If you are a golfer, go to Bermuda; if you are a sailor, come to BVI (British Virgin Islands); and if you are a diver, go to Cayman (Islands).
This old Caribbean saying, perhaps said jokingly, highlights the fact that choosing a destination for an offshore vehicle could even come down to personal preferences.
A level playing field among these centres is maintained by their efficient corporate friendly administration, optimised service delivery mechanism, attractive tax benefits, flexible statutes and ever-present willingness to adapt and evolve.
Specialisation
Despite the overall similarities, these centres are known for holding expertise relating to particular branches of corporate transactions. For example, the BVI is regarded as a good choice for aircraft leasing, shipping investments, mergers and acquisitions, holding companies and shareholders’ agreements. Cayman attracts most investments from hedge funds and securitisation vehicles. Bermuda is popular for insurance, and the Isle of Man for private aviation. While Mauritius banks on the benefits of its tax treaties for attracting investments into India and Africa, there are Jersey, Guernsey and the Isle of Man who score over the others when the investments are bound for the United Kingdom.
Adaptation
Tax structuring, flexibility and ease of corporate governance and shareholder protection are driving the trend for the increasing usage of offshore holding structures, says Jonathan Culshaw, Asia managing partner of Harneys, based in Hong Kong.
No wonder then that the competition among these centres is also growing. “If one jurisdiction has an advantage, the others copy it quickly,” says Robert Briant, partner and head of the BVI office of the offshore law firm, Conyers Dill & Pearman.
In fact, many offshore centres make an active effort to ensure that their laws and regulations are competitive. According to John Melia, a partner at Appleby’s Hong Kong office, the legislators and the industry professionals in these centres are always on the lookout for innovations in other jurisdictions that could be adopted by them.
There are plenty of such innovations to attract offshore clients. Cayman Islands Companies (Amendment) Law, 2011, for example, even includes a provision that allows companies to have dual names in non-Roman scripts such as Chinese. “The revisions introduced many of the enhancements requested by Cayman’s client base of sophisticated and institutional investors,” says Nathan Powell, Hong Kong-based partner at Ogier, “it gives flexibility for Chinese clients, who find it attractive and useful.”
However, a number of key factors for choosing an offshore centre continue to dominate structuring decisions and the selection of an offshore financial centre. John Rogers, managing partner of Walkers’ Singapore office, says that these key factors include the overall cost, establishment and incorporation fees, laws derived from English common law principles, stability of courts and right to appeal to English law courts, investor friendliness and political stability. Furthermore, he says that there are two fundamental considerations, “whether they are tax neutral jurisdictions like Cayman and the BVI, or have a network of double tax treaties like Ireland and Mauritius.” The ultimate decision, according to him, will often be influenced by what is the most tax efficient structure for a particular transaction.
Making the choice
The choice of the jurisdiction is often made by one or more of the lawyers, accountants, investors or financial advisers when a deal requires payment flows across borders, says Rogers.
According to Melia, clients frequently make their own decisions as to which offshore jurisdiction to use, guided by past experiences or by the recommendations of friends and business partners.
However, persuasive arguments could still be effective in changing perceptions. Stephen Adams, the BVI specialist partner at Bedell Cristin in Singapore, is quite confident that the versatility of his home jurisdiction can take on any challenge. “Often, people are surprised to know the number of things one can do in the BVI,” he says, “once they are educated about it, they tend to use it even when they had originally thought that they were going to do something else somewhere else.”
Indeed, the popularity of the BVI as an offshore centre shows up in its impressive statistics. With a small population of 28,000 and a GDP of little more than $1 billion, it had a registry of 459,000 companies in December 2012. Forty four thousand of these were set up in the preceding nine months only. In comparison, the number of companies registered in the U.S. state of Delaware is over a million, which is half of all the publicly traded companies in that country.
Not just the BVI, but Cayman is also one of the favourites for Asian clients, says Briant. He calls these two jurisdictions “centres of excellence” as they have many lawyers and service providers.
