a dynamic and cost-effective venue for new fund set-ups and redomiciliations from non-EU jurisdictions. The jurisdiction was voted the best European Fund Domicile by Hedge Fund Review in both 2013 and 2014. In 2015 it hosted more than 600 funds with a net asset value in excess of €10 billion, two fund administrators, eight custodians and 147 investment service operators. The basic structure used for collective investment schemes in Malta is the SICAV (société d’investissement à capital variable) with its variable capital nature and the option to establish sub-funds within
such structure. This is the most widely used vehicle to date, especially in the non-retail sector. It can be structured to include master feeder funds and umbrella funds with segregated sub-funds.
from a particular country can also be excluded if the Government so chooses.
The majority of funds in Malta are professional investor funds or PIFs, which typically take the form of open-ended public or private limited liability investment companies. The creation of a new regime for alternative investment funds or AIFs is one of the biggest recent developments on Malta’s fund landscape and has opened the door to the promotion of diverse structuring opportunities such as private equity, venture capital, real estate, infrastructure and loan funds.
FinanceMalta is a non-profit public-private initiative that was set up in 2007 to promote Malta’s international business and financial centre within Malta as well as outside it. It harnesses the resources of the financial industry and the Government to ensure that Malta maintains modern and effective legal, regulatory and fiscal regimes in which its financial services sector can continue to grow and prosper.
Malta was one of the first countries to enshrine the EU’s fourth Undertakings for Collective Investment in Transferable Securities Directive directive (UCITS IV) in its law and hosts a number of UCITS schemes and non-UCITS retail funds that may be registered in Malta and ‘passported’ to the rest of the EU. A new vehicle was added to Malta’s repertoire of cellular fund vehicles in 2012, called the Recognised Incorporated Cell Company (RICC). This structure directly targets fund platform providers and allows the RICC to provide, in exchange for payment of a platform fee, certain administrative services to its Incorporated Cells (ICs). The Government’s Individual Investor Programme is designed to attract people from abroad who can share their talent, expertise and business connections with people on the island. Only reputable applicants are allowed to acquire Maltese citizenship thorough a rigorous ‘due diligence’ process. Applications from countries to which international sanctions apply may not be accepted. Applications
dia organisations and firms that perform real-estate services, recruitment services, business and professional services.
ABOUT FINANCE MALTA
The founding associations of this foundation include the Malta Funds Industry Association, the College of Stockbroking Firms, the Malta Bankers Association, the Malta Insurance Association, the Association of Insurance Brokers, the Malta Insurance Managers Association and the Institute of Financial Services Practitioners. The organisation offers corporate and affiliate membership through which members benefit from their direct experience and knowledge of each other, regular industry updates, training and seminars on specialist subjects, industry lobbying and, international marketing and public relations initiatives under the FinanceMalta umbrella. Corporate Membership, which currently accounts for more than 200 members, is open to such entities in the financial sector as fund, insurance and pension management companies. Affiliate Membership, which 60 entities have, is designed for organisations and companies that wish to take advantage of the growth of Malta’s finance industry and the FinanceMalta network. These include me-
The FinanceMalta team reports to a board of governors which is chaired by Mr Kenneth Farrugia, a banker by profession, who has stated: “The aim of FinanceMalta is to position Malta as a financial centre of repute from which firms can conduct international investment service business. The key financial sectors on which we focus are asset management, insurance, reinsurance, wealth management, capital markets and Islamic finance. Our focus for the coming twelve months is to explore new markets, including those of the Middle East, New York and Asia, whilst simultaneously developing business in more familiar areas that show great potential for growth.” Mr. Ivan Grech, the head of business development at FinanceMalta, has also commented, “Malta is internationally recognised as a brand denoting excellence in financial services and our remit is to market it as such both locally and globally. We focus on representing the interests of our members by promoting the virtues of Malta’s financial services industry, creating networking opportunities and helping our members, and our country, prosper. With this in mind, we are continuously developing relationships with intermediaries in Europe, Asia and the Americas and supporting our members and operators at every level by informing them about changes in product legislation and emerging business opportunities.”
* For further information about FinanceMalta, visit www.financemalta.org
A JURISDICTION OF ENERGY, VIBRANCY AND SKILL * by Samantha Snow, Abacus Corporate Services Ltd During the course of the last five years, it has been a pleasure to see Malta thrive as an international financial centre, supported as it is by a very progressive economic infrastructure and a strong government that is friendly to entrepreneurs.
clients buying or operating yachts and private business jets, or through entrepreneurs availing themselves of structuring opportunities through the many double-tax treaties that Malta has signed during its life as an international financial centre.
The number of cranes reaching out into the skyline seems to increase almost daily and the number of new financial jobs advertised in the Times of Malta on a Sunday also seems to be growing steadily. These are perhaps two of the most obvious signs of a successful economy.
So why is Malta such a success story? Its entrepreneurial government has been highly instrumental in its prosperity. Other reasons include its burgeoning ship registry business, the stable venue that it provides for online gaming and, most recently, the Malta Individual Investor Programme.
Abacus has been in Malta since 2010, during which time we have witnessed both our business and the island build on success year after year. In our case, this success has principally been through private
SHIP, YACHT AND AIRCRAFT REGISTRATION
Malta’s registry business can rely on exceedingly good support from trade bodies such as Transport
Malta, which both internationally (through events like the Monaco Yacht Show) and internally (through various local yacht and aviation events) is a credit to the island and which approaches business in a very commercial and energetic manner, while always trying to serve the best interests of Malta as a whole. According to the latest official statistics, Malta now has the sixth largest ship register in the world and the largest of such registers in Europe. The Maltese flag is the flag of choice for several major international ship-owning companies. Last year the Malta ship register recorded spectacular growth in the number of merchant ships flying the Maltese flag, with around 500 vessels being enrolled. This is largely because of the modernisation of the registry and the flexibility of Maltese rules. IFC WORLD 2016
Year-on-year record growth is the norm for the island’s register. Malta has become a leading maritime hub because it is strategic location in the centre of the Mediterranean, it has natural harbours and an extensive range of maritime services such as shipbuilding and repair, its freeport, bunkering services, ship supplies and towage services. It has also become a world leader in commercial yacht registration. Despite the current worldwide financial malaise, there has been a significant increase in the registration of superyachts over 24 metres in length over last year. For pleasure yachts, in addition to the brisk registration process, Malta offers a favourable regime for value-added tax (VAT) minimisation, with a VAT rate as low as 5.4% available through leasing structure arrangements. There are marinas all over the Maltese islands that cater for the superyacht owners and crews.
More than 450 gaming firms are based on the island, employing around 7,000 people Malta has also become an attractive jurisdiction for aircraft owners, or people who are thinking of purchasing an aircraft, owing to the introduction of an aircraft VAT leasing arrangement that its VAT department introduced. This is based on the successful Malta Yacht VAT leasing scheme and aims to reduce the effect of VAT on the purchase of an aircraft (or just its engine, if necessary). It is worth noting that the Malta aircraft registry started out with just 18 aircraft in 2010 but now contains more than 200 registrations – a testament to good regulation, to the local tax regime and to the general safe and secure environment that Malta affords to businesses and people alike. LET THE ONLINE GAMES BEGIN! The remote gaming sector is the most dynamic and the fastest growing gaming sector in Malta, regulated under the guidance of the Malta Gaming Authority (MGA). Malta has a long history of host-
ing gaming operators and was the first EU member state to regulate remote gaming. Along with other laws, Malta’s Income Tax Act (written specifically with international companies in mind) makes it a very popular destination for online gambling operators. More than 450 gaming firms are based on the island, employing around 7,000 people in the sector. Online casino and poker sites are just two of the typical gaming businesses that one can find there. With new ideas and technological innovations popping up all the time, the MGA is now reviewing cloud products and finalising its policy for digital games of skill with prizes. The island also hosts many back-office operations that process transactions for gaming operators based in other European countries. With offices in Malta and the Isle of Man, both of which are key gaming jurisdictions, Abacus has seen its portfolio of services expand in line with the marketplace, thanks particularly to the VAT-related issues that apply to gaming entities in the context of the new VAT rules that the Government introduced in January 2015. The outlook for the remote gaming industry in Malta has never been brighter. IMMIGRATION FOR INVESTORS The same can be said of Identity Malta, the ‘citizenship by investment’ service that administers the Malta Individual Investor Programme (Malta IIP) that has proven so successful for Malta as a whole. Citizenship-by-investment is one of Abacus’ key business areas and has bolstered its private client base massively. One of the first schemes of its kind, it grants Maltese Citizenship to foreign high net-worth (HNW) individuals of a reputable standing, along with their dependants, subject to a stringent ‘due diligence’ process, through Certificates of Naturalisation. Successful applicants are rewarded with visa-free travel to more than 160 countries (including the United States), the right of work and establishment in all 28 EU countries and, potentially at least, tax-planning benefits. Applicants and their dependants must be represented by ‘accredited persons’ licensed by Identity Malta to act as authorised intermediaries. As an accredited agent, Abacus can help people complete their individual Investor Programme applications, collating the necessary identifying documents to ensure that the forms are ready for processing and approval. The great benefit of Malta IIP is that not only do high-spending individuals put their income into the
MALTA A JURISDICTION OF ENERGY, VIBRANCY AND SKILL
economy; more often than not, their families are from entrepreneurial backgrounds and, consequently, create jobs. Abacus has been fortunate enough to have helped a number of globally active HNW families, all of which have enriched the world’s economy in their different ways. Their presence in Malta is a testament to the jurisdiction’s hospitality towards entrepreneurs. It is a place where an HNW family can enjoy sun, sea, sport and architecture and also create businesses that generate employment. These businesses can produce further income which the family can then use to buy significant real estate, import and operate its yacht and register its private/business jet. All of these things are beyond most people’s wildest dreams but Abacus has helped clients of this type do exactly that.
Malta now has the sixth largest ship register in the world and the largest in Europe A GOLDEN AGE How do we envisage Malta developing as a jurisdiction in late 2016/early 2017? We certainly expect its economy to keep growing, although on a slightly more moderate upward slope. There are already plans in place to invest in medical and tertiary education tourism over the next few years – these sectors will help to prevent Malta’s economic revolution from running out of steam. Because of the high standards that Malta now follows in accountancy, legal services and IT, any company of any size will receive excellent support services if it chooses to base itself there. In short, Malta is going through a golden age and we strongly expect it to stay that way. Its progressive government will continue to work hand-inhand with the private sector, Malta IIP will carry on being successful, and the sun will continue to shine. * Abacus is a fiduciary and fund services group with offices in the Isle of Man and Malta. Its experts can be reached on +356 2065 0500 or at email@example.com
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MALTA - A TAX & FISCALLY COMPETITIVE JURISDICTION; PERSONAL & CORPORATE STRUCTURING * by Geraldine Noel, Barrister - Registered in Malta; M.A (Oxford), LLM (Fordham) The Republic of Malta, a full member of the European Union and the Schengen visa-free travel area, has excellent country credit ratings and has experienced steady and impressive growth in recent years. Such growth is not solely the result of its tax and fiscal policies – other factors, such as a multilingual workforce, fairly low labour costs, a strategic location and a sound telecommunications infrastructure, are important. The result has been an influx of investors, high-net-worth individuals and corporations in search of a stable, reputable jurisdiction in which to reside and/or structure their personal and corporate affairs.
Trusts law is based upon the law of Jersey and may be used for personal and commercial applications alike Malta’s legal system is a mixture of civil and common law, with the commercial laws – companies, trusts, financial services etc. – being modelled on English and now EU law. Clients always find comfort in stable legal systems of this type. Malta is a cost-effective, tax-efficient and highly flexible jurisdiction in which to structure corporate and commercial affairs. It has no withholding taxes and limited capital gains rules, no entry or exit taxes and no rules that pertain to thin capitalisation, transfer pricing or controlled foreign companies. It is a signatory to more than 70 tax treaties. It also boasts a number of advantageous tax and fiscal regimes that it has set up to attract business in a variety of economic sectors. MALTA’S ADVANTAGES FOR HNWIS Personal taxation. Resident but non-domiciled persons are only taxed on income arising in or remitted to Malta, a fact that allows for a highly tax-efficient structuring of personal assets. Capital (income held for over a year) is not taxed in Malta; this taxation regime is applicable for all applicants for residency and citizenship too. Maltese citizenship-by-investment. The ‘Individual Investor Programme’ requires a contribution of €650,000 to the Maltese Government; the holding of property in Malta (a minimum purchase of €350,000, or €16,000 rental per annum) for five
years; and a returnable investment of €150,000 for five years. Individuals are subject to extensive ‘due diligence’ checks before the citizenship programme can accept them. Applications may include grandparents and other dependents up to 27 years of age. The Global Residence Programme. With a €15,000 annual tax payment, which covers the entire family, the GRP (including grandparents and servants) offers a flexible ‘residency solution’ with no income or wealth thresholds; low requirements for the rental or purchase of property; the possibility of family members and staff living in Malta; and no ‘minimum stay’ requirements. The Malta Residence & Visa Programme. Permanent residency can be achieved, subject to ‘due diligence’ checks on the applicant, payment of €30,000 and an investment in Malta of €250,000 and a purchase of property (Malta €320,000 / Gozo €270,000) or rental for 5 years (Malta €12,000 / Gozo €10,000). MALTESE COMPANIES A Maltese company is considered to be ordinarily resident and domiciled in Malta for tax purposes and is subject to Maltese tax on its worldwide income at an effective corporate rate of 5% for trading income, reduced from the standard rate of 35% by certain tax refunds. In addition, any overseas tax suffered by a Maltese company is generally eligible for relief as a credit against the Maltese tax liability arising on the corresponding source of income. Malta is one of the few remaining countries to retain a full imputation system. Once tax is levied on a Maltese company’s profits, no further tax is levied on those dividends at the level of the shareholder – thereby completely avoiding double taxation. The Republic of Malta, a full member of the European Union and the Schengen visa-free travel area, has excellent country credit ratings and has experienced steady and impressive growth in recent years. Such growth is not solely the result of its tax and fiscal policies – other factors, such as a multilingual workforce, fairly low labour costs, a strategic location and a sound telecommunications infrastructure, are important. The result has been an influx of investors, high-net-worth individuals and corporations in search of a stable, reputable jurisdiction in which to reside and/or structure their personal and corporate affairs. Malta’s legal system is a mixture of civil and common law, with the commercial laws – companies, trusts, financial services etc. – being modelled on English and now EU law. Clients always find comfort in stable legal systems of this type. Malta is a cost-effective, tax-efficient and highly flexible jurisdiction in which to structure corporate
MALTA A TAX & FISCALLY COMPETITIVE JURISDICTION; PERSONAL & CORPORATE STRUCTURING
and commercial affairs. It has no withholding taxes and limited capital gains rules, no entry or exit taxes and no rules that pertain to thin capitalisation, transfer pricing or controlled foreign companies. It is a signatory to more than 70 tax treaties. It also boasts a number of advantageous tax and fiscal regimes that it has set up to attract business in a variety of economic sectors. MALTA’S ADVANTAGES FOR HNWIS Personal taxation. Resident but non-domiciled persons are only taxed on income arising in or remitted to Malta, a fact that allows for a highly tax-efficient structuring of personal assets. Capital (income held for over a year) is not taxed in Malta; this taxation regime is applicable for all applicants for residency and citizenship too. Maltese citizenship-by-investment. The ‘Individual Investor Programme’ requires a contribution of €650,000 to the Maltese Government; the holding of property in Malta (a minimum purchase of €350,000, or €16,000 rental per annum) for five years; and a returnable investment of €150,000 for five years. Individuals are subject to extensive ‘due diligence’ checks before the citizenship programme can accept them. Applications may include grandparents and other dependents up to 27 years of age. The Global Residence Programme. With a €15,000 annual tax payment, which covers the entire family, the GRP (including grandparents and servants) offers a flexible ‘residency solution’ with no income or wealth thresholds; low requirements for the rental or purchase of property; the possibility of family members and staff living in Malta; and no ‘minimum stay’ requirements. The Malta Residence & Visa Programme. Permanent residency can be achieved, subject to ‘due diligence’ checks on the applicant, payment of €30,000 and an investment in Malta of €250,000 and a purchase of property (Malta €320,000 / Gozo €270,000) or rental for 5 years (Malta €12,000 / Gozo €10,000). MALTESE COMPANIES A Maltese company is considered to be ordinarily resident and domiciled in Malta for tax purposes and is subject to Maltese tax on its worldwide income at an effective corporate rate of 5% for trading income, reduced from the standard rate of 35% by certain tax refunds. In addition, any overseas tax suffered by a Maltese company is generally eligible for relief as a credit against the Maltese tax liability arising on the corresponding source of income. Malta is one of the few remaining countries to retain a full imputation system. Once tax is levied on a Maltese company’s profits, no further tax is levied
on those dividends at the level of the shareholder – thereby completely avoiding double taxation. Businesses that use Maltese holding companies can benefit from the so-called participation exemption, which allows for a tax-efficient extraction of income or gains from a foreign subsidiary as no Maltese tax is levied on such income and no foreign withholding taxes are either. Alternatively, a Maltese holding company might include such income or gains as part of its taxable income and pay tax at 35%. Upon the distribution of dividends by that company, its shareholders would then be entitled to a full (100%) refund of the Maltese tax that it had paid. This option might be desirable if the shareholders wish to receive part of the earnings in refunds rather than exclusively in dividends. There are many intellectual property holding companies in Malta. Royalties from patents, artistic copyright and trademarks are 0% taxed for three years - and this is renewable. Amortisation over the life of the intellectual property is allowed, as is a step up in value upon the transfer of intellectual property to a Maltese company from book to fair market value upon transfer, whilst capital gains may not be levied upon disposal in certain circumstances. AVIATION Private aircraft are not considered to generate income and are therefore free of tax. For commercial operations, tax can be reduced and the tax-deduction rules are generous in respect of finance and operating leases. On top of this, accelerated depreciation periods are available for aircraft, aircraft engines and related parts.
