Evolving role of offshore IFCs in meeting Chinese investment needs

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Offshore international finance centres (IFCs), keen to highlight the opportunities and advantages they offer international investors in China, have needed to take into account the increasing demand for more stringent regulation in developing their commercial relationship with Asian markets. However, leading IFCs such as Jersey, consistently recognised as the highest ranked offshore jurisdiction in the Global Financial Centres Index (GFCI), have developed a competitive advantage over competitors through their adoption of some of the highest standards of corporate governance, and a commitment to the global drive to improve information exchange between regulatory and tax authorities.

Tighter regulation

The rising tide of regulation has been evident since the global financial crisis in 2007 and shows no sign of abating. However, with increasing amounts of confidential data being exchanged across borders, data security is a real concern in Asia, and balancing transparency with the legitimate right to an appropriate level of confidentiality has become vital.

Richard Corrigan
Richard Corrigan

A much greater importance is now placed on jurisdictional risk where long-term financial structures are concerned, with investors keen to avoid the kind of data leakage that has been experienced by some other IFCs in recent times. Robust estate planning is a much more important consideration than tax when it comes to offshore trust structuring now, with Asian clients requiring high levels of sophistication involving complex cross-border family business and personal structures.

Jersey ensures that it remains one of the best regulated IFCs globally, a position acknowledged by independent assessments from some of the world’s leading bodies, such as the World Bank, the Organisation for Economic Co-operation and Development (OECD) and the International Monetary Fund. In the concerted global effort to crack down on tax evasion and financial crimes, Jersey is one of the countries that has committed to early adoption of the OECD’s new common reporting standard for automatic exchange of information, and Jersey already has in place regulation so that entities are fully accessible under tax information exchange agreements (TIEAs). Jersey and China signed a TIEA in 2010, Jersey’s regulator has signed a memorandum of understanding with China, and Jersey and Hong Kong have ratified a double taxation agreement. Such moves are important in Asia where robust regulation is, rightly, a major selling point.

Jersey’s ability to develop high-quality legal and regulatory regimes over the years, within a tax neutral environment and with a workforce of experienced, qualified financial practitioners, has earned it a global reputation as a leading centre for private client work. It has kept ahead of the regulatory requirements to support the international funds community, and it remains well placed to provide the investment vehicles to funnel international capital into China for the infrastructure projects it undertakes. It possesses similar company entities to enable Chinese businesses to expand internationally and access capital on foreign exchanges including the London Stock Exchange.

Company listings

Before 2008, 25% of Chinese companies listed on the alternative investment market in London were incorporated in Jersey, with the number now having risen to around one-third. With the ability to trade shares directly through CREST, and also as an approved jurisdiction for listing on the Hong Kong Stock Exchange, Jersey is one of the leading IFCs used for listings. There are more than 100 Jersey companies listed on worldwide stock exchanges with a combined market capitalisation of more than £168 billion (US$278.8 billion).

Trust amendments

In the private client market in China, trust structures are increasingly recognised as suitable structures for accessing Western markets.

Jersey’s trust law, established in 1984 and a model for others, continues to evolve so that Jersey trusts remain competitive. The latest amendment, the Trusts (Amendment No. 6) (Jersey) Law 2013, works to codify into statute Jersey’s existing jurisprudence on mistake (in the trusts context) and on the so-called “rule in Hastings-Bass”.

The effect of the amendment is to confirm the Royal Court’s ability to provide discretionary relief in a number of trust scenarios, e.g. where a settlor has made an error in settling assets into trust, or where a trustee has erred in exercising a power, perhaps failing to take into account matters that should have been considered, or acting on incorrect professional advice.

Alongside the traditional range of trust products including discretionary trusts and private client trusts, further vehicles have been launched to offer a wider choice for investors. The introduction of the foundation in 2009 has proved popular in Asian markets. Key features include its separate legal personality, shareless corporate structure, infinite durability and adaptable level of founder and guardian control, depending on the objectives of the founder. It offers an alternative to the trust structure and has appeal in civil law jurisdictions, where the Anglo Saxon trust concept is less familiar in legal circles.

Fund structuring

Jersey’s expertise in real estate structuring has been called upon to help meet an almost insatiable demand by private and institutional investors to acquire property for investment purposes in Europe, especially in the more attractive parts of central London. In the corporate market, for example, Jersey law firm Appleby has recently advised on two major landmark UK property transactions on behalf of Asian clients, with a combined value of £2.5 billion.

This year, EU rules are being implemented within the funds industry to ensure that alternative funds that are marketed in Europe comply with a new directive, the Alternative Investment Fund Managers Directive (AIFMD). Jersey, ahead of some competitors, is offering an attractive AIFMD-compliant option and also maintaining regimes for non-EU funds and non-EU investors, which are outside the scope of the AIFMD, thereby offering the best of both worlds for international investors.

It’s evident that IFCs such as Jersey, which a study last year revealed has been a conduit for nearly £500 billion of foreign investment into the UK, have an increasingly important role to play in support of the investment objectives of Chinese investors and their advisers. Jersey is acting both as a gateway for investment into Western markets and as a provider of robust yet flexible investment vehicles for private clients within a regulated environment, where high compliance standards are enforced.

Richard Corrigan is the global head of business development at Jersey Finance. He can be contacted on +44 (0)1534 836000 or by email at [email protected]