Powell too considers Cayman as an extremely popular destination for stock exchange listing in Hong Kong and pre-IPO restructuring and investments. Though the number of registered companies in Cayman is far less than the BVI - around 93,000 - it has 10,871 registered funds, which is still an impressive figure for a territory with a population of 54,000 and a GDP of $2.8 billion.
Bermuda is another established offshore name from the Caribbean, and until five years ago, was counted amongst the top destination for Asian clients. It still remains the favourite for insurance- related work with $107.6 billion worth of gross premium written and assets holding of $452.2 billion as of December 2011. The number of Bermuda-registered companies in December 2012 stood over 12,500.
However, Bermuda has fallen off from the list of preferred overall centres and lost ground to Cayman, says Powell. According to him, there is a perception among Asian businessmen that setting up a company in Bermuda is slightly more difficult and expensive. “Whether this perception is fair or not, it does not matter,” he says.
According to Andy Randall, managing partner of Walkers’ Hong Kong office, Bermuda is paying the price for being stagnant and inflexible and continues to lose traction in Asia. At the same time, he says that Jersey, a small British dependency off the coast of France, has tried hard to market itself in Asia, and is also experiencing some success.
“Given the historic ties between Europe and Jersey, the investments within Europe have, in a number of cases, favoured the use of Jersey vehicles,” says Rogers. According to him, in the last year, there has been substantial increase in the investments flowing from Asia into Europe. This includes both sovereign wealth and private investment into London’s property market, he says.
Jersey, with a population of 97,000, has more than 32,500 registered companies and 1,388 funds with the net asset value of funds under administration being $293 billion. According to official figures released by Jersey Finance, the deposits in its 42 banks stood at $231 billion in December 2012, but only 4 percent of them were from the “far east.”
Guernsey, with a population of 65,000, has $420 billion as the net asset value of funds under management. The Indian Ocean state of Mauritius, on the other hand, is much bigger in size with 1.3 million people and a GDP of 9.8 billion, but has only little more than 10,000 registered companies including global funds.
Emerging centres
New offshore financial centres continue to market themselves to the international investment community as more sets of islands look to diversify their income and attract cross-border investment, says Rogers, although he adds that the businesses and investors are reluctant to take undue risks by investing through untested vehicles.
The transaction support in these newer offshore jurisdictions is often limited, says Culshaw. “One can copy the laws of other jurisdictions, but it takes time to develop the deep pools of skilled lawyers, accountants and other service providers which are required to properly service transactions on a timely basis,” he says.
In the absence of material Unique Selling Points, these new centres try to compete on cost, but are still struggling to make a headway. “For a material commercial deal, a few hundred dollars here and there is not going to make a difference,” says Culshaw.
Despite a strong negative outlook and adverse market conditions, some lesser known offshore centres have managed to find a foothold. Culshaw says: “In spite of the banking crisis in Cyprus, our office there continues to see a steady flow of new instructions related to corporate and finance transactions involving Cyprus companies.”
Briant also says that the Cyprus banking crisis may not affect the island’s corporate services. “The link between the banking and the corporate services is tenuous,” he says, “however, as the jurisdiction has suffered a blow, there is likely to be a knock-on effect on its corporate services.”
Furthermore, according to Briant, a problem similar to that in Cyprus cannot happen in the BVI as it does not have a large banking industry.
Undoubtedly, financial and political instability could have a big negative impact on the future of any offshore jurisdiction. “One fact that unites BVI and Cayman is that they are prosperous and stable microstates with small, affluent populations isolated to some extent from global economic and political turmoil by not being part of any major political or economic grouping,” states Culshaw. Furthermore, he says that their dependence on offshore business restricts them from bringing in any material change in their laws and tax structure, which is adverse to the investors.
The benefits can extend beyond the usual range of accountants, fiduciaries and lawyers. “Many of these jurisdictions attract property investments and investments in the leisure sector, as well as provide berths for luxury yachts.”
Marketing
To be relevant and popular in the region, the emerging centres need to market their jurisdiction in the most effective way. According to Randall, there is no substitute for being on the ground in the Asian time zone and outlining to clients the benefits of a given jurisdiction.