YACHTS, MARITIME AND SHIPPING BUSINESS Subject to registration as a shipping company and payment of the set tonnage tax, a total 0% tax-exemption applies to all the income of a licensed shipping organisation that owns, charters or operates a tonnage tax ship. Income, profits or gains derived from the sale, or other transfer of, or rights over a tonnage tax ship is exempt from tax. For yacht leasing, the reduced VAT regime allows for VAT rates to be levied only for time spent in EU waters, payable over a three-year period. Income derived from a Maltese company engaged in such activities is taxed at 5% as per Malta’s corporate taxation rules. FUNDS AND FINANCIAL SERVICES If a fund holds 85% of its assets outside Malta, income and capital gains are 0%-tax-rated, as are distributions to non-resident investors. In addition, statutory fees for funds are highly competitive. For example, a Professional Investor Fund’s statutory application fee is €2,000 and €500 per sub-fund. Maltese law provides for a number of flexible structures for funds and investment companies, such as SICAVs and investment companies or INVCOs, incorporated cells, contractual funds, LLPs and unit trusts - both trusts and foundations are regularly used. Furthermore, Malta complies with the EU’s Alternative Investment Fund Managers’ Directive and certain financial services can be ‘passported’ throughout the EU.
security and estate-planning benefits and are transparent for tax purposes. In other words, trust income may be “looked through” and is exempt from tax in the hands of non-resident beneficiaries. Alternatively, a trust may opt to be treated like a company for tax purposes, thereby enjoying the tax refund facility (i.e. 5% effective corporate tax rate), while still having access to Malta’s extensive tax treaty network. FOUNDATIONS As a foundation has a separate legal personality, for tax purposes it is treated as a company and is therefore subject to Malta’s corporate tax rules (5% effective corporate tax rate), such as the use of the participation exemption provisions (holding companies), including the remittance rules (down to 0% tax rate). As a result, beneficiaries may be entitled to claim a refund of all or part of the tax paid at the level of the foundation. Alternatively, for tax purposes, a foundation can opt to be treated like a trust and enjoy the “transparent” tax rules of trusts i.e. 0% tax rated in Malta. This is the case if all of the income of the trust arises outside Malta and all beneficiaries are persons who are either not ordinarily resident in or not domiciled in Malta. Such income is deemed to be derived directly by the beneficiaries of the foundation. A Maltese foundation is therefore highly advantageous in cases where it involves non-resident founders, beneficiaries and assets.
TRUSTS Both trusts and foundations may be used for personal, as well as commercial, purposes. The law of trusts is based upon Jersey law. Maltese trusts, which do not have to be governed by Maltese law, offer protection,
* Geraldine Noel, M.A (Oxford), LLM (Fordham) is a barrister trained in England and the USA and registered in Malta. She can be reached at email@example.com. In Malta’s Best in Business Awards for 2015, Acumum was hailed as the best law firm.
Malta located trusts are tax-transparent and no tax is levied in Malta.
Alternatively, such a trust can opt to be treated for tax purposes like a company, thereby enjoying:
MALTA LOCATED TRUST / FOUNDATION
• 5% effective tax rate applies • clear flow through or operating income • ability to use of Malta’s tax treaty network
• use of participation exemption
IFC WORLD 2016
MALTA’S INDIVIDUAL INVESTOR PROGRAMME - A MODEL OF DUE DILIGENCE * by Till Neumann, IMCM, the managing partner at Citizen Lane GmbH in Zurich Having come into force after some controversy in 2014 under the recently-elected Labour government of the time, the Malta Individual Investor Programme is one of many ‘golden visa’ and economic citizenship initiatives by which the governments of small international financial centres hope to encourage wealthy persons to invest from abroad. (It is important that this programme should not be confused with an older – and still extant – Maltese residence regime that bestows special tax status, such as a flat rate of 15% on foreign-sourced income, on the participant if he remits it to Malta. Participants have to pay a minimum annual tax charge of €15,000.)
Countries that offer citizenship-byinvestment are now afraid to accept people whom the great powers dislike The programme is designed to grant, or make it easier for the Maltese government to grant, citizenship to foreign high net worth individuals and their families. Malta is a full member of the European Union and is therefore offering investors an easy route to settlement in the Western half of Europe as well. The citizenship is granted on condition of applicants investing significantly in the National Development and Social Fund, a government-established asset pool. The fund focuses on capital and social projects that the Government believes to benefit the country. Because Malta is a member of the EU and the Schengen Area, a participant from outside the EU who becomes a citizen has full access to the EU; he can travel without hindrance throughout the bloc and also in the four states of the European Free Trade Association (Iceland, Norway, Switzerland, and Liechtenstein). A holder of such citizenship can also travel to more than 160 countries all over the world, including the USA, without need of visas. At present, to achieve citizenship by means of the programme, the so-called ‘main applicant’ has to pass the following tests: he must be 18 years old or above; he must provide proof of residency in Malta for a period of 12 months before the day that a certificate of naturalisation is awarded, and he must meet the requirements for application set out in the regulations. At present, the programme is limited to 1,800 main applicants, excluding their dependants. (It is, as with all such government-run programmes, possible that this number might change.)
Among other tests, main applicants have to show that they and their dependants have a global health insurance policy (so as to avoid becoming a burden to local Maltese taxpayers) of at least €500,000 per person a year, and to be able to obtain coverage indefinitely. Applicants and dependants will go through a checking process to ensure that they are fit and proper persons to hold a Maltese citizenship. Identity Malta, the organisation that manages the programme, might ask anyone who applies for an interview, although it cannot demand one. The names of successful applicants are published each year in the Malta Government Gazette. This applies to those who have achieved this status either by registration or naturalisation during any previous 12-month period. At the core of the programme are investment requirements and each applicant has to meet a number of conditions. Firstly, he must contribute to the aforementioned National Development and Social Fund. The principal applicant must contribute at least €650,000, purchasing property worth at least €350,000, or leasing property for a minimum annual rent of €16,000 and investing €150,000 in government-approved financial instruments. The spouse must contribute at least €25,000; dependent children aged up to 17 years must contribute at least €25,000, while each dependent child from 18 and above must put in at least €50,000. The principal applicant also must pay ‘due diligence fees,’ when the application is submitted, of €7,500. Other due diligence fees include €5,000 for the spouse and adult dependents and €3,000 for children aged 13-17. Identity Malta charges other fees for passports (€500) and bank charges (€200). In the more discerning of jurisdictions such as Antigua, Malta and St Kitts/Nevis, the ‘due diligence’ process no longer concentrates solely on the cleanliness of the applicants’ funds or wealth. Any CEO of a company that has polluted the environment is now extremely unlikely to be granted a passport in those jurisdictions. In more flexible countries such as Vanuatu and Dominica, the regimes might let such people in. The less fastidious jurisdictions are also more likely to sell passports to Syrians or other people whose nationality might disqualify them elsewhere, but they still insist on these people passing all the necessary tests for reputational probity. St Kitts/Nevis still runs the biggest citizenship-by-investment programme around. The people in charge of these programmes rarely publish any numbers, although Cyprus and Malta publish the names of the economic citizens (alongside those of other citizens) in their government gazettes. Malta is one of the most fastidious jurisdictions, having wisely insisted on good ‘due diligence’ right from the start of its programme, and its ceiling of 1,800 applications is another guarantee of tight control.
MALTA MALTA’S INDIVIDUAL INVESTOR PROGRAMME - A MODEL OF DUE DILIGENCE
The application procedure is perhaps the most important part of a citizenship-by-investment regime. The issuing country must ensure that its regime is not open to bribery – this problem surfaced a year ago in Portugal, which had to suspend its residence-by-investment programme. The Government sacked the head of the relevant unit for taking money in exchange for ‘fast tracking’ a Chinese client. To get around this problem, Antigua & Barbuda have established a Citizenship by Investment Unit, a stand-alone body that receives ‘government fees,’ charged for each family member, of US$50,000 or more to cover its expenses (fees for dependent children are less than that, but children always have to be accompanied by adults, making $50,000 the smallest amount payable). With these, it can pay its functionaries salaries that are high enough to deter them from accepting bribes. Its relative independence from the rest of the Government is important as well; when a CIU is housed in the ministry of finance, as it is in St Kitts/Nevis, it is likely that the ministry’s revenue-generating instincts will inhibit it from processing applicants as fastidiously as it might. ‘Due diligence,’ then, is something that every jurisdiction’s programme must take seriously in an attempt to avoid reputational risk. Jurisdictions are now wary of taking on foreign applicants who come from countries with ‘bad’ reputations or who themselves (according to submitted documents, open-source news searches and, these days, reports from private investigators who work for the governments) are not of good repute. Since the summer of 2014, the authorities of St Kitts now ask for far more documents than they did before, even turning clients down for minor infractions such as drink-driving and speeding.
A programme participant from outside the EU who becomes a citizen has full access to the EU In the last couple of years, the programmes have started to compete with one another. Powerful Western onshore countries are also pressurising smaller jurisdictions to check the backgrounds of applicants very stringently, and this pressure even extends to forcing them to add to the information that their passports must contain. The price of non-compliance can be high, with onshore powers cancelling their visa-waiver agreements with
More than an Island The Malta Individual Investor Programme. Citizen Lane advises clients depending on their personal situation with the choice
of a residence solution or aiding with the selection of the right citizenship program.
Malta Individual Investor Programme (IIP) came
efficiently execute the application process from A to Z. The focused consulting
into operation at the start of 2014. Malta is the
approach of Citizen Lane, our sound knowledge of the various residence and
only EU country which offers an official Citizen-
citizenship programs and our expertise on the local situation makes it possible
ship-by-Investment program. The Maltese pro-
for us to provide a personal, lean service fulfilling all requirements for quality â€“
gram is limited to a total of 1,800 applicants and
the Maltese program is one of many options that Citizen Lane offers.
Together with our clients we identify the best-possible investment category and
is designed in such a way that it not only generates foreign investment for the national fund but also integrates new citizens into the country. Accordingly, the program is set up in a manner that requires applicants to initially hold a residence permit for a period of one year before they can submit the effective application for citizenship. The Maltese passport permits holders to enter 166 countries without a visa and is therefore the most convenient passport of all Citizenship-by-Investment programs.
We look forward to getting to know you.
Citizen Lane LLC Zentrum Staldenbach 15 firstname.lastname@example.org
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countries that offer CIP programmes of which they somehow disapprove, thereby reducing the usefulness of those programmes to high-net-worth participants who originally signed up in the hope that they would then be allowed to travel to those onshore locations without visas. In November 2014 the nightmare came true when the Canadian Government cancelled its visa waiver agreement with St Kitts and Nevis – this was a warning shot across the bows of all offshore centres. Even though St Kitts, in the summer of 2014, had already started to issue a new format of passport for all citizens which contained their dates and (again) places of birth, this was not fast enough for Canada. The Canadians forced St Kitts to renounce all the relevant passports, setting the end of January 2015 as a deadline. They announced their policy in late November 2014. This upset the schedules of many people who were planning to come back from their Christmas holidays in the middle or even the end of January (the Eastern Orthodox Christmas being later than others), especially since
a passport application in St Kitts can take six weeks and often longer. Other intervention on the part of the great powers is evident. In December 2014, Antigua stated that it would ban anyone from Afganistan, Iraq, North Korea, Somalia and Yemen from its programme unless they were resident in the UK, the US or Canada. Countries that offer citizenship-by-investment are now afraid to accept people whom the great powers dislike, and in some cases are changing the rules of their citizenship programmes to favour those onshore powers’ economies. Why should the suspension of visa waivers matter to them? One might expect many applicants for passports to care solely about moving their assets to a new jurisdiction where their home governments cannot steal them. This is sometimes the case – Citizen Lane occasionally deals with people who want to set up trusts in Nevis, for example – but most clients are not from Western countries.
Russian and Chinese clients are very interested in travelling the world without the need for visas and have to buy these passports to do so, as Western countries will insist on visas otherwise. Many of these people want to travel for leisure or to meetings in the US, the UK, the Schengen area and elsewhere for commercial reasons. The threat of a withdrawal of visa rights therefore gives the great powers a measure of real control over the issuers of citizenship-by-investment passports. As in other fields of offshore endeavour, the need to offer innovative products is balanced by the need to avoid the displeasure of the onshore world. Offshore governments already check the backgrounds of applicants for economic citizenship in far more detail than in the case of people who want to be naturalised through the usual channels (e.g. by marrying citizens of countries they want to live in or by residing in countries for long periods before applying for passports) and such scrutiny can only increase as time goes on.
MALTA’S OFFERING TO HNWIs AND TO THE WORLD * by Tom Burroughes, editor of WealthBriefing Whenever a jurisdiction battles to win business and create a strong brand for itself, there is great merit in having one or more signature offerings for which they are widely known. The Cayman Islands has its hedge funds; Jersey and Guernsey have funds, trusts and other features; Bermuda has its reinsurers. And now there is Malta. In the case of this jurisdiction, an economy is taking shape that means outsiders might associate it with more than just the Knights of St John, noisy August festivals and more than 300 days of sunshine a year. Malta has gone for several legislative features it hopes will become widely recognised as attractions, which seems to have created a whole greater than the sum of its parts. One element that is already very much in practice and generating attention is its citizenship-by-investment programme (since early 2014), which is one of a number of “golden visa” initiatives adopted by European and other states to encourage inward investment. (Other examples include the UK, Portugal and Spain.) And there is a new element on the horizon that could be a game-changer for this former UK colony and now European Union member state - the Family Business Act. The Act, which at the time of writing is in its White Paper stage and heading through the Maltese legislature – due to be signed into law during 2016 – is designed to do a number of things. It is, for ex-
ample, designed to help family businesses achieve continuity between generations; provide legal form and clarity to the sector; give a legal and administrative framework against which family businesses can finally have a method to guide, and facilitate their transition to ensure growth and continuity. Features include a formal definition of what constitutes a family business (not always as obvious as it might seem), who should be considered for family membership (again, not always obvious), how is governance regulated, how can foreign-owned family businesses avail themselves of the Act, and other matters.
The Family Business Act could be a game-changer for Malta The idea of creating such an act makes plenty of sense for an IFC because so large a chunk of the world’s businesses are family-owned. For business owners who want to protect what they have created over the generations, the legislation, so its framers hope, will provide an enticing option.
MALTA MALTA’S OFFERING TO HNWIs AND TO THE WORLD
A senior figure in the Maltese financial and legal community, Dr Nadine Lia, née Sant, who is an advocate in Malta and barrister at law in England & Wales, and legal advisor at the Ministry for the Economy, Investment and Small Business in Malta, has recently told your writer of the international calls for such an act. The European Commission, for example, has called on governments to address what she calls the “Achilles Heel” that family businesses face when they transfer wealth and business to younger family members. The European Commission has repeatedly asked for such legislation from member states, stating this point as recently as 30 June, 2015. A crucial aspect, Dr Sant says, is that family businesses will for the first time be given an identity and a platform. The Act is also intended to act as a complement to present legal and financial structures that apply to local and foreign family business that are thinking of making Malta their jurisdiction of choice. The Act is also a kind of innovation that makes sense for an island that in some ways has a hybrid identity. It is an ex-British colony (independent since the 1960s) of which there are visible signs such as old red telephone boxes, loyalty to English soccer teams and English as a second language. Malta is a European Union member-state and multi-lingual and multi-legal (a mixture of Anglo-Saxon Common Law and Napoleonic Civil Code law).
There is relative proximity to the European mainland with regular flights from European and other hubs and, crucially, there are robust property rights and a stable political system.
outside the European Union – there are minimum requirements in terms or purchasing/renting property and those who qualify have a 15% flat income tax on income remitted to Malta.
CITIZENSHIP BY INVESTMENT
OTHER INITIATIVES AND BUSINESS LINES
Such a background also explains why Malta felt able to enter the “golden visa” world and create another signature “brand” offering. Enacted in early 2014, amid some controversy in Europe at the time before adjustments were made, the Malta Individual Investor Programme was eventually endorsed by the EU. Anyone who wants to join the programme must make a significant and non-refundable contribution to the country’s National Development and Social Fund.
