The term “offshore” is colloquially used in a very wide ranging number of sectors, including the mining industry, the sailing community and more frequently in the increasing hunt for renewable energy. But in relation to the world of funds, where exactly are we referring to when we say “offshore” and why are funds established there?
Where is “offshore”
The funds industry uses the term “Offshore” to mean a tax-neutral jurisdiction with a sophisticated financial services infrastructure which provides a wide ranging number of products and services to non-residents. The majority of the established offshore jurisdictions globally are either British Crown Dependencies (Jersey, Guernsey and the Isle of Man) or British Overseas Territories (such as the British Virgin Islands, Cayman Islands and Bermuda). Our focus in this blog is on the two leading offshore fund jurisdictions, the British Virgin Islands and the Cayman Islands.
Tax neutral environment
Maximizing tax efficiency will always be a factor in deciding to set up offshore. Funds established as companies and limited partnerships in the British Virgin Islands or the Cayman Islands do not pay tax on their profits and payments made by the funds to investors and are not subject to any withholding or distribution taxes (except, in certain circumstances, under US FATCA). This is essential to enable fund managers to attract investment from investors in multiple jurisdictions. Without a tax-neutral vehicle, those investors’ returns would be reduced by tax liabilities payable in a country to which they otherwise have no connection and they would be unlikely to invest, thereby artificially and unfairly reducing the possible returns the investors could make. It must always be noted, however, that whilst the corporate offshore vehicles are not liable to taxation, the amounts paid to investors will be liable to taxation in their country of residence.
Sophisticated and reliable legal system
Both the British Virgin Islands and the Cayman Islands have flexible and commercially driven corporate legislation drawing on the very best statutory aspects of what is available worldwide and supported by a framework of English common law. They each have a sophisticated Commercial Court with a wealth of experience in resolving complex matters and with ultimate recourse to the Privy Council of the United Kingdom. The strength of the legal systems in the British Virgin Islands and the Cayman Islands provides certainty to all parties involved and offers reassurance to investors that recourse will be available if disputes arise.
The British Virgin Islands and the Cayman Islands have an established and respected regulatory framework for investment funds and other investment business. The regulators, the British Virgin Islands Financial Services Commission and the Cayman Islands Monetary Authority ensure that their respective funds industries comply with the most rigorous international regulatory standards, thereby protecting investors in offshore vehicles accordingly, whilst the regulations also remain as flexible as possible to allow fund managers to flourish. Both jurisdictions have a strong compliance culture with sophisticated anti-money laundering legislation and have signed up tax exchange agreements with OECD jurisdictions to comply with requirements for offshore centers.
Experienced service providers
The British Virgin Islands and the Cayman Islands boast experienced service providers specializing in the complicated funds industry. The big four accountancy firms all maintain offices in both jurisdictions, allowing for a sophisticated level of audit where required. Both jurisdictions also have top-level fund administrators based on the islands themselves, as well as internationally regarded banks, with the Cayman Islands being fifth-largest banking center in the world with Goldman Sachs, Deutsche Bank, UBS all operating there.
Last and of course not least (in our eyes anyway), the leading offshore law firms in each jurisdiction have specialist funds teams who recruit lawyers from top firms internationally and provide a thorough, diligent and responsive service. Without wanting to blow our own trumpet (but at least letting you know that we have a trumpet), Harneys is very proud to have the largest funds team in the British Virgin Islands and the fastest growing team in the Cayman Islands.
Destinations of choice for funds
So, in conclusion, the combination of a tax neutral environment, sophisticated and reliable legal system, appropriate regulation and an excellent standard of service providers make the British Virgin Islands and the Cayman Islands the premiere destinations of choice for establishing and operating offshore fund vehicles.