In fact, even the BVI government has announced that it is going to open a representative office in Hong Kong. Culshaw says that the new office could assist in promoting the various uses of BVI business companies and trust structures, and should act to stimulate an additional interest in the jurisdiction. “It was overdue as much of the BVI’s offshore business has been sourced from Asia, and historically, the hub for much of that work has been Hong Kong,” he says.
Jersey already has a representative office in Hong Kong, while Guernsey has one in Shanghai.
It is not just government officials who try to increase the awareness of their jurisdictions. According to Rogers, law firms also see themselves partly as representatives of the jurisdictions that they offer. “We support the efforts, and work in conjunction with the governments of all the jurisdictions that we offer.”
Rogers says that law firms have a role to work with governments and government bodies to increase demand for the jurisdiction they offer, as well as to deliver high-quality and responsive legal advice.
However, the question remains that given the similarity of services and structures offered by most offshore centres, how do these big law firms maintain an objective balance while promoting all of them at once?
According to Melia: “We try to be agnostic about recommending which jurisdiction the client should use." We have such a broad jurisdictional footprint that we are able to mix and match products in order to deliver the best possible outcome to our clients.”
Melia also says that law firms catering to only one offshore jurisdiction work with the handicap of not being able to offer all the options to their clients. “There is always the temptation to sell the structures based in their jurisdiction, as otherwise they will lose the business,” he says, emphasising that it is always better to engage a law firm with a broad coverage. Appleby practises the laws of eight jurisdictions including Bermuda, Cayman, BVI, Jersey, Guernsey, the Isle of Man, Mauritius and the Seychelles.
Multijurisdictional law firms further increase their appeal by placing lawyers from different jurisdictions in one office. “The reason why we have the BVI and Cayman lawyers practising in Hong Kong is to service our Asian clients who can speak to them during the local business hours,” says Melia.
Appleby is not the only one to serve its clients in this fashion and according to Culshaw of Harneys, the demand for direct access to offshore lawyers within the same time zone first came from clients. “They often also prefer to get advice in Cantonese or Mandarin which we can offer from our Hong Kong office,” he says.
Satisfying those demands has led to a substantial growth in Harneys’ core legal services, says Culshaw, and its Hong Kong office has expanded to include five partners and 25 fee-earners.
The importance of physical presence in Asia is also recognised by lesser known offshore centres targeting the region. In August 2011, Collas Crill became the first law firm from Channel Islands to open its Asian office in Singapore. From there, it offers Channel Islands’ legal services in corporate, funds and trusts. Later in January 2012, Mourant Ozannes, a Guernsey-based law firm, opened its office in Hong Kong. According to Randall, Ireland too is gaining strong momentum in the regional funds and finance sectors.
Doing business through Channel Islands is perceived to be more expensive and clients are less familiar with the jurisdiction, says Culshaw.
However, according to Powell, whenever there is a requirement of travelling for board meetings, people tend to choose Channel Islands or even Luxembourg, although he adds that physical presence is required only in a few bespoke structures.
Regarding the cost incurred in other jurisdictions, Melia says that BVI and Seychelles companies are very competitively priced. “Costs are important for smaller businesses and funds, which are always looking for the hardest bargain,” he says.
The intricacies relating to the use of offshore financial centres are the main topics of discussion at the yearly China Offshore Summit organised in Beijing and Shanghai. “The sole purpose of these conferences is to make people aware of the nature of the offshore structures and the various benefits of using them,” says Culshaw, “it was interesting to note that the 2012 Shanghai conference attracted over 400 delegates evidencing the growing interest throughout PRC (Peoples Republic of China) in offshore.”
The demand for the use of offshore-related work is clearly on the rise in Asia, but the jury is still out on the dynamics of the supply side. According to Culshaw, "from a global economic perspective, we may be at the point where the offshore jurisdictions which can serve a material function in the global economy have already been established."
However, in Briant’s view, the global market can sustain several offshore jurisdictions each with its own set of specialisation.
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