Citizenship-by-investment and the FBA may be the two most recent and high-profile features of Malta’s investment story, but the island also likes to draw attention to other features. Malta has a vigorous funds administration and fiduciary sector, which shows few signs of decelerating; its Common Law system is of course fertile soil for trusts, but more continental European features of its legal code also are a useful fit for entities such as foundations. Such a combination is relatively unusual in southern Europe. There is no shortage of banks; firms such as HSBC, FIMBank and Banif Bank, operate in Malta. (A couple of large European banks have cut some services in the island.) Meanwhile, there are private banking boutiques serving highnet-worth and ultra HNW individuals such as Mediterranean Bank. The country is also home to the “Big Four” accountancy firms – Deloitte, EY, KPMG and PricewaterhouseCoopers – a fairly potent seal of approval.
Main applicants must commit at least €650,000 (there are smaller amounts for spouses and children). Another requirement is that applicants must commit to having a residence in Malta for at least five years, which can be done by buying a property worth at least €350,000, or by leasing such a property for five years or more where the annual rent is €16,000. Before the application goes through, the person in question must invest at least €150,000 in government-approved financial instruments such as bonds, stocks, and debentures that benefit the nation and must commit to keeping the investment for at least five years. Once all this has been done, the candidate is issued with an eResidence card; 12 months after the applicant has established residency in Malta, those who have maintained residency become citizens. Significantly, a citizen does not have to spend all 365 days in the Malta before getting that citizenship. The Maltese authorities will be satisfied by a stay of a minimum of 183 days or by the purchase/rental of property together with a visit to Malta.
Family businesses will for the first time be given an identity and a platform It is worth pointing out that this initiative operates alongside the jurisdiction’s existing Global Residency Programme, open to foreigners inside and
There have been other developments in recent times, such as the rollout of Malta’s aviation registration legislation in 2010, which has galvanised developments in this area. Unsurprisingly for an island, it also has shipping registration capabilities. It is important to put some of these details into context. Malta is a relatively low-tax jurisdiction, but this point should not be overstressed. Income tax, for example, is charged at progressive rates of up to 35% – a rate that nevertheless compares favourably with the UK’s top rate of 45% on the highest earners, for instance. Malta also operates an imputation system for dividends, which means that tax that is paid by a firm is imputed as a credit against the tax due by the shareholders when a dividend is paid out. Companies are taxed at a flat rate of 35%, but the imputation system can significantly mitigate the impact of the tax on shareholders, encouraging firms to incorporate in the island. The amount of the tax refund is set at 6/7ths of the advanced corporation tax paid by the company. What all these forces and ventures mean is that Malta appears to be well-placed to keep its edge, although other jurisdictions will not want to sit
still. The country’s financial services industry now accounts for about 12% of gross domestic product (roughly the same as that of Switzerland). While the island certainly had some nervous moments in the financial crisis years, not a single bank went bust or needed state rescue. Maltese banks have been admirably “dull” in terms of giving no great cause for alarm. Moreover, the island ranks as the 14th soundest economy on the World Economic Forum’s Competitiveness Index for 2013/14; it has generally been given a clean bill of health by global rating agencies.
Malta appears to be well-placed to keep its edge The state of the overall economy is still relatively robust; the EU forecasts the island’s GDP to expand by 4.3% this year and by 3.6% in 2016 – growth rates that many European finance ministers will envy. Unemployment, while not tiny, is in low single digits. All this has been achieved at a time when the country, with fewer than 500,000 people in total, has been affected, along with much of southern Europe, by refugees who are trying to leave North Africa and parts of the Middle East. NO GROUNDS FOR COMPLACENCY There are no grounds for any complacency; this is an island that has had, in the absence of major natural resources, to live on its wits. Tellingly, however, along with many other small locations that are IFCs, Malta hasn’t the natural resource “curse”. Its main capital is human brainpower, not oil or precious metals. There is a substantial, educated middle class and many Maltese are keen to study abroad and take their learning back home. Looking across the range of offerings in Malta – citizenship, the new Family Business Act, registration for funds, aircraft and ships – what comes across is an impression of a relatively balanced financial jurisdiction. It also has a busy sector of online gaming, a vibrant film-making industry and business relating to technology, medicine and tourism. (Some of the most memorable scenes of Gladiator, Game of Thrones and Troy, for example, were filmed there.) This balance and broad appeal are important tests of successful IFCs, particularly when jealous rivals are always trying to encroach on their business.
IFC WORLD 2016
LAND OF THE GOLDEN VISA * by João Gil Figueira, Lugna Portugal is not an offshore jurisdiction; among its possessions only Madeira, an island in the Atlantic, could claim that title because of some quirks of its corporate income tax regime. This coastal Atlantic jurisdiction does, however, have a kind of citizenship-by-investment regime. Other European countries have similar schemes and there has been no international pressure from the European Union to stop this regime. Portugal is currently a target for foreign direct investment, a safe country to live in, and the quality of living is unmatched by that of most of its competitors. THE GOLDEN VISA PROGRAMME Portugal does not have a ‘direct-to-citizenship programme’ for investors. There is, however, a fasttrack scheme for residency leading to possible citizenship using the so-called Golden Visa Programme. Its formal name – seldom used – is the Residency Permit for Investment Activities and the regime has been in force since 2012. All successful applicants for Portuguese citizenship receive the same type of passport as native citizens and are entitled to the same rights. The differences between the Golden Visa and other international citizenship-by-investment programmes lie in timing, with the Portuguese regime lacking speed (it may take six years for an applicant to become a citizen, after he has met all the requirements) but making up for this shortcoming by costing less. A Golden Visa entitles the holder to a permanent residence permit and unrestricted access to the Schengen area (which consists of 26 European countries that have abolished passport controls – and all other types of border control – for each other’s people). In addition to that, he has the right to bring in his children if they are minors or young adults still at school, and his parents if they are dependent on him. After six years, Golden Visa holders who reside in Portugal may apply for Portuguese citizenship and so can their spouses, children and dependant parents. The Portuguese passport allows for visa-free travel to 141 or 172 jurisdictions (depending on whose concept of jurisdiction on uses) and is only a few countries away from the United Kingdom and ahead of the United States of America passports. The Golden Visa was designed as an investment visa for citizens from outside the European Union and is granted to investors who pursue eligible investment activities in Portugal. These are as follows: a) capital transfers, bank deposits or investments in financial products valued in excess of one million euros; or b) the creation of at least 10 jobs; or c) the acquisition of real estate with a market value exceeding €500,000; or
PORTUGAL LAND OF THE GOLDEN VISA
d) the acquisition of real estate for a minimum purchase price of €350,000, if the property is at least 30 years old or is located in an urban regeneration area and the acquirer refurbishes it; or e) sponsorship for the production of art, for the restoration of Portugal’s cultural heritage (€250,000) or scientific research (€350,000), through services carried out by a range of public or private entities; or f)
capital transfers amounting to at least €500,000 for the acquisition of shares in investment or venture capital funds aimed at the capitalisation of small and medium-sized enterprises.
Citizens of foreign countries can conduct the said investment activities either individually or through companies. Investment and quantitative thresholds (b), (c), (d) and (e) are reduced by 20% if the investment is located in an area with low population density.
There are no new laws in the pipeline regarding citizenship or residency Almost all eligible investments are refundable in the sense the investor is able to sell the property/ assets or divest from a company or business if need be. Divestment will only be regulated by the particularities of the investment deal itself. Sponsorship of the arts and scientific research is, however, not a refundable investment, mainly because of the way that contract law/public law (which makes them almost a donation) works. As for requirements for permanent residence, visa holders are required to stay in Portugal for as few as seven days per year during the first year and as few as 14 days in the following two-year period. There are no new laws in the pipeline regarding citizenship or residency. The latest amendments in 2015 to the Portuguese immigration and citizenship laws introduced new types of eligible investments for the Golden Visa and created a new ‘citizenship programme’ for foreigners of Portuguese Sephardic Jewish ancestry. For some of these people, the Portuguese passport represents a chance to live in their spiritual homeland that their ancestors lost when the Inquisition expelled them in the last decade of the 15th century. For others it is an opportunity to gain free access to the benefits associated with an EU passport.
Portuguese nationality allows for dual nationality, enabling new citizens to retain their previous citizenship. There are no ‘minimum stay’ requirements and Portugal does not levy taxes on wealth or tax anyone according to citizenship. Applicants for the Sephardic Jewish programme must have their criminal records, if they have any, verified in order to apply for citizenship and must produce evidence of their Portuguese and religious ancestry. The Portuguese Foreigners and Borders Service controls immigration and visas, together with the Ministry of Foreign Affairs. The Civil Registry deals with requests for citizenship, although the SEF may co-ordinate or evaluate some matters. Golden Visa holders are not subjected to a specific income tax regime, but the greater part of Golden Visa applicants are people who have never resided in Portugal. Because of this, they will be entitled to ask for ‘non-habitual resident’ status (valid for 10 years) and benefit from a special regime. This special income tax regime applies to people who have not qualified as tax residents in Portugal for the last five years. If someone becomes a tax resident (i.e. a non-habitual resident rather than an ordinary resident) in Portugal it will not, in most cases, cause additional taxation. The reason behind this is the fact the non-habitual residents regime provides for exemptions for most types of income that are taxed at source or could have been taxed according to an applicable treaty. The only types of income that will lead to tax in Portugal would be capital gains on the sale of shares and capital gains on the sale of Portuguese real estate. Because most HNW investors have structures, their income is usually dividends or interest, which in most cases is exempt from tax in Portugal. The regime has helped to make Portugal a target for foreign direct investment and a prime location for high-net-worth individuals to live in.
Eligible investments include capital transfers, bank deposits or investments in financial products of €1 million Visa-free travel to Portugal, incidentally, is an option for stays of up to 90 days (as a rule it can be renewed for the same period) for the citizens of 141 countries.
Donâ€™t leave anything to chance. Invest, wisely. Lugna is a boutique firm specialised in Tax, Corporate Restructuring and Business Model Optimisation, Private Client Advisory, Family-owned Businesses and Business Immigration. Due to its international footprint, the firm handles cross-border and jurisdiction-specific issues and has a deep understanding of the cultural and practical aspects of investing and doing business in Portuguese speaking jurisdictions. Simply put, we are easy to work with.
Bespoke Tax & Structuring Solutions Private Client | Corporate & International Business Portugal | Brazil | Angola | Timor-Leste
GOOD POINTS FOR HNWS Benefits for HNWs who apply for non-habitual resident status include a tax exemption for most types of passive income such as foreign dividends and interest, a full exemption for foreign pensions and special tax rates for earned income (20% for “high-value-added activities,” i.e. activities of a scientific, technical or artistic nature, 0% for foreign salaries taxed at source and progressive rates for non-eligible activities). There are no wealth or inheritance taxes in Portugal. Gifts between spouses and to parents or offspring are, as a rule, liable to tax. Portuguese company law does not recognise such vehicles as trusts and foundations because Portugal is a Civil Law jurisdiction. These structures are usually taxed in Portugal on a case-by-case basis. Structures are available to mitigate this. PORTUGAL AS A FINANCIAL CENTRE IN GENERAL Portugal has become a popular jurisdiction to set up a holding company with the purpose of investing
PORTUGAL LAND OF THE GOLDEN VISA
in non-European markets. For Portuguese-speaking countries such as Brazil, Angola or Macau, a Portuguese company is a flexible and efficient gateway through which businesses can tap into the European Union market. For Chinese companies, it is a strategic hub to prepare investment into any of the jurisdictions of Portugal’s wide tax treaty network, namely Portuguese-speaking markets.
After six years, Golden Visa holders who reside in Portugal may apply for citizenship and so can their dependants
An increasing number of multinational groups and family businesses use efficient holding structures in Portugal to do business worldwide and benefit from a broad participation exemption regime (no tax on dividends, capital gains on the sale of shares or foreign branch profits). The banking system has seen its fair share of troubles since the meltdown of 2008, with government intervention in two big banks, but investors are safe. The Portuguese Deposit Guarantee Fund compensates Portuguese bank account holders up to one hundred thousand euros per bank / bank account in the event of a bank default.
* Lugna is a boutique firm that specialises in tax, corporate restructuring, business model optimisation, private client advisory services and immigration. It handles investment-related business in Portugal, Brazil, Angola, Timor-Leste (East-Timor) and Macau.
OFFERING AFRICA SAFETY AND THE RULE OF LAW * by Rupert Simeon, CEO, Seychelles Investment Board For any country’s economic sector to flourish, two key elements must be present. First, the state must draw up regulations and follow economic policies that are conducive to the growth of the economy. Second, it must have the active support of the private sector. Both these elements are present in the Seychelles, which has been successful in making use of them to promote such growing sectors as renewable energy, tourism and the financial services sector. All three are key economic pillars of the jurisdiction. In addition, the country is situated in an advantageous time zone and offers foreigners a modern legal system and body of law and a wealth of experience in tax-planning and tax management. Despite being the smallest of Africa’s countries, the Seychelles are on track to become the premier financial centre for both Africa and the Middle-East.
The first securities exchange, named Trop-X, was set up in 2012 POLITICAL STABILITY When investors weigh up the pros and cons of entering a new market, one of their key considerations is whether or not the country is stable politically. The Seychelles can definitely be described as one of the most, if not the most, politically stable countries in Africa. This makes it the ideal location for business because investors can rest assured that their investments are safe. In fact, in the 2013 Ibrahim Index of African Governance the Seychelles were ranked the highest for “safety and the rule of law” in East Africa. The jurisdiction was also ranked higher than any other African country in the categories of human development, infrastructure, education and health. Moreover, the Seychelles Investment Act 2010 also protects investors against sharp practice, minimising any risk of expropriation and allowing for the full repatriation of profits. The country’s Exclusive Economic Zone (EEZ) contains about 115 islands. It occupies 1.3 million square kilometres in all, with only 455 square kilometres consisting of land. The Seychelles have in the past been heavily reliant on their fishing and tourist sectors and these are still the strongest. During the past few months both sectors have notched up significant achievements, not least their inclusion on the International
Maritime Organisation’s white list. The tourist sector triumphed during the 22nd annual World Travel Awards this year, with the Seychelles being voted in as the leading Indian Ocean destination and home of the Indian Ocean’s leading Tourism Board. During the award ceremony the national airline, Air Seychelles, was also hailed as the leading Indian Ocean airline. The Seychelles also won the award for the Indian Ocean’s leading cruise port and leading cruise destination.
funds. Each of these has its own unique benefits to offer, yet they all result in more effective risk management, company structuring and tax planning. For example, the CSL is subject to only 1.5% tax on its worldwide (gross) income and is incorporated as a domestic company under the Companies Act 1972 but awarded a special licence that allows the company to benefit from access to the Seychelles’ growing network of Double Taxation Avoidance Agreements (DTAAs).
A WELL-REGULATED FINANCIAL SECTOR
The CSL can also operate part of its business in the Seychelles. The establishment of a CSL in the Seychelles’ International Trade Zone (SITZ) can very well be one of the most efficient ways to export products and services into Africa.
The financial services sector has had many successes of its own and today there are close to 70 corporate, trust and foundation service providers operating in the islands, offering foreign companies an abundance of legal, tax and management services to choose from. One milestone worth mentioning is the signing of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters in February 2015 which represents the country’s commitment to continuing to make improvements to its existing laws and legal practices in the field of exchanging information for tax purposes. However, Seychelles’ policy-makers have also been thinking of improving existing legislation that governs several products and services such as international business companies (IBCs) and company special licenses (CSLs) which are expected to be more in line with current market trends and the current economic situation. It should be noted that all professionals who work in the international financial services sector must meet the strict requirements of the Seychelles Financial Services Authority (FSA). This ensures that only reliable and qualified individuals are able to offer these services. Examples of these include the need to have sufficient experience in the industry and to possess academic and professional qualifications such as those provided by the Institute of Chartered Secretaries (ICSA) or other globally recognized qualifications such as those issued by the Association of Chartered Certified Accountants (ACCA) or the Chartered Institute of Management Accountants (CIMA). This is very reassuring for investors and adds to the country’s positive reputation across the globe. CORPORATE STRUCTURES AND INVESTMENT VEHICLES Several products and services are available to investors who are looking for efficient ways in which to run international companies. These include IBCs, Limited Liability Partnerships (LLCs), CSLs, Protected Cell Companies (PCCs), trusts and foundations. The Seychelles register airlines and ships. Its investment vehicles include mutual funds and hedge
SEYCHELLES OFFERING AFRICA SAFETY AND THE RULE OF LAW
The Seychelles Mutual Fund & Hedge Fund Act 2008 allows for full exemption from Seychelles business tax on the income of licensed funds and exempt foreign funds, which are also exempted from withholding tax and stamp duties. Furthermore, foreign funds which are already licensed in jurisdictions ‘recognised’ by the Act are granted exemptions from Seychelles licenses as long as they are managed by Seychelles-licensed fund administrators and listed on stock exchanges in recognized jurisdictions, or as long as the minimum investment by each investor is not less than US$100,000. These ‘Exempt Foreign Funds’ can be of particular interest to fund managers who are looking for the best location from which to operate their funds. The Government has also set up several mechanisms to allow for the development of other services. For example, a banking license granted by the Central Bank of Seychelles (CBS) allows the bank in question to carry out both offshore and onshore banking. This means that it may cater for all the companies currently incorporated in Seychelles, which number almost 150,000. Moreover, the Securities Act 2007 also allows for the Seychelles’ first securities exchange, named Trop-X, which was set up in 2012. It also sets out rules for a number of other new activities in the industry. A NEW TOURIST BOARD In 2014, the Seychelles Investment Board (SIB) took on the task of promoting the financial services sector for the country and since then has been holding an ever-more fruitful dialogue with representatives of the private sector both locally and overseas. Its job is to be proactive in informing the world of what the Seychelles have to offer. SIB plans to host and participate in a number of forums in the Seychelles and overseas and is also looking to attract reputable international legal and accounting firms that will complement the financial sector and help it grow.
SEALED WITH TRUST
A HERITAGE OF TRUST At Asiaciti Trust, we understand the importance of delivering reliable, discreet, personalised service. Place your trust in our 45 year record of adding long term value to clients’ wealth preservation strategies. We are committed to serving the best interests of our clients, protecting their assets and building a legacy for their families. Asiaciti Trust, a heritage of trust.
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Asiaciti Trust Singapore Pte Ltd
163 Penang Road, #02-03 Winsland House II, Singapore 238463 Tel: (65) 6533 2611 • Fax: (65) 6305 0180 • Email: Singapore@asiacititrust.com Cook Islands • Dubai • Hong Kong
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THE SINGAPORE PRIVATE FUND – A NEW VEHICLE FOR STRUCTURING PRIVATE WEALTH * by Aaron Mullins, managing director of Asiaciti Trust Singapore Pte Ltd Funds have long been a part of the commercial investment landscape. They became widespread in the early 20th century and allowed investors to pool investments in the stock market. The first type of fund was a unit trust, essentially a trust arrangement between a fund manager and a trustee for the benefit of investors, who are known as unit holders. Nowadays, commercial funds may be structured either as unit trusts or companies and the regulated fund market worldwide is estimated at some 100,000 funds with US$37 trillion of net assets. Increasingly, funds are also being used as the central vehicles of private wealth structuring. Such private funds are not available to public investors and their existence may not be a matter of public record, but their legal structure and the ways in which they work are the same as those of commercial funds.
and flexible way of providing appropriate degrees of participation for different beneficiaries, through the granting of different numbers and classes of units in the fund. Above all, a fund – although a sophisticated and robust structure – is conceptually very simple and is familiar to most clients. In this sense it is a very ‘user-friendly’ structure that is often easier to understand than a traditional structure such as a trust or foundation, where the formal governance model may be less familiar.
Fund reporting requirements can be customised
In Singapore, then, the client is always secure in the knowledge that his assets are going to be managed well and that he will always be able to customise their management to his own needs and preferences. OTHER FEATURES OF THE SINGAPORE PRIVATE FUND Confidentiality is a growing worry for many clients, who wish to maintain compliance with their tax and reporting obligations but also want to uphold their personal privacy. As one of the most respected financial jurisdictions in the world, Singapore applies the highest standards of compliance and its primary regulator, the Monetary Authority of Singapore, has an excellent reputation. However, Singapore also respects personal privacy and a Singaporean private unit trust is a private and confidential arrangement with no registration or public disclosure requirements.
PRIVATE FUNDS IN SINGAPORE
A private fund can formalise different investment mandates THE STRUCTURING OF FUNDS FOR WEALTHY FAMILIES Let take a simple example. A fund is created for one family. It acquires family assets – say a financial portfolio – and the shares in the fund are held by family members. More commonly, a private fund would have sub-funds holding separate classes of assets – for example, the family business, property and financial assets. It is possible to structure a private fund so that subfunds have different classes of shares each with different rights. For example, shares in a financial portfolio may be freely cashed-in – perhaps subject to liquidity provisions – whereas shares in the family business may be inalienable for a set period. This flexible arrangement is important as it allows the governance of a fund to be precisely customised to the circumstances and requirements of the client family. A private fund structured in this way is often the centrepiece of a family governance model because it afford family members a clear, consolidated view of all assets, it can formalise different investment mandates appropriate to different assets and it is an easy
Like any other structure, a private fund can be established under the laws of many jurisdictions. However, Singapore offers a number of well-known advantages, not least its reputation as a well-regulated onshore jurisdiction with an excellent banking infrastructure and professional services to match. Funds are also well-regulated in Singapore. A Singapore private fund is typically established as a private unit trust, which provides the security and confidentiality benefits of Singapore trust law, and is normally free of Singaporean tax for international investors. A fund manager is appointed, with the client being given wide latitude to propose a fund manager of his choice, subject to certain criteria. The fund manager need not to be resident in Singapore and in practice would more usually be located close to the client and/or the assets – say in London, Switzerland, Dubai or the client’s home country. Different managers may be appointed for different sub-funds, each holding a particular asset class or following a distinct investment strategy. For example, a real-estate sub-fund might have a specialist property fund manager; a financial investment subfund would probably appoint a suitable bank or investment manager or managers to pursue different strategies in the portfolio; specialist private equity managers may manage private equity holdings; and, in some cases, the client’s own private office might act as a fund manager, assuming that it was capable of that. Fund investment mandates and fund reporting requirements can be customised extensively in almost infinitely variety to suit the nature of the assets and to the client’s requirements.
SINGAPORE THE SINGAPORE PRIVATE FUND – A NEW VEHICLE FOR STRUCTURING PRIVATE WEALTH
A private fund is non-tradable, so third parties cannot buy in to such a fund without some pre-defined agreement. However, in cases where the investors are looking for co-investors – for example to bring external capital into a family business they can use a Singapore private fund which they can, if they desire, subject to an external audit. This gives co-investors confidence, which is particularly important when a business is making the transition from being owned only by the members of a family to having diverse investors. Whether or not co-investors are on the menu, Singapore private funds are straightforward long-term ownership vehicles for family and business assets. They are well-governed, structured in a familiar manner and located in a secure onshore jurisdiction. ASIACITI TRUST’S OWN EXPERIENCE An interesting practical example is a private fund that we established for a client with significant business interests, all of which were located in his home country. They included an operating business that had grown very successfully over the last twenty years or so, together with some associated real estate assets. The client was beginning to consider his longer term plans. His children did not wish to work in the family business, but the family as a whole wanted to maintain a significant stake in it and the object of the exercise was therefore to find a model of ownership that could allow the members of the family to realise some value while remaining long-term strategic investors. An outright sale was therefore inappropriate. A single investor would be likely to want to take control and might also want the promise of an outright sale at some point. The client’s home country had
also experienced some political instability, which threatened to make it hard for us to find investors in the business. After we had all considered the various options, the client decided to establish a Singapore private fund. This acquired the business, with the units held by a trust on behalf of the client and his family. In order to be governed well, the fund appointed specialist private equity fund managers and other advisors, including external auditors. After a period of successful trading, the fund had built up a good track record of performance that the client could flaunt in his search for a small number of co-investors. This happened, allowing the family to realise some money while maintaining a long term stake, and the fund structure made it much easier to move the firm’s ownership to a diversified investor base. MR S GOES TO SINGAPORE Perhaps a more common use of the private fund structure is illustrated by the case of a client to whom we can refer as Mr S. He was a successful entrepreneur of advanced years who wished to make provision for his family in a way that would ensure a secure succession whilst allowing him and certain other family members to oversee a diverse range of assets, including property, financial assets, the family business and several private equity investments closely. His family situation included children from three marriages and also certain people he wished to exclude as potential beneficiaries of his estate.
After considering various options, including a private trust company and a foundation, he opted for a private fund because it allowed for the allocation of assets to beneficiaries in a simple way and also because it allowed him to oversee the assets closely without incurring onerous legal obligations to do with governance. This was because, as is not the case with alternative structures, the client had extensive reporting rights and was able to choose fund managers without incurring any formal responsibilities in respect of the structure.
A private fund is non-tradable, so third parties cannot buy in A private fund was therefore created with four sub-funds for different asset-classes. The patriarch took considerable care in specifying who would be entitled to units in each sub-fund on certain conditions, for example the condition that units in the family business fund could only be passed on to family members of his choice. The units were held in trust for these chosen beneficiaries on this basis. The client created an informal family council consisting of himself and selected family members,
which chose fund managers for each asset class. In most cases these were managers with whom the client had long-standing relationships. The family council agreed on specific reporting details in respect of the assets and it now meets annually with the fund managers to review their performance. As a Singapore private unit trust, the fund is a completely private and confidential arrangement. The client has chosen those family members whom he wishes to inform about the structure and involve in its oversight, but its existence is not publicly recorded and there is no publicly accessible source of information about it. In this way, the client has created a structure that ensures that his assets will eventually go where he wants, making an appropriate provision for his chosen beneficiaries. It allows the family members of his choice to oversee its assets. It is also a permanent structure that does not require any family member to take on any responsibility for ‘governance’. CLEAR AND STRONG GOVERNANCE These two examples illustrate the way the private fund structure works in very different situations, but in both cases its appeal lies in its clear and strong governance, together with its flexibility in owning and managing virtually any type of asset in a way that is customised to the client’s circumstances and needs. It is for these reasons that the private fund is becoming increasingly popular as a vehicle for structuring wealth.
IFC WORLD 2016
THE CITY OF LONDON: THE MIGHTIEST IFC OF ALL? The City of London’s contribution to the UK’s national income is estimated at £45bn in 2014, or 3%, while London itself accounts for £334bn or 22% of the UK’s national income. [Source: Centre for Cities and Cambridge Econometrics, June 2015.] According to the most recent Business Register and Employment Survey in October 2015, 414,600 people are employed in the City of London. This represents 8½% of Greater London’s workforce and 1.4% of the UK’s total. All major British banks have their main offices in The City and 385 foreign banks are there, as is the London Stock Exchange, the Lloyd’s of London insurance market, the Baltic Exchange for shipping contracts and the London Metal Exchange. Every year a Lord Mayor is elected as monarch of the “Square Mile,” second in precedence at formal occasions only to the Queen, and the British Parliament does not make a move without consulting him. He is the leader of the City of London Corporation and his representative in the House of Commons, who sits behind the Speaker’s chair, is called the Remembrancer. Altogether, there are more than 1,400 financial service firms in the UK which are owned mostly by foreigners from about 80 countries – 498 of these are American and 424 are Swiss. Overseas-owned companies represent 46% of all financial service groups worth in excess of £100m. This is nearly three times larger than any other sector of the market and demonstrates the international nature of the United Kingdom’s financial services.
Overseas-owned companies represent 46% of all financial service groups worth in excess of £100m The City’s grip on the life of greater London is likely to increase in future. A research institute called Centre for Cities and Cambridge Econometrics forecasted in June 2015 that employment in the City of London will rise from 396,800 to 435,700 by 2025. This represents an increase of almost 39,000, equivalent to a rise of almost 10%. Employment in Greater London is projected to rise by 404,000 during the same period, so 1 in every 10 new jobs in the capital will be based in the City.
In 2014 the Bank of England appointed the China Construction Bank, one of China’s “big four” banks, as the Chinese currency clearing bank in London, London’s renminbi (RMB) clearing house. This was a central pillar in HM Government’s drive to make London a hub for Chinese currency dealing. The year before, the Foreign and Commonwealth Office had published a report with the title “London gaining strength as an offshore RMB centre,” citing a report that showed huge increases in the use of RMB in London: a 390% increase in RMB trade services, a 20-fold increase in RMB letters of credit and a 150% increase in trading in yuan foreign exchange products. It added: “Developing London as the Western hub for RMB business, complementing Hong Kong as a bridge to the West, is a key priority for the UK.” The results have been mixed so far; in the middle of 2014 Singapore overtook London to become the biggest offshore renminbi centre outside Hong Kong. The UK is bidding to become a major centre of Islamic finance. In October 2013, premier David Cameron told a conference: “I don’t just want London to be a great capital of Islamic finance in the Western world, I want London to stand alongside Dubai and Kuala Lumpur as one of the great capitals of Islamic finance anywhere in the world.” At the moment Malaysia’s domestic debt issuance is in the form of sukuks or Islamic bonds, making it the world’s largest Islamic bond market with more than 60% of world sukuk issuance originating there. Singapore has been trying to make its way in the world of Islamic finance since at least 2007 and countless other offshore jurisdictions are jumping onto this bandwagon. The City is, according to some measurements, the largest financial centre on Earth, but its reach is even wider than it seems. Many offshore commentators see the United Kingdom’s network of financially active overseas territories as an extension of the services that London offers. Jersey Finance, for its part, writes in its brochure entitled Jersey: for Banking: “For many corporate treasurers, institutional bankers and treasury specialists, fund promoters, brokers and other corporate financiers, Jersey represents an extension of the City of London.” Deals are originated, brokered and partially structured in London but then finished off elsewhere, often in Britain’s gigantic offshore centres such as the Cayman Islands, Bermuda and the British Virgin Islands. The UK, and especially London, attracts money and finance by another device: the so-called remittance basis of taxation, which has formed a crucial
UNITED KINGDOM THE CITY OF LONDON: THE MIGHTIEST IFC OF ALL?
part of its tax ‘offering’ for 200 years. It is available to wealthy individuals who are resident but not domiciled in the UK. In other words, people who migrate to the UK can elect only to pay British taxes on foreign income and gains that they remit (hence the word ‘remittance’) to the UK and/or bring in with them. If they were to be both resident and domiciled in the UK, they would pay income tax and capital gains tax on their worldwide income and gains. Other countries – notably southern Cyprus – are belatedly offering the same taxbreaks.
Deals are originated, brokered and partially structured in London but then finished off elsewhere Government attempts to curb this system, which in the eyes of the public favours high-net-worth individuals at the expense of the ordinary taxpayer, have been pusillanimous. Labour’s Gordon Brown promised in opposition to end the non-dom rule in the 1990s. In 2008, after Brown had been chancellor for a decade and had then moved on to become prime minister, Alistair Darling, his successor, imposed a mere £30,000 annual charge on all non-doms, which was subsequently bumped up to £50,000 – the kind of money that the average UHNW individual might spend on a party. From April 2017 onwards, however, the Government plans to abolish ‘remittance basis’ taxation for anyone who has resided in the UK for more than 15 years in a 20-year period. People who are born in and live their entire lives in the UK will no longer be able to benefit and neither will people who acquire a foreign domicile of choice be able to retain resident non-domiciled status should they elect to return to the UK. Despite these developments, it seems inevitable that remittance basis taxation will continue indefinitely as a means of attracting offshore wealth to the UK, which itself in many ways is a gigantic offshore jurisdiction.
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THE LAND OF CONTRASTS * by Till Neumann of Citizen Lane Vanuatu is a land of contrasts, where the 21st Century melds comfortably with the 19th Century. Located in the South Pacific, it is often referred to as the Isles of Contrast and the Paradise Islands. With its sub-tropical climate, carefree attitude and easy-going lifestyle, it has been voted the “Happiest Place on Earth” twice in recent years. The country has a population of around 270,000 and its indigenous inhabitants speak more than 170 different languages and dialects, making it, per capita, the most ethnically diverse national population on the planet. The peoples’ historical origins are predominantly Melanesian, intermixed with Polynesian, and also include the famed Lapita People who sailed across the Pacific from Asia almost sixteen hundred years before Christ. The country still retains a mixture of its historical colonial past as it is a condominium – a colony of both England and France – with a comfortable intermixture of ethnic varieties on top of its already diverse indigenous population and a peaceful, relaxed, easy-going lifestyle. The official languages are Bislama (which is a type of lingua franca spoken by all) and English and French. The languages used in the education system are English and French, with state schools teaching a locally developed curriculum and private schools teaching an Australian or French curriculum. Most students come out of the country’s secondary education system able to speak English and French on top of Bislama and their native indigenous language.
The honorary citizen enjoys all privileges except the ability to participate in political life Medical services are available from the staterun health services and expatriate and local foreign-trained private medical specialists who dispense such services. There is also ready access to modern medicinal drugs and remedies from commercial chemists. Vanuatu is situated about 3 hours’ flight from Sydney or Brisbane, almost 3 hours from Auckland, 1½ hours from Fiji, 1½ hours from Honiara and 1 hour from New Caledonia. From these destinations, one
VANUATU THE LAND OF CONTRASTS
can go to more or less anywhere around the globe. The political system is a democratic Westminster system of government with a Parliament elected by universal suffrage every four years and a president as the head of state. The executive arm of the State is a democratically elected government headed by a prime minister elected by Parliament on the basis of majority rule. The nature of the people is such that, despite irregular changes in the country’s dynamic democratic political environment, peaceful transition has always been the order of the day. THE CITIZENSHIP PROGRAMME In recent years the country has amended its laws to allow for dual citizenship. Several types of citizenship classes exist. These are naturalized citizenship, citizenship by virtue of marriage, citizenship by entitlement, citizenship by investment and honorary citizenship. Further information on types of citizenship, processes, requirements and procedures is available at http://www.vnso.gov.vu/ . In mid-March 2015, Vanuatu was affected by cyclone Pam and its infrastructure and buildings were seriously damaged. In response, the Government launched the Vanuatu Economic Rehabilitation Programme (VERP) to grant citizenship to applicants who were willing to make a cash contribution of US$130,000 to it. Each applicant was entitled to honorary citizenship of Vanuatu pursuant to section 20(1) Vanuatu Citizenship Act [Cap 112] and the Honorary Citizenship (Vanuatu Economic Rehabilitation Programme) Regulation Order Nos 34 and 37 of 2015, and the Privileges for Honorary Citizenship (Vanuatu Economic Rehabilitation Programme) Regulation Order No 38 of 2015. The honorary citizen enjoys all privileges except the ability to participate in political life (i.e. elections). Beyond the contribution there are other fees which come to US$70,000. In total, this amounts to US$200,000 – plus our fees. The Citizenship Commission, which is an independent governmental entity regulated by its own Act of Parliament, has appointed only a few companies to deal with applications, of which Citizen Lane is one. Citizenship applications can be processed within two months. The Citizenship Commission usually meets once every month on the last or second last week of the month. Vanuatu’s citizenship investment programme scores over those of other centres because the commission does a “pre-check and pre-approval.” This saves everybody time and effort. The prospective client sends copies of passports and police clearance certificates to us, we forward them to the government and within one to two weeks we receive a “pre-approval.” Only then has the client to sign the agreement, we then lodge the applica-
tion upon receipt of our fees, and the client pays the first 50% of the amount. After the final approval, the client has to pay the remainder within 30 days. The Citizenship Commission, as we have said, usually meets in the second half of the month and this is when it bestows “final approval.” After he has received that approval, the client has to swear his oath to the country. He can do this in Vanuatu or abroad. If the latter, he can invite the commissioner to travel anywhere in the world, but would then have to pay his expenses.
There are no tax treaties with other countries, although there are now a dozen TIEAs THE FINANCIAL ECONOMY AS A WHOLE The economy is dominated by tourism but there is an agricultural industry and just as important is the country’s Offshore Finance Centre. More information on the nation’s economic and social parameters can be obtained from: http://www.vnso.gov. vu/ . Vanuatu has a very well-developed international communications system, with a new submarine cable connecting it to the global communication network. It also has two major domestic telecommunications companies: Telecom Vanuatu Limited (a subsidiary of Mauritius Telecom) and Digicel (Vanuatu). Vanuatu has a very well developed Offshore Finance Centre, which has been operating since 1971 with confidentiality provisions, excellent communication systems and experienced professional service providers. Vanuatu is in a uniquely advantageous time zone for the location of a financial centre. The Vanuatu International Finance Centre was established in 1972 and its members have indepth financial, investment, banking, accounting and legal expertise. They facilitate the formation of international and local companies, trusts and foundations, provide full international banking and insurance services and offer access to international investments and share trading in international markets. For more information please visit the Vanuatu Financial Centre Association’s website at: http://www.fca.vu/fca/ . There are no income taxes, withholding taxes, or capital gains taxes. No gift, death, estate or
succession duties apply to companies, trusts or individuals. There are also no tax treaties with other countries, although there are now a dozen Tax Information Exchange Agreements (TIEAs) with foreign governments. Under the Vanuatu International Companies Act, companies have a 20year guarantee against taxes, duties and exchange controls. The Vanuatu Investment Promotion Authority is a one-stop shop for interested investors who wish to invest in Vanuatu’s myriad of opportunities with tourism and agriculture featuring prominently alongside the finance centre’s activities for those who want to take advantage of Vanuatu’s tax haven privileges. More information on such opportunities can be obtained from: http://www.investvanuatu.org/ . The Vanuatu Financial Services Commission is responsible for the regulation and supervision of investment business and trust and company service providers. The commissioner is also the Registrar of Companies, Charitable Organizations, Credit Unions, Trade Unions, Personal Property Securities and Controller of Stamp Duties. The commission has additional responsibilities that include the development of the financial services industry in Vanuatu.
VANUATU THE LAND OF CONTRASTS
Although it is always keen to promote the financial centre’s facilities, the commission has an unwavering commitment to keeping the centre’s reputation for integrity spotless. Accordingly, Vanuatu always updates its laws to conform to international standards and best practices. An overhaul of the finance centre’s body of law is underway. This ought to bolster both the reputation of Vanuatu as an international finance centre and promote confidence among investors. The latest developments include a user-friendly system of company registration which can be done over the Internet. More information on the types of commercial structure available and on the registration processes of different commercial structures (including international companies and international banks) can be obtained from: https://www.vfsc.vu/. PICTURESQUE REMOTENESS AND BUSINESS CONNECTIVITY SIDE BY SIDE The Republic of Vanuatu is especially unusual in the Pacific not only because of its indigenous and traditional ethnic diversity but also in its colonial heritage, which has resulted in a melting pot of people coming together in a peaceful and relaxed
living environment. It is a country where one can enjoy a tropical environment surrounded by ocean, customs and tradition and still access the world at large. It is also a country that has been traditionally politically independent, choosing to walk the middling path in global politics according to its conscience rather than foreign influences.
Citizenship applications can be processed within two months It is a country where, in one day, one can visit traditional villages and see lifestyles unchanged over centuries, look into the world’s most accessible volcano, dive on one of the world’s largest most accessible shipwrecks, and then return to being a part of a dynamic and ever-changing modern world. It is truly a Land of Contrasts.
JURISDICTIONS IN PROFILE
JURISDICTION PROFILE DIRECTORY The world of international financial centres is in constant flux. In this index we look at the place of each one in the world market. These profiles also look briefly at jurisdictions’ recent history, the tribulations that some of them are undergoing and changes to their reputations as they all go about the business of developing and surviving. Readers may find it interesting to detect common themes, a task made simpler in a collection of reasonably short profiles that go to the heart of the matter in each case.
ABU DHABI Abu Dhabi moved into offshore financial services in 2015. The jurisdiction has in the past focused its efforts on oil and gas exclusively but it hopes to remedy this with the Abu Dhabi Global Market, its ‘financial free-zone’ which, according to reports, was ‘created’ in 2013 and is developing gradually.
its shape, at any event) is tried and tested. The new financial regulations and rules are comprehensive in scope, spanning a variety of regulated financial services, including asset management, banking and insurance businesses. The regulations also include imperatives to safeguard the interests of the marketplace, a market infrastructure system, market conduct rules and the ADGM’s enforcement powers and disciplinary procedures.
It officially opened for business in October of last year. Cabinet Resolution No 4 of 2013 called for the setting-up of the financial free zone on Al Maryah Island and Law No 4 of 2013 established the ADGM and its board of directors as its authority.
As of early January, the new IFC was awaiting its first batch of applicants for entry. It has already undertaken roadshows in India and the United States with the aim of drumming up business.
The big news is that the ADGM is eschewing the Code Napoleon for English common law as its legal base. This is largely an acceptance of the fact that most offshore centres, or at least the most successful, are rooted in common law or some approximation to it. The free-trade zone is aiming high from the very start, proclaiming its desire to be regulated to the highest degree and to compete with Dubai.
In one of its consultative documents, it says: “English common law, as it stands from time to time, will govern matters such as contracts, tort, trusts, equitable remedies, unjust enrichment, damages, conflicts of laws, security, and personal property.” Abu Dhabi’s and the United Arab Emirates’ civil and commercial law does not apply in the ADGM, but the federal criminal law of the UAE does. British, Caribbean, Australian and New Zealand law firms, ex-regulators and compliance consultants are reportedly rubbing their hands in anticipation. The jurisdiction has been making appointments to the board of its all-in-one Financial Services Regulatory Authority, which appears to be modelled on the old Financial Services Authority of the United Kingdom. Sir Hector Sants, a British former regulator, has been appointed as the chief advisor to the chairman, Ahmed Al Sayegh. Five very senior Anglo-Saxon judges from the ‘White Commonwealth,’ most of them with titles, have in the meantime been appointed to preside over the ADGM’s courts. The ADGM is proud of its unique selling-points, one of which is the so-called ‘restricted-scope company’ which is designed for use by family offices. The centre is touting this innovation as the ideal holding company for institutions and professional investors. Firms and individuals can now apply for the appropriate financial service licences, under an easily recognisable system of law and regulation that (in
This tiny principality, wedged between Spain and France, has the president of France and the Bishop of Urgell as its joint heads of state. Its banking assets are about 6½ times its annual economic output, while its financiers have assets under management on the order of 17 times GDP. It is not a particularly popular venue for incorporations, although Andorran companies pay low taxes. The main financial endeavour in Andorra is offshore banking, especially for high-net-worth individuals. Banking accounts for one-fifth of GDP. There are five banks which are as follows: • Andorra Banc Agrícol Reig (Andbank), which concentrates on products and services in asset management, private banking and investment funds for worldwide customers. • Mora Banca, which concentrates on asset management services and ‘personalises’ them for customers with significant assets. • Banca Privada d’Andorra, which does private banking, asset management and investments. • Banc de Sabadell d’Andorra, which does private and commercial banking, plus online banking and other services. • Credit Andorra, which performs personal and commercial private banking services and which has a branch in Panama. All banks have non-residents on their books, but Banca Privada d’Andorra and Credit Andorra are the main ones. Many commentators have noted that the jurisdiction is peculiarly vulnerable to the harm that bank failure might wreak on its economy, as it did on the economies of Iceland and Cyprus a few years ago. Unlike Cyprus, whose banks benefited from onshore bailouts, Andorra’s banks have no central bank to act as lender of last resort. This is likely to make HNW investors wary, as they face the
prospect of becoming unsecured creditors in the wake of a bank failure. This is a very relevant point as the banking system was rocked to its depths in March last year in the Banca Privada d’Andorra (BPA) money-laundering scandal. The US Financial Crimes Enforcement Network’s wounding inquiry into the bank led to the bankruptcy of one of its subsidiaries, Banco Madrid. Joan Pau Miquel Prats, the main bank’s CEO, was arrested. The report that FinCEN eventually released on BPA painted a picture of a veritable money-laundering shop. In FinCEN’s words: “It is difficult to assess on the information available the extent to which BPA is used for legitimate business purposes.” The bank has five foreign branches that operate in Spain, Switzerland, Luxembourg, Panama, and Uruguay. One of its managers allegedly colluded with Andrey Petrov, a money manager who worked for Russian criminal organizations and who used the proceeds of transnational organized crime to bribe officials in Spain. Petrov is thought to be connected to Semion Mogilevich, one of the US Federal Bureau of Investigation’s “ten most wanted” fugitives. In another scheme, a Venezuelan laundryman and his network relied on BPA to deposit the proceeds of public corruption. FinCEN says that BPA gained some fame among criminal networks for its weak AML controls and its provision of high-risk services to shell companies. Since the scandal broke, the bank has been on financial ‘life support.’ Its non-toxic assets have been put into Vall Banc, which was created especially for the purpose and is being sold off.
BELIZE A former British possession, Belize is an English-speaking country in central America that gained independence in 1981. Since the late 1980s it has branched out into areas such as a shipping registry (more than 3,000 vessels fly the Belizian flag), and has become an international financial centre. In 1990, Belize enacted the International Business Companies Act. More than 15,000 IBCs have been registered since then. In 1992, a Trusts Act was enacted, providing for onshore and offshore trusts. In 1996, the jurisdiction enacted the Offshore Banking Act, providing for two categories of offshore banking licenses – the Unrestricted “A” Class and the Restricted “B” Class license. The holder of a “B” Class license maintains lesser capital and is restricted to conducting certain limited business activities only. IFC WORLD 2016
In the late 1990s, the country enacted the International Financial Services Commission Act which seeks to promote, protect and enhance Belize as an international financial services centre and to regulate the provision of international financial services; it also enacted the Protected Cell Companies Act and the Mutual Funds Act. There are also Acts that provide for the creation of limited liability partnerships and international business companies. The country has an international foundation registry and a trusts registry. All international (i.e. offshore) trusts must be registered. International banks include Atlantic International Bank; Belize Bank International; Caye International Bank; Heritage International; Market Street Bank, and Choice Bank. The country passed anti-money laundering legislation in 1996. The banking sector (including offshore banking) is regulated by the Central Bank of Belize, while the non-banking sector falls within the jurisdiction of the International Financial Services Commission. The organisations give lists of banks/other financial institutions registered in the country. There is a 15% withholding tax paid to non-residents and the same tax rate applies to interest paid to non-residents. A withholding rate of 25% applies to management fees, rentals and charges for services to non-residents. There is no capital gains tax. VAT rises to 12.5%. Employed persons resident in Belize pay a 25% tax on chargeable income. Belize has double taxation agreements in force with the UK, Austria and the countries of the Caribbean Community (source: PKF, 2013.) In 2014, Belize signed the OECD’s Convention On Mutual Administrative Assistance In Tax Matters (Source: OECD website). The country is due to adopt the Common Reporting Standard in 2018.
BERMUDA “When the world needs someone to solve its insurance problems, it turns to Bermuda.” So said the CEO of Business Bermuda, the jurisdiction’s promotional agency, a few years ago. The Bermuda insurance market as a whole is more than half the size of the dominant market in London. Bermuda is a prime example of how a jurisdiction can dominate an offshore business line – in this case the offshore insurance sector – if only it can gain ‘first-mover advantage.’ The foundation of the Bermuda Marine Assurance Co (which insured cargo en route from Bermuda to Philadelphia aboard the ‘Liberty’ ship) provided such an advantage and the jurisdiction has never looked back. In 1948 the International Reinsurance Co became the first reinsurance company to operate there, propelling the archipelago JURISDICTION PROFILE DIRECTORY
into that business too. In 1962, once again acting as a first mover, Bermuda helped US entrepreneur Fred Reiss to set up the first true modern-day captive insurer, although the heritage of captives began in the coffee-houses of London in the 17th Century. In the 1960s Bermuda invented captive insurance companies, established by parent firms (usually large ones from the USA) for the purpose of covering the risks that those parent firms faced, and remains the world’s top domicile for them. It was also the ‘first-mover’ venue in the 1970s for rent-a-captives (in which clients rent the cells of captive insurance companies), which work along the same lines as today’s protected cell companies but without any statutory (only contractual) protection for the cells from each other’s liabilities and other problems, but then Guernsey stepped into the breach in 1997 with the Protected Cell Companies Ordinance which provided that protection, with Bermuda and the rest of the world following suit. No regulatory or filing processes are required to create a cell in a PCC. This British overseas territory has a huge expatriate population for its size – about one-third of the entire workforce – much of which consists of the professionals and skilled functionaries who are a necessary support for its lofty position in insurance and reinsurance. This is what happens when a jurisdiction moves into a niche and goes out of its way to attract the best minds in the business before any rival can do so; the weight of its skillbase propels it to ‘critical mass.’ When large numbers of such people operate close together, they invent new products and create new investment opportunities without having to look outside the jurisdiction for support, as Bermuda-based ‘expats’ and home-grown experts do in reinsurance. During the past few years, ‘hedge-fund reinsurers’ have emerged there. Bermuda benefits from lying closer to London and the prosperous east coast of the United States – in other words, to its consumers and counterparties – than do its Caribbean fellow-jurisdictions. Climate and geographical position are important factors in the fortunes of offshore centres because of their appeal to expatriates and their general likelihood to be picked as locations for offices. So, too, are their immigration policies – Bermuda’s is more liberal than some, although the introduction of a controversial term limit policy a few years ago (now rescinded) caused problems. Bermuda is a low-tax jurisdiction. There are no Bermuda income or profits taxes, withholding tax, capital gains tax, capital transfer tax, estate duty or inheritance tax payable by a Bermuda company or its shareholders, other than shareholders who normally reside in the archipelago. Bermuda is famous for registering aircraft. There is an online gambling sector (although not much else is available to gamblers) and duty is charged at the rate of 20% on all bets made. The archipelago has a solid British common law system. The Bermuda Monetary Authority has signed co-operation agreements with the majority of European Union member-states in relation to the Alternative Investment Funds Managers Directive or AIFMD.
BRITISH VIRGIN ISLANDS This British overseas territory in the Caribbean excels in offshore company formations and offshore trust formation. It was a fluke that Michael Riegels, a barrister who later became the first head of the Financial Services Commission, received a telephone call in the 1970s from an American lawyer with a proposal to incorporate a company that took advantage of an Anglo-American double-tax treaty. American lawyers were already using the Dutch West Indies for their offshore activity but the callers were interested in doing business with an English-speaking jurisdiction – an important example of the inherent appeal of the English language in the offshore world. Other incorporations followed in great numbers and the BVI’s offshore sector was born. After the US Government abrogated the treaty in 1982, devastating the BVI’s nascent offshore sector, Riegels and his ‘gang of five’ lawyers drew up the legendary International Business Companies Act 1984. It authorised the creation of a new form of International Business Company or IBC. Take-up was slow but then gathered pace. Harneys, the law firm to which three of the lawyers belonged including Riegels himself, writes: “The IBC Act was radical at the time – it streamlined the incorporation procedure, removed the requirement of corporate capacity, abolished the need for corporate benefit, recognised that companies could exist without members and permitted companies to provide financial assistance for the acquisition of their own shares. It provided for true statutory mergers and created new statutory tools for restructuring and reorganisation. It was based on Delaware corporation law but incorporated additions from elsewhere.” As a result, the BVI has for the past thirty years been the preferred jurisdiction for registrations for offshore vehicles and the world’s leading centre for company incorporation, with more than a million shell companies (i.e. companies with no physical presence) incorporated since 1984, of which 479,000 were still active in early 2015. IBCs were also only required to keep records “as the directors consider necessary”; in other words, they were very opaque in the way they worked and in their ownership. Nominee directors could be used and money-laundering was rife. The IBC Acts of Anguilla, the Bahamas and Belize copied the original Act parrot-fashion but the BVI, as so often in the offshore world, retained ‘first-mover advantage.’ Eventually, pressure from the Organisation of Economic Co-operation and Development over ‘harmful tax competition’ convinced the BVI to change the Act and it passed a reformed version, the BVI Business Companies Act 2004, with constant amendments since then but nominees still possible. Michael Riegels was by then the islands’ chief financial regulator, looking for fresh markets to conquer. Also because of international pressure, companies do not issue many bearer shares any more as new
laws have undermined their once-notorious anonymous transferability. The licence fees for them are punitive and any bearer share that is not held by a licensed custodian loses its legal value and cannot be used to vote or to receive dividends. More than 2,100 regulated funds are domiciled in the BVI, making it the second largest funds jurisdiction – and the second jurisdiction for hedge fund formation – in the world. Its financiers had the sense to begin to develop the sector in the 1990s, perhaps realising that the glory days of IBCs were numbered. The jurisdiction’s considerable pool of fund practitioners offers advice to asset managers, promoters, public, private and professional funds and other industry participants on the structuring and restructuring of BVI funds and on regulatory issues that affect funds. The BVI does not have a tax regime in relation to dividends, interest, rents, royalties, compensations and other amounts paid by an investment fund to anyone who is not resident there and funds pay no stamp duty. Investments can be worldwide. Far Eastern business has played a large part in the rise of the BVI, with many BVI companies being incorporated in Hong Kong and most BVI law firms having offices there. The BVI became Hong Kong’s jurisdiction of choice after Li Kai-Shing and his Hutchison Whampoa business empire decided to use a new BVI IBC as his holding company in the 1980s and caused a massive migration of copycat Asiatic business to the BVI. In 2013 the Government of the BVI set up BVI House Asia in Hong Kong to help BVI corporations to be near their Asian clients. The Virgin Islands Special Trusts Act 2003 created the VISTA trust, the best-known of all types of BVI trust, of which there may be more than 10,000 in existence. The BVI is now regarded as one of the world’s premier jurisdictions for this sector. BVI trusts are, in general, exempt from registration and filing requirements and there are broad exemptions from taxation in the Trustee Ordinance. The BVI also hosts a shipping register of global importance. Owners find this attractive because there is no corporation tax to pay on ships and the local trust law is so advanced that they can set up special purpose trusts to provide finance and protect all parties from environmental hazards. Offshore banking is a minor part of the BVI’s business. The jurisdiction has, however, seen an influx of banking business because its insolvency regime is very congenial for secured creditors. It is also a hospitable forum conveniens for international cases, which ties in with the use of BVI companies to funnel investments into countries with less developed judiciaries or rules of law – a crucial selling-point for so many offshore jurisdictions. The jurisdiction has recently modernised its arbitration and dispute resolution regime, making some small provision for mediations. The Government has appointed five people to sit on the board of the International Arbitration Centre. D Orlando Smith,
the BVI’s premier, has long had the development of this sector as one of his top priorities. Because of the very nature of arbitration, the development of this sector is bound to take time. Law firms such as Harneys have been putting arbitration clauses (with the BVI as the venue) into financing documents for a few years, but parties to such deals do not usually end up in arbitration immediately after signing up to them and the spate of cases has not yet begun.
CAYMAN ISLANDS The Cayman Islands dominate the hedge fund industry and host the fifth largest banking centre in the world. They are an overseas territory of the United Kingdom and are largely self-governing, especially after the latest injection of devolution into their constitution in 2009. The Governor can exercise complete executive authority if he wishes, but chooses not to. There are twice as many companies registered in the Caymans as there are people. More than 9,000 mutual funds, some 260 banks and 80,000 companies operate through the islands. Generally speaking, it is cheaper to set up shop in Cayman than in Bermuda, the island with which the jurisdiction has a slightly symbiotic (and competitive) relationship. There is a huge expatriate community for the jurisdiction’s size, accounting for 31% of total employment in financial services, while the remainder is Caymanian. The Government often forces ‘expats’ to reapply for work permits every year, but certain occupations (senior managers and underwriters) in the fund administration and reinsurance industries are eligible for ten-year work permits and ten-year term limits without having to become ‘key employees.’ Previously seen as a money-launderer’s paradise and the venue for many scandals too numerous to mention here, the Cayman Islands have spent recent years moving up-market and now have a very impressive battery of regulations and AML laws. The Cayman Islands Monetary Authority, their financial regulator, is one of the most respected in the world. The jurisdiction was the first to explicitly legislate in favour of hedge funds with its Mutual Funds Law 1993. As befits the world’s most famous tax shelter, the Cayman Islands harbour a large pool of highly skilled auditors, banking and trust personnel, company directors, fund administrators and lawyers of the highest standard. Evidence is mounting that the European Union’s Alternative Investment Fund Managers Directive, which regulates managers stringently for the first time, is helping onshore European funds to compete more effectively with the Caymans. The EU has yet to grant Cayman funds a ‘passport’ to allow them to trade more easily in Europe under the AIFMD. Competition is also rearing its head from other quarters: UBS recently used a new Irish structure, the ICAV, to move a fund-of-hedgefunds with assets of $565m to the Emerald Isle. Cayman enjoys success in attracting business from western Canada and the gulf part of the US up
the Mississippi River to Chicago. Miami is just one hour’s flight away. The Cayman Islands’ clientele – much of it from these regions – is predominantly institutional. There are no direct taxes – no income tax, company, corporation tax, inheritance tax, capital gains or gift tax. There is no form of taxation in the Cayman Islands relating to individuals, corporations or trusts. The Government has signed 36 ‘international exchange of information’ or AEOI agreements with other countries, 29 of which are in force. In 2013 it signed a ‘model 1’ international governmental agreement with the US Government to fall into line with the US Foreign Account Tax Compliance Act 2010. To accommodate the indirect nature of the tax system in the Cayman Islands, the IGA is a model 1B (non-reciprocal) IGA. The islands, unlike quieter offshore centres such as the Isle of Man, are grappling with a spike in gang violence, robberies and shootings and unprecedented levels of unemployment. The jurisdiction has a solid British common law system.
DELAWARE As one set of business incorporators among many relates in its advertising material, one can form a Delaware USA limited liability company (LLC) or corporation without ever coming to the United States, that is even if one is not a resident or citizen. If one is neither of these things and has no ‘US source’ income, one owes no income tax to the US or Delaware. This is a significant concession because part of a dividend paid by a foreign corporation is considered ‘US source’ if one-quarter of its gross income is effectively connected with a US trade or business for the three tax years before the year in which the dividends are declared. The Delaware Division of Corporations does not maintain the names of Delaware LLC members/ managers on public record. Not only is Delaware a tax haven in the heart of the very country that spends the most time persecuting other tax havens; it is far more opaque than jurisdictions such as Switzerland. It does not make details of trusts, company accounts and beneficial ownership a matter of public record. This is a major reason why it hosts one-half of America’s quoted firms and 60% of Fortune 500 companies are incorporated there. On 1st May 2008, along with senators Coleman and Obama, Senator Carl Levin of Michigan introduced a bill called the Incorporation Transparency and Law Enforcement Assistance Act (US legislators, rather optimistically, usually refer to their bills as ‘acts’ in anticipation of a happy outcome) into the federal Senate, proclaiming: “This bill tackles a longstanding homeland security problem involving inadequate state incorporation practices that leave this country unnecessarily vulnerable to terrorists, criminals, and other wrongdoers, hinder law enforcement, and damage the international stature of the United States. Each year, the States allow persons to form nearly two million IFC WORLD 2016
corporations and limited liability companies in this country without knowing – or even asking – who the beneficial owners are behind those corporations. “Right now, a person forming a US corporation or limited liability company (LLC) provides less information to the State than is required to open a bank account or obtain a driver’s license. [A] report revealed that one person was able to set up more than 2,000 Delaware shell corporations [i.e. corporations with no physical presence] and, without disclosing the identity of the beneficial owners, open US bank accounts for those corporations, which then collectively moved about $1.4 billion through the accounts. It is one of the earliest government reports to give some sense of the law enforcement problems caused by US corporations with unknown owners. It sounded the alarm 8 years ago, but to little effect.” The Bill has been introduced into the US legislature four times, but it has never been passed and it never will be. The commitment of Senator Obama to it seems to have waned since his election to the presidency. Nor have US bank regulators ordered US banks – or any other banks – to stop dealing with Delaware corporations. As long as this jurisdiction’s habits persist, American diatribes against the rest of the offshore world will ring hollow.
DUBAI Dubai, the foremost of financial centres in the United Arab Emirates, is an oasis of calm in the turbulent Middle East, with a common law court system for its offshore business and a regulatory regime copied almost entirely from the UK’s, complete with top regulators recruited from all over the Anglo-Saxon world. It was Sheikh Mohammed’s decision to establish the Dubai International Financial Centre (and its regulator, the Dubai Financial Services Authority) in 2002 that made Dubai the biggest financial hub between Western Europe and Singapore. The jurisdiction’s offshore business takes place in other venues as well, notably the Dubai Investment Park, Dubai Internet City and the The Jebel Ali Free Zone. The jurisdiction offers the incorporation of Dubai Offshore Companies and offshore banking services, among other things. The currency of the United Arab Emirates, a confederation of principalities of which Dubai is the second largest, is the dirham. One US dollar = 3.67 dirham. There are no taxes on the income and profits of companies in the DIFC. In that free trade zone, and in others in the United Arab Emirates, foreigners can own shares in companies and pay no tax when they dispose of them. Those companies are classified as tax-resident in the DIFC if they are substantially managed and controlled from Dubai. DIFC companies’ income in the form of dividends from investments anywhere in the world (and income from interest or royalties) is not taxed, nor are profits. No remittance tax applies to profits that a DIFC branch has transferred to its head office onshore. There is no stamp duty. There is no withholding tax on interest payments to local or foreign recipients. JURISDICTION PROFILE DIRECTORY
However, the Gulf Co-operation Council, to which the UAE belongs, is thinking about introducing VAT on various things. Dubai has signed tax information exchange agreements (TIEAs) with Denmark, Norway and Sweden. Their status is ‘pending.’ The process of opening a bank account in Dubai is not super-fast, taking between one and four weeks. Know-your-customer guidelines are in force, at least on paper. No minimum deposit is normally required for a business account, but a private client who does not have a registered address in Dubai might open a private bank account. To open a current account, according to the Government website, one has to be a resident but some banks allow non-UAE residents to open savings accounts. Some banks set a minimum account/balance limit, sometimes US$ 500,000 or more. Many international banks have representative offices in Dubai, but few have chosen to acquire banking licences. No exchange controls are in place, making it easy for people and offshore corporations to move funds in and out. The DIFC had just over 1,000 companies with a combined workforce of more than 15,000 by the third quarter of 2013. By then, it had attracted 21 of the world’s top 25 banks, 11 of the top 20 money managers, 6 of the world’s 10 largest insurers, and 6 out of 10 top law firms. Arabian Business states that during 2014 it had experienced double-digit growth and its workforce had risen by 14% to 18,000. Dubai Islamic Bank, established in 1979, was the world’s first modern commercial Islamic bank and Dubai has been a major locus for Islamic banking ever since. The jurisdiction does have its detractors, however. Misha Glenny in his book McMafia in 2008 says: “Dubai thrives on conflict, provided none of the drama takes place on its territory. Desert Storm, the Palestinian Intifada, 9/11, the American attack on Afghanistan and the second Iraq war all led to people funnelling large sums into Dubai. 9/11 provoked a spectacular flight of money from the United States into Dubai.” He adds that there are no bombs or assassinations in this almost tax-free jurisdiction because nobody, including Al Qaeda, wants to disrupt it. The US State Department in its International Narcotics Control Strategy Report for 2015 says that there is pervasive corruption within the ruling and religious elite, government ministries and government-controlled business enterprises. It has, nonetheless, risen above its neighbours to become the principal IFC in its time-zone and region.
GUERNSEY A British Crown Dependency with a population of almost 66,000, the island is one of the better known IFCs. In recent years, through its promotional agency, Guernsey Finance, it has sought to raise its profile in regions such as Asia. It has, for example, recently opened an office in Hong Kong. Other recent moves include the signing of an agreement with the Shanghai Family Office Union to work on business links. There are 30 licensed banks in the island; services range from retail banking and deposit-taking
to private wealth management. As of the end of September 2015 deposits in Guernsey banks stood at £81.6 billion. Total funds under management of Guernsey-registered funds stands at £225 billion and there are 816 captive insurance funds and cells (source: Guernsey Finance.) Cell companies were, GF says, pioneered in Guernsey; they are also called segregated cell companies and segregated portfolio companies. The concept has grown more sophisticated over the years with the introduction of the Protected Cell Company and Incorporated Cell Company. The country also hosts many private trust companies; it has a register of image rights and is doing well in the market for this form of intellectual property; it has a law for foundations – a relatively new area; its services also encompass custody, managed trusts and Shariah-compliant trusts. The island is also home to family office service-providers. Another source of income for the jurisdiction its its Channel Islands Aircraft Registry. Details of this can be found on the Guernsey Finance website. The Association of Guernsey Banks has an extensive list of members that includes the likes of Julius Baer, the Bank of Cyprus, Barclays, Butterfield, Credit Suisse, Deutsche Bank, EFG, Kleinwort Benson, HSBC, Rothschild Bank and Skipton International. Guernsey has a depositors’ compensation scheme. The island remains home to more non-UK entities listed on the London Stock Exchange (LSE) than any other jurisdiction globally, according to figures published in early 2016. The Guernsey Financial Services Commission oversees financial services. Its website lists regulated and registered entities, as well as warnings, public statements, legislation and key documents. Guernsey is in the first “early adopter” wave of countries signing up to the global Common Reporting Standard, gathering data from 2016, exchanging information from 2017. The island has signed a number of tax agreements with other jurisdictions: 60 Tax Information Exchange Agreements (TIEAs) so far; 14 full double-tax treaties (and 13 partial ones, including two with Poland on different subjects) and the EU Tax Savings Directive. The European Securities and Markets Authority recommended in late July 2015 that Guernsey should be granted a ‘passport’ for the purpose of the European Union’s Alternative Investment Fund Managers Directive, or AIFMD. There have been concerns that the directive will freeze out managers based outside the EU, a bloc of which Guernsey is not a member.
HONG KONG Hong Kong, a former British colony now owned by China, competes with (and operates on the same
level as) London and New York as an international financial centre. Its has a small share of the global bond markets but its equity markets a had 23% share in 2009 [source: Chatham House] and have been growing quickly, partly because of the expertise that this hub can bring to bear when organising international placements of the largest sort, including initial public offerings. It has the second biggest stock market in Asia after Tokyo. Its relationship with mainland China slightly resembles the UK’s relationship with its overseas territories in the Caribbean. It is the main fund management centre in Asia. The Securities and Futures Commission (the SFC, a much more active regulator than the Hong Kong Monetary Authority) states that there are 1,935 authorised funds there with a net asset value of just under US$1.3 trillion. Hong Kong’s combined fund management business, rising rapidly, stood at 2.27 trillion at the end of 2014 (up 10½% since 2013). The number of SFC-authorised funds domiciled in Hong Kong increased by 26% year-on-year to 594 in March 2015. Hong Kong is the international hub for mainland China, which is now the world’s manufacturing powerhouse and the home of many captains of industry and ‘princelings’ of the Communist party who are keen to re-route their money to the United States and/or offshore. This makes it the world’s largest offshore hub for renminbi business, which China has been supporting more and more in recent years, and the world’s largest offshore pool of renminbi liquidity. Switzerland has always been the leading wealth management centre, but Hong Kong has grown the fastest since 2008 and by 2014 was the fifth largest. Assets under management in the private banking sector, according to the SFC, came to a total of US$397 billion in 2014. Shanghai-Hong Kong Stock Connect, a cross-boundary investment channel, was set up in November 2014 to provide mutual trading access between the Shanghai and Hong Kong stock markets. In effect, it opened one of mainland China’s two stock markets – and the fifth largest in the world by market capitalisation – up to capital from all over the world. Investors, including fund management firms based in Hong Kong, can trade eligible shares listed on the other market subject to daily and aggregate quotas. The northbound daily quota is set at 13 billion renminbi, the southbound at 10½ billion. As of June 2015 there were 2,626 SFC-authorised collective investment schemes, including 2,063 unit trusts and mutual funds, 294 investment-linked assurance schemes, 243 pension/MPF-related funds and 26 other investment schemes. The ETF market in Hong Kong has demonstrated remarkable growth in recent years. At the end of November 2015, there were 135 ETFs listed in Hong Kong, as against 122 ETFs listed at the end of 2014. In December 2015, mainland and Hong Kong regulators approved seven cross-border funds (three
from Hong Kong and four from China proper) as part of a long-awaited ‘mutual recognition of funds’ scheme, which gives the world’s asset managers access to Chinese investors. About 100 Hong Kong-domiciled funds used by overseas investors are eligible to use the scheme. There is no withholding tax on interest and dividends, no wealth tax, no capital gains tax and no accumulated earnings tax on companies that keep earnings instead of distributing them. One day, according to the ruling elite, there will be no stamp duty on the sale and issuance of securities. Hong Kong adheres to a “territorial source principle of taxation,” not taxing any income from outside, its tax laws are very simple and easy for outsiders to use and the mainland Chinese government levies no taxes there. Tax on salaries is only 16%, making it a good destination for offshore operators who want to relocate there.
ISLE OF MAN In the mid-1980s the tourist trade declined permanently, leaving this rainy Crown Dependency in the Irish Sea in a quandary which it solved triumphantly by becoming an offshore centre of finance. The isle, which already had ‘British infrastructure’ including National Insurance and income tax and could therefore appeal to British businesses and high-net-worth individuals, began by taking over banks’ and funds’ outsourced back-office functions, with various banks shunting their back offices off there in the 1990s. Subsidiaries came to the island as well: Barclays Private Clients International operates from there. The island has the biggest offshore life insurance business, which employs 2,000 people. It has relatively low taxes and its offshore financial sector accounts for most of its GDP. It has a comprehensive talent-pool of offshore lawyers, accountants and other professionals and is very well-regulated. One of the isle’s selling-points is that it immediately agrees to practically every international or British initiative without demur, giving it the advantage of letting global investors know where it stands at all times. The latest example is the Organisation for Economic Co-operation and Development’s ‘automatic exchange of information’ initiative – commonly referred to as “GATCA” or “Global FATCA” - regarding financial accounts at banks, which contains the reporting and ‘due diligence’ rules of the so-called Common Reporting Standard or CRS. The Isle of Man agreed to it quickly while Jersey and Guernsey dragged their heels for some time. Company formation times are speedy – two or three days being normal – but formation costs are relatively high. Manx companies can register for value-added tax or VAT. One popular vehicle is the ‘2006 company.’ When the British Virgin Islands experienced mounting criticism from the OECD that its International Business Companies Act was creating opaque IBCs and giving them “harmful tax competition” advantages, it enacted the placatory BVI Business Companies Act 2004. The Isle of Man was watch-
ing. It duplicated that Act in 2006 for its own purposes and thereby gained an important stream of business. ‘2006 companies’ can be limited by share and/or guarantee or can be unlimited companies with or without shares. They pay no capital gains tax, income tax or inheritance tax. The identity of the beneficial owner can be hidden from the eyes of the public (though not the authorities) through the use of a corporate shareholder. In 2014 many virtual (e.g. Bitcoin) currency exchanges fled the stifling regulatory environment of New York for the ‘light touch’ regulation-to-be of the Isle of Man, responding to the pragmatic welcome that the authorities gave them. It was one of the first countries in the world to amend legislation to apply to digital currency; the London Daily Telegraph christened it ‘Bitcoin island’ and ‘Crypto valley.’ Crypto businesses have to register with the government and undertake some background-checking bureaucracy to avoid money laundering and other financial irregularities, but once that is out of the way the doors to innovation are wide open. Aside from this, the jurisdiction has spent recent years reacting to a tidal wave of financial legislation – such as the Alternative Investment Fund Managers’ Directive – from the European Union, to which it does not belong, and tax initiatives from the OECD. Only recently has it come out with a new batch of policies to help it diversify, and these are not specifically financial ones. Finance, indeed, is not the island’s only type of offshore business. It has always been interested in technical innovation – such as online gambling with the enactment of the Electronic Transactions Act 2000 and the Online Gambling Regulation Act 2001. These Acts allow it to grant operators full licences, sub-licences and Isle of Man network licenses, which allow businesses registered to non-Isle of Man operations to play on Isle of Man servers without re-registering. The isle has also been very successful in aircraft registry business, becoming the market leader for business jets.
JERSEY Jersey has 42 banks and 1,334 funds, with a compensation scheme in place for depositors. For the last 50 years at least, it has been a venue for private wealth management, trusts and estate and succession planning, and more recently foundations. The financial sector takes up one-quarter of the workforce. Jersey’s trust law, established in 1984, is a model for others and for the Hague International Convention on Trusts. One hundred Jersey companies are listed on stock exchanges all over the world and Jersey has the highest number of FTSE 100 companies registered outside the United Kingdom, its ‘big brother next door’ with which it has a love-hate relationship. It is a Crown Dependency outside the European Union but is not entirely independent of the UK. Offshore banking is an important consideration in assisting with wealth creation and preservation. The range of banking services provided from Jersey is extensive, including multi-currency banking, IFC WORLD 2016
offshore mortgages and investment structuring. The pool of professional talent to be found on the island is equal to none.
shore” jurisdiction. The languages are Malaysian and English. Besides its international financial services, it has oil and gas reserves.
The island levies no capital transfer tax, capital gains tax, value-added tax or VAT, withholding taxes or wealth taxes. Its offshore financial sector is extremely well-regulated. According to an expert at MONEYVAL, Jersey and Guernsey undertake the best anti-money-laundering compliance in Europe. There are no secrecy laws. ‘Tax-resident’ (and therefore zero-tax) status goes automatically to every company incorporated in Jersey unless it is substantially controlled from somewhere else or it undertakes certain types of financial service business, in which case there is an income tax of 10%. Jersey has been very late in boarding the global ‘tax-transparency’ express train which is now coming down the tunnel at top speed. This, however, seems not to have caused it much trouble.
The jurisdiction has taken steps to be a hub not only for conventional finance but also as a centre for Shariah-compliant finance in the region. By some measures, it is home to more than 6,500 offshore companies.
Jersey is a massive fund management hub. The way in which funds are regulated there depends on the types of investor they attract and whether or not they are closed-ended or open-ended. Sophisticated or institutional investors are regulated less onerously than others, as long as the offer documents make the risks obvious. The jurisdiction’s funds sector has gone into Islamic asset management recently and is now a domicile for developed asset classes such as real estate, private equity, commodity and equity for Islamic fund mandates. Jersey’s financiers have a good reputation for corporate structuring, especially involving special purpose vehicles or SPVs for a variety of purposes, and customers from the Gulf of Persia have long been taking advantage of this. However, Shariah scholars have deemed this unacceptable because they believe that SPVs should be independent. This has allowed Jersey products to be used successfully with Sukuk structures, i.e. Islamic asset-based bonds. Jersey-based SPVs have been used in connection with a wide variety of Shariah-compliant Islamic capital markets transactions, some for the purpose of taking investments off the balance sheet and securitising assets. A variety of legal vehicles are available including Jersey-incorporated companies that issue Sukuk, limited partnerships that issue partnership interests and trusts that issue units or trust interests or certificates. Jersey companies are governed by the provisions of the Companies (Jersey) Law 1991, as amended, and the formation of offshore companies is quick and cheap. An urgent incorporation service allows a company to be incorporated in less than twenty-four hours, if all the required information is supplied. Jersey companies are limited by share and shelf companies are not available. New regulations in 2011 simplified mergers between Jersey companies and foreign ones and the Hong Kong Stock Exchange allowed Jersey companies to be listed there in 2009.
The Labuan Financial Services Authority (formerly called LOFSA or the Labuan Offshore Financial Services Authority) was set up in 1996; it is responsible for overseeing and developing the Labuan International Business and Financial Centre, the jurisdiction’s promotional agency. Important bodies include the Chartered Tax Institute of Malaysia and the Malaysian Financial Planning Council; educational institutions such as the International Centre for Education in Islamic Finance; legal service providers such as ZICOlaw; insurance entities including The Archipelago Group; and trust companies. The Association of Labuan Banks and the Association of Labuan Trust Companies are important trade bodies in Labuan. Banks operating there include HSBC, Maybank, and Standard Chartered. The IBFC in Labuan is used for trading; investment holding; fund management; money broking, issuance of financial instruments, both Islamic and conventional; tax planning; banking, insurance, mutual funds, trusts; company management, family trusts and estate planning. Labuan has no capital gains taxes, or withholding taxes on dividends, fees and interest; there is no stamp duty. Non-Malaysians working in a Labuan company enjoy a 50% tax exemption from personal income taxes. There are two types of offshore companies in Labuan: trading companies and non-trading, or holding, companies. Then there is the Labuan Charged Company; this can choose to be taxed under federal Malaysian law, benefiting from Malaysia’s double-taxation agreements. Labuan trading companies are taxed at 3%. Such companies cannot trade in the Malaysian currency. A Labuan trust must have a resident settlor. The beneficiary must be a ‘Labuan person,’ but this can be a foreign-owned legal body. Both residents and non-residents are entitled to set up trusts. In the case of a non-resident, Malaysian property can be injected into a Labuan trust while a Malaysian resident can place international assets into a Labuan trust but Malaysian property requires the approval of the regulator, the Labuan FSA. In February 2010, Labuan enacted a law which made Limited Liability Partnerships (LLP) possible. At least two partners are required. Personal income tax is the same as in Malaysia, ranging from 0% to 26%.
LABUAN Labuan is a federal territory of Malaysia and lies off the coast of Borneo. Its authorities call it a “midJURISDICTION PROFILE DIRECTORY
More than 70 double tax agreements are in force. When investing overseas, a Labuan company that wants to benefit from a DTA may need to ask for
a certificate of residency from the Malaysian tax authorities. This tax-resident certificate is issued by the Inland Revenue Board (IRB) or Malaysia and subsequently shown to the foreign tax authorities overseas.
LIECHTENSTEIN The tiny European principality’s financial sector contributes about 30% to its gross domestic product. Financial services are private asset management; international asset structuring, funds and insurance. It has a total population of around 37,000. The jurisdiction signed a customs agreement with Switzerland in 1923 and adopted the Swiss franc as the legal currency in 1924. It joined the European Economic Area in 1995; since that year it has also been a member of the World Trade Organisation. There is a Finance Liechtenstein organisation, with a website available in English and German, giving useful facts and figures about trade bodies, key legislation and business groups. The Liechtenstein banks are represented by the Liechtenstein Bankers’ Association. Prominent banks and financial institutions include LGT, Kaiser Partner, Liechtensteinische Landesbank, VP Bank, Banque Havilland, Raiffeisen Privatbank Liechtenstein, EFG Bank von Ernst, Bank Frick & Co. The Financial Market Authority Liechtenstein (FMA) regulates financial services. The country also adheres to the global standards for transparency and exchange of tax information developed by the OECD. It has a AAA credit rating from Standard & Poor’s. In November 2013, the ‘Liechtenstein declaration’ was issued, reconfirming the country’s commitment to the existing OECD standards for tax co-operation. Liechtenstein is among the “early adopter” jurisdictions for the Common Reporting Standard and will start following it in 2017. In accordance with the European Union’s directives, Article 7 Liechtenstein Banking Act (the BankG) contains provisions for the guarantee of bank deposits and the protection of investors. The law requires banks and other financial service providers to protect deposits and investments adequately with supervised financial service providers by establishing separate organisations or by participating in foreign protection schemes. Liechtenstein has signed comprehensive double-tax treaties with Austria, Germany, the Hong Kong Special Administrative Region (SAR), Luxembourg, Malta, San Marino, Singapore, the United Kingdom and Uruguay. It has initialled double-tax treaties with Bahrain, the Czech Republic, Georgia, Guernsey, Hungary and the United Arab Emirates. The treaties follow the draft model of the Organisation for Economic Co-operation and Development. Liechtenstein has also signed limited double-tax treaties with Switzerland and with two cantons of Switzerland. In 2015, Liechtenstein and Switzerland initialled a new treaty.
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In 2009 Liechtenstein and the UK signed a ground-breaking disclosure agreement about secret accounts – the famous Liechtenstein Disclosure Facility. Under its terms, Britons who held accounts in the country could ‘regularise’ them on condition that they paid certain amounts. It was seen as a relatively lenient way for accounts to be disclosed. As a result of the tax reform that entered into force on 1 January 2011, the ‘net worth’ tax is no longer calculated separately but is integrated into the income tax. All resident or domiciled individuals are subject to income tax on worldwide income, with the exception of income from real estate located abroad and income from either a fixed place of business or a permanent establishment located abroad. Non-residents are subject to tax if they are employed in Liechtenstein, if they own real property in Liechtenstein or if they have business premises in Liechtenstein. Non-residents are subject to tax on income derived from Liechtenstein sources including Liechtenstein real estate, owned or leased, and business premises. In addition, non-residents are taxed on income from self-employment and business activities carried out in Liechtenstein (source: EY). The income tax rates (for 2015) range from 3% to 24% (for a commune applying a communal multiplier of 200). Income from foreign assets, including real property and business premises, and other foreign income is considered in calculating the progressive tax rate. Capital gains derived from transfers of participations (business assets) and personal movable assets are generally exempt from income tax. Capital gains derived from transfers of personal and business immovable assets are subject to a separate capital gains tax on real estate.
MALTA The Mediterranean island-state, a former British colony, is in the European Union; its legal code is a mixture of English Common Law and continental European civil law. Languages are Maltese and English. The Malta Financial Services Authority regulates financial services. There are 26 banks (source: Finance Malta), 615 investment funds with a total net asset value of €8.95 billion (June 2013); Malta-based banks currently hold over €30 billion in deposits. The Tier 1 regulatory capital of the domestic banking sector sits at 11.8% (June 2014). Major banks in the country include HSBC, Banif Bank, FIMBank and Bank of Valletta. Among the private banks serving HNW individuals specifically are Mediterranean Bank. Banking institutions in Malta are regulated by the Banking Act, which is founded on EU legislation. The non-bank financial institutions are regulated by the Financial Institutions Act. There are 27 recognised fund administrators and more than 70 fund managers; there are 137 trust JURISDICTION PROFILE DIRECTORY
and fiduciary companies, 58 insurance vehicles and 12 retirement scheme administrators. There is an established offshore Malta company regime, introduced in the 1980s and adapted to EU rules when Malta joined EU in 2004. As an EU member, Malta has to (or will soon have to) obey such laws as the Alternative Investment Fund Managers’ Directive, the second Markets in Financial Instruments Directive and ‘Solvency 2. ‘ Legislators are due as of the time of writing to enact the Malta Family Business Act, a structure designed for family-owned companies from around the world. The country has promised to comply with the Common Reporting Standard and engage in the automatic exchange of information for tax matters from 2017 onwards; it has enacted primary legislation. Affluent people who are not citizens of the EU can use the Global Residency Programme, with a 15% flat tax rate on income remitted to Malta; it is linked to the purchase of property. In 2014, Malta introduced its Individual Investor Programme, offering Maltese citizenship by paying at least €650,000, and by meeting other conditions. Income taxes are progressive, rising to a limit of 35% on income of €60,001 or above. There is a corporate tax rate of 35%; through the country’s full imputation system shareholders can claim tax credits for tax paid by their companies. Capital gains tax is generally levied at a flat rate of 12% on the transfer value or the selling price.
MAURITIUS A former British and French colony (English and French are both spoken there), the island is located in the Indian Ocean and is a popular tourist destination as well as a financial hub. Its financial sector makes up around 10% of GDP. The island has been renegotiating a Double Taxation Avoidance Agreement with India. Mauritius is an important conduit of foreign direct investment flows to India. International banking groups such as HSBC, Standard Chartered and Deutsche Bank operate in the island. A full list of banks can be obtained from the Mauritius Bankers’ Association. The Financial Services Commission regulates the non-bank financial services sector and global business; it was established in 2001. The Bank of Mauritius, the country’s central bank, oversees and licences banks as part of its remit. The Mauritius Revenue Authority is the tax-collecting agency. The MRA says that so far, the country has concluded 43 tax treaties and is party to other treaties under negotiation. It has concluded DTAAs with countries such as Luxembourg, Singapore and Malta. There is a flat rate of 15% on chargeable income. Under its international corporate structure system, a company holding a Category 1 Global Business
Licence is liable to tax at the rate of 15%; a company holding a Category 2 Global Business Licence is exempt from tax. It is considered as non-resident for treaty purposes and is thus not covered by any double taxation agreement concluded by Mauritius, except for exchange of information purposes, if the agreement so provides. Residents of Mauritius are eligible to tax credits in respect of foreign tax paid on their foreign source income. A foreign tax credit includes a tax-sparing credit and in the case of dividends credit is also granted for underlying tax charged on profits out of which the dividends are paid. The jurisdiction has ratified the Convention on Mutual Administrative Assistance in Tax Matters. It is among 56 “early adopter” nations that are implementing the Common Reporting Standard, gathering relevant data since the start of 2016. To obtain a tax residency certificate, applicants for a Global Business Company must have two local directors, a local auditor, a principal bank account in Mauritius and board meetings held and chaired in Mauritius. Because of its period as a British colony, the country adopted the trust structures under English Common Law. Besides rulings in England, Mauritius legislation such as the Trusts Act 2001 is significant. Trusts are normally liable to income tax on their chargeable income.
MONACO This tiny, independent state near the Franco-Italian border is renowned as an offshore centre, a home for the super-rich and the venue for the annual Formula One motor race. There is a resident population of 35,000 people and a working population of 50,000. Some 35 banks are licensed; Monaco has 58 asset management houses and €103 billion of assets under management are held at the Monegasque Banking and Finance Centre (source: Monaco For Finance). The jurisdiction is promoted by the Commission for the Promotion of the Monaco Financial Centre and has a website under the title of Monaco For Finance. The MFF website has a list of banks and other institutions. Banking groups operating in the principality include Bank J Safra Sarasin; Credit Suisse; Compagnie Monégasque de Banque; HSBC Private Bank; UBS; Société Générale and Union Bancaire Privée. Asset management firms include Atlana Wealth Monaco; Bedrock Monaco; BSI Asset Managers, CMB Asset Management; Global Securities; Goldman Sachs; Julius Baer Wealth Management (Monaco); Knight Vinke; Wealth MC International. There are mutual funds run by such firms as BNP Paribass, HSBC and Edmond de Rothschild. Some 70% of the industry’s assets belong to non-resident clients from all over Europe and sub-Saharan Africa, the Middle East, Latin America and Asia-Pacific.
Monaco-based banks are supervised by the Prudential Supervisory Authority (Autorité de Contrôle Prudentiel - ACP). This authority was created in 2010. Another regulator is Financial Activities Supervisory Commission; this was founded in September 2007. It oversees the financial marketplace, such as deciding on licence applications from mutual fund firms. Service d’Information et de Contrôle sur les Circuits Financiers, or SICCFIN, is the body responsible for preventing and catching money launderers. Every foreigner over the age of 16 who wishes to reside in Monaco for more than three months of the year must apply for a resident card issued by the Monegasque authorities. Anybody who wants to become resident must prove that he has financial resources by producing a work contract, showing that he is self-employed or the manager or director of a firm, or producing evidence of liquid savings or of financial support from someone else. The organisation handling that handles such matters is the Monaco Welcome & Business Office. All foreigners officially residing in Monaco and people with Monegasque nationality pay no income tax. There is one caveat: French citizens who are resident in Monaco must pay personal income tax in accordance with French tax law. They pay the French Government directly. Monaco does not have capital gains tax or wealth tax. Assets in Monaco are subject to inheritance tax. Monaco will be under the Common Reporting Standard regime from 2018, collecting data to that end from 2017 onwards. In 2014 Monaco signed the Convention on Mutual Administrative Assistance in Tax Matters, managed by the OECD. In December 2015, Monaco signed the multilateral OECD Mutual Agreement Procedures agreement on automatic exchange of information for tax purposes.
PANAMA Recent revelations only go to show that this publication’s low opinion of this jurisdiction has been entirely justified. For years now, deficiencies in the rule of law and conformity to international standards have been gnawing away at Panama’s reputation as a safe and credible international financial centre. Bearer share corporations still exist in Panama, leading to a heightened risk of money-laundering in the eyes of the US State Department which produces a report on the subject every year. There is now a law on the statute book (Law 43 of 2013) that dictates that all bearer shares must be held by custodians but this only came into effect last summer and allows for a transitional period of three years, which means that it will not be fully in effect until 2018. Panamanian shell companies also exist. Panama’s move towards tax transparen-
cy is exceedingly slow. It also has a slew of bank secrecy laws. The US Central Intelligence Agency’s recent World Factbook states that Panama is a “major cocaine trans-shipment point and primary money-laundering centre for narcotics revenue; money-laundering activity is especially heavy in the Colon Free Zone; monitoring of financial transactions is improving; official corruption remains a major problem.” Its corporations have often featured in the recent spate of non-prosecution agreements that Swiss banks have been signing with the US Department of Justice. Panamanian law requires all banks in the jurisdiction to undertake “know your customer” controls and to report suspicious activity to the Financial Analysis Unit for the Prevention of Capital Laundering Crimes or UAF, but its regulatory regime is lax. Its economy is pegged to the US dollar. Offshoreprotection.com lists the major advantages of a Panamanian corporation as follows. • The freedom to appoint directors and officers of any nationality and country of residence. • The freedom to appoint nominee directors and officers. • The legal protection afforded for the confidentiality of business and banking transactions. • The tax exemption status provided to offshore companies. • The complete anonymity afforded to owners of Panamanian Corporations through the use of bearer shares of stock. • The freedom of capital movement in and out of Panama and the absence of regulatory supervision. • The absolute confidentiality of banking transactions under numbered accounts belonging to corporations with nominee directors and bearer shares in the hands of the owner. Non-resident corporations in Panama are free from having to pay tax on capital gains from the sale of company stock and tax on dividends, income, interest, rents and royalties. Indeed, the jurisdiction does not levy taxes on foreign source income and until recently has shied away from signing double-tax treaties with other countries. This changed in 2009 when it ended up on the OECD’s ‘grey list.’ It has now signed such treaties with the Czech Republic, France, Ireland, Israel, Italy, Korea, Portugal and the United Arab Emirates. It has a comprehensive free-trade agreement with Canada. It also has a model 1 ‘agreement in substance’ with the United States as regards compliance with the Foreign Accounts Tax Compliance Act, which was not in force at the end of last year. In 2014 it also found itself on the Financial Action Task Force’s ‘grey list,’ from which it has, surprisingly, emerged this year. Panama in 2008 was home to 350,000 international business companies or IBCs, the third highest number anywhere except for the British Virgin Islands and Hong Kong. There are more than 400,000 corporations & foundations, making Panama one of the globe’s most popular incorporation jurisdictions. It also hosts a world-class shipping registry.
PORTUGAL The Government of Portugal established the Madeira Free Trade Zone, where most of the island’s offshore financial business takes place, in the 1980s, originally as an industrial complex and place for the free movement of goods. As Madeira is an autonomous part of Portugal and therefore in the European Union, its offshore regime counts as ‘state aid’ and therefore requires EU permission to carry on. With the EU’s blessing, the present tax regime allows for the incorporation of new entities until the end of 2020. There is a reduced corporate tax rate of 5% until the end of 2027. In the case of activities to do with international services, the reduced rate is applicable to profits derived from operations exclusively carried out with non-resident entities or with other companies operating within the ambit of the IBC of Madeira. According to the Tax Incentives Statute, the following is exempt from income tax: a) income derived from the concession or temporary licensing, by non-resident entities in the territory, of patents, utilisation licenses, models, industrial models or designs, trade marks, names and establishment insignias, manufacturing or conservation processes and similar rights, as well as the income derived from the supply of technical assistance and from the provision of information acquired through an experience in the industrial, scientific or commercial sectors, provided that these rights relate to the activity developed within the free trade zone; and b) income derived from the rendering of services, obtained by non residents, as long as such income is not imputable to a permanent establishment located in the Portuguese territory outside the free trade zones, and as long as such income is paid by entities located within the free trade zone and relates to the activity developed there. In Europe, Portugal (and therefore Madeira also) has double-tax treaties with Austria, Belgium, Bulgaria, Cyprus, the Czech Republic, Estonia, Finland, France, Germany, Greece, Holland, Hungary, Ireland, Iceland, Italy, Latvia, Lithuania, Luxembourg, Malta, Moldova, Norway, Poland, Romania, Russia, Slovakia, Slovenia, Spain, Sweden, Switzerland, Turkey, the Ukraine and the United Kingdom. In the Americas, it has DTTs with Brazil, Canada, Chile, Colombia, Cuba, Mexico, Panama, Peru, Uruguay, the United States of America, and Venezuela. In Africa it has DTTs with Argelia, Cape Verde, Morocco, Mozambique, South Africa and Tunisia. In Asia its treaties are with China, Hong Kong, India, Indonesia, Israel, Japan, Qatar, Kuwait, Macao, Pakistan, Singapore, South Korea, and the United Arab Emirates. The Central Bank of Portugal is the banking regulator. Both onshore and offshore banks still have good correspondence networks with the rest of the world, despite the recent trend of ‘de-risking.’ Most of them subscribe to international banking services like SWIFT and Reuters. IFC WORLD 2016
In Portugal, the incorporation of a standard pre-approved company may take place in hours and a tailored one usually takes less than a week. Decree-law nr. 352-A/88, according to the IBC, regulates the incorporation and operation of offshore trust companies or branches in the Madeira Free Trade Zone. Article 11(1) states that the names of the settlor and the beneficiaries are subject to secrecy and may only be disclosed by way of a court decision. The stated object of the law is to give entities “the legal instruments and means...provided in other offshore centres.”
SEYCHELLES This Indian Ocean archipelago’s offshore financial services sector has grown from 650 international business companies or IBCs in 1996 to 140,000 today. There are also about 1,000 registered trusts and more than 300 foundations. The archipelago is a small offshore tax-haven. Its finances are being restructured with the help of the International Monetary Fund, which has lent it money by means of its Extended Fund Facility. It has had a turbulent political history since it gained independence from the United Kingdom as a republic in 1976. The first Gulf War (1991), which happened a mere 2,000 miles away, wreaked havoc with the islands’ tourist industry and its politicians decided to diversify their economy to escape their dependence on it. The year 1994 was the crucial one for the evolution of offshore business in the Seychelles with the passage of the International Business Companies Act. The National Assembly amended this in 2013 to force IBCs to keep accounting records – not full accounts, but evidence that would allow for the preparation of accounts, including receipts, invoices and bank statements. Other legislation followed this seminal Act, including the International Corporate Service Providers Act 2003 (which provided for the formation and running of foundations as well as corporations), the Securities Act 2007 (which led to the setting up of the first exchange, Trop-X, in 2012), the Seychelles International Trusts Act 1994 (amended in 2011 to make the trust structures more flexible), the Limited Partnerships Act 2003 (such partnerships being formed to conduct business outside the islands), the Protected Cell Companies Act 2003 and the Mutual Fund and Hedge Fund Act 2008. The IBC Act was amended in 2013 to please the Organisation for Economic Co-operation and Development. The OECD had just found the jurisdiction to be ‘non-compliant.’ It is now rated ‘largely compliant.’ Bearer shares ceased to exist in 2014. Barclays was the first commercial bank to establish operations in Seychelles in 1959 by opening a local branch and in 1999/2000 this became a local subsidiary. Although six more banks were to appear in the local market, it remained the leading bank and went into offshore banking there in 2004. The other pre-eminent offshore bank, BMI Offshore Bank which was registered for business in 2008, lost its correspondent relationships abroad and its day-to-day running had to be JURISDICTION PROFILE DIRECTORY
taken over by the central bank in 2014. Any confidential banking and personal information may only be divulged after a court ruling. The Government might hand such information on to foreign law-enforcers after a domestic investigation, but banks may not. Offshore banks are now obliged to ascertain the beneficial ownership of accounts, although non-face-to-face business is still possible. The Seychelles Financial Services Authority is the regulator for non-bank financial services in the Seychelles. Established under the Financial Services Authority Act 2013, the FSA is responsible for the licensing, supervision and development of the nonbank financial services industry of the Seychelles. It is also responsible for the registration of IBCs, foundations, limited partnerships and international trusts in the jurisdiction. In 2014 it replaced the Seychelles International Business Authority which had since 1995 done the two jobs of regulating and publicising the financial services sector. In February 2015, the Seychelles became the 85th signatory of the OECD’s Multilateral Convention on Mutual Administrative Assistance in Tax Matters. There is no capital gains tax. Income from abroad – e.g. from shares in the form of dividends – is not taxed.
SINGAPORE Financial services are regulated and overseen by the Monetary Authority of Singapore. The citystate is home to more than 200 banks and these had almost $2 trillion in assets as of 2013 (source: MAS). There are more than 1,200 financial institutions, ranging from banks to IFAs. It is estimated that up to 70% of money in Singaporean banks is from abroad. Of the 123 commercial banks, there are five local banks, 118 foreign banks and 36 offshore banks. A study late in 2015 by Aite Group said there could be as many as 330 wealth management institutions (private banks, family offices, other) in the jurisdiction. Singapore is a member of the Financial Action Task Force (FATF) and a founding member of the Asia / Pacific Group on Money Laundering. In 2013, the authorities said that they would make the handling of proceeds from foreign tax evasion a crime, making Singapore the first state in the region to do this. The jurisdiction has also inked more than 50 agreements to facilitate the exchange of tax data with other countries. Singapore has also agreed to adopt the OECD’s Automatic Exchange of Information standard, which comes fully into force in 2018. However, Singapore has warned that other financial centres must agree to similar standards so that it is not put at a disadvantage. Singapore has an English Common Law legal system and therefore has an established business in trusts that follow those of other Common Law jurisdictions, such as the UK and US. Trustees in Singapore have statutory duties under the Trustees Act; trust companies are licensed and regulated by MAS under the Trust Companies Act 2005 (see below).
Singaporean law allows people to form foreign trusts, and distributions to beneficiaries are free of tax under Section 13G Income Tax Act. Singapore trust law also allows use of a private trust company or PTC to act as the trustee of a specific trust, or a group of related trusts. Singapore has a progressive tax rate starting from zero, up to 20% above S$320,000 (from 2016 onwards it will end at 22% above S$320,000). There is no capital gain or inheritance tax. Individuals are taxed only on income they have earned in Singapore. The income earned by individuals while working overseas is not subject to taxation barring few exceptions (source: Hawksford, other). Tax rules differ according to the tax residency of the individual. A person is considered a tax resident in Singapore if he is a Singaporean or a Singapore Permanent Resident and has established a permanent home in Singapore; or a foreigner who has stayed or worked in Singapore for 183 days or more in the tax year. A person is deemed a non-resident for tax purposes if he is a foreigner who stayed or worked in Singapore for fewer than 183 days in the tax year. The jurisdiction is, along with other regional hubs, competing to win business in areas such as offshore renminbi-denominated transactions, as well as develop as a development centre for financial technology and private banking talent management. An extensive number of law and accountancy firms operate there and the ‘Big Four’ accountancy firms, as well as law firms such as Withers and Baker & McKenzie, have large practices.
SWITZERLAND The Alpine state holds around $2 trillion of offshore assets out of a global total of $9.2 trillion (source: Deloitte, 2015). The country has 275 banks (source: Swiss Bankers Association). There are SFr6.656 trillion ($6.57 trillion) of assets under management in the country, with 51.1% of this AuM coming from abroad. Switzerland has 25% of global cross-border asset management business, making it the global leader. Some 28,000 people work in the industry, creating SFr19 billion in gross earnings. Switzerland is outside the European Union. UBS is the country’s largest bank, with Credit Suisse and Julius Baer in second and third place respectively. The country’s bank secrecy law dates back in modern form to 1934 and it has not yet been repealed. The power of this law in protecting nonSwiss account holders has been eroded by automatic exchange of information agreements and is expected to weaken further in 2018. Its repeal requires national legislation. Financial services are regulated by the Swiss Financial Market Supervisory Authority (FINMA). There are 26 cantons, each with their own law-making bodies and taxes. The Swiss political system is federal.
In 2014, Swiss voters supported a referendum proposal to curb immigration from the EU; this is due to become law by 2017. People who reside in the country must pay tax on their worldwide income and assets, except on the income and wealth from foreign business or real estate or if tax treaties prevent double taxation. Residence for tax purposes arises if a person stays in Switzerland for 30 days, or for 90 days if the person does not work. Non-residents can be taxed on income from Swiss sources such as property, permanent business operations. Cantonal income tax rates are mostly flat but some cantons use graduated rates. The federal income tax is as high as 13% and is a progressive tax. Effective ordinary corporate tax rates on income vary significantly from one canton to another
(from approximately 12% up to a limit of around 24% in 2012).
ness. Companies qualifying for domiciliary status are exempt from cantonal tax on dividend income and on capital gains from qualifying participation.
Since January 2015, eligibility for being classified as an expatriate employee â€“ and its tax status â€“ has been tightened. Swiss citizens, foreigners with a permanent residence permit C, or any foreigners who are married to Swiss citizens need to file tax returns each year.
Other Swiss-sourced income is taxed at ordinary income tax rates but profits from trading outside are usually also subject to tax at reduced rates. Swiss federal tax does not provide for any particular relief for domiciliary companies (source: PKF).
Federal withholding tax is levied at 35% on certain forms of income, such as dividends, interest on debt, liquidation proceeds, lottery prizes and payments by life insurances and private pension funds.
Holding companies are exempt from cantonal and communal corporate income tax and are often also subject to capital tax at reduced rates. Holding companies may own real estate in Switzerland.
Special purpose companies (i.e. domiciliary and holding companies) exist. Domiciliary companies only have administrative activities in Switzerland and are exclusively engaged in international busi-
However, as an exception, any income or capital gains generated from such real estate is subject to ordinary taxation. Federal income tax is levied at ordinary corporate income tax rates.
IFC WORLD 2016
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With contributions from #AlbertIsola Minister for Financial Services HM Government of #Gibraltar, #PaulAstengo, Senior Executive #GibraltarF...
Published on May 11, 2016
With contributions from #AlbertIsola Minister for Financial Services HM Government of #Gibraltar, #PaulAstengo, Senior Executive #GibraltarF...