Lowtax International Tax Planning/IOFC Analysis

So far at least, the economic fallout from the debt crisis which is acting as a drag on many of the world’s major economies does not seem to be affecting the world of offshore, with many key jurisdictions having reported increases in business activity in 2011.

Although corporate taxes have been trending down across the world in recent years, the attractions of forming legal structures in low-tax and offshore jurisdictions remain compelling, especially with taxes generally on the rise in austerity Europe, a bitterly divided Congress causing much legal uncertainty in the United States, and a plethora of new laws springing up to regulate the finance industry in response to the global financial crisis. This has been demonstrated through statistics reported recently by governments and promotional agencies in a number of low-tax and offshore financial centres, showing that company incorporations across a range of sectors increased last year over 2010. In this feature we summarize some of the major developments in key jurisdictions.

Guernsey Lures Insurance Companies

The Guernsey Financial Services Commission reported this month that the number of insurance licenses issued in Guernsey last year rose more than 50% compared to the previous 12 months. The figures show that the Commission licensed 72 international insurers during 2011, which is a 53% increase from the 47 approved during 2010. This has helped push the net number of international insurance entities licensed in Guernsey up by 12, from 675 at the end of 2010 to 687 at the close of 2011.

Fiona Le Poidevin, Deputy Chief Executive of Guernsey Finance, the promotional agency for the island’s finance industry, said: “The latest figures show that there have been far more licenses issued during 2011 than the immediately preceding years and this is across the range of entities from conventional captive insurance companies, Protected Cell Companies (PCC), Incorporated Cell Companies (ICC) and in particular, PCC and ICC cells. These additions significantly outweigh the number of surrenders during the same period and we are aware of several more entities which are being licensed during the very early part of 2012. These developments are expected to see the value of our international insurance sector rise yet further from the current strong position reached through growth in recent years.”

Martin Le Pelley, Chairman of the Guernsey International Insurance Association, added: “It is extremely encouraging for Guernsey’s insurance market that we are seeing such positive trends at a time when an economic and political storm is engulfing the rest of Europe. In fact, the uncertainty created by the credit crunch and subsequent recession emphasize how important proper risk management is within companies operating in the European market and elsewhere. Guernsey has been well-placed to assist companies in this regard due to our breadth of experience and reputation for quality.”

Le Pelley went on to observe that: “As a result of the decision not to seek equivalence with the proposed European regulatory regime, Solvency II, our internationally compliant insurance regulations continue to provide the local industry and also our current and potential clients with certainty and clarity regarding the regulation of insurance business in Guernsey. This has, no doubt, contributed to the growth of the market during 2011.”

GFSC information shows that 63% of licenses issued in 2011 were to entities with parents in the UK but there was also new business from other parts of Europe, North America, the Caribbean and Asia. The GFSC has also released data for 2010 which shows that the Guernsey international insurance industry had gross assets of GBP21.4bn (USD32.9bn), a net worth of GBP8.5bn and premiums written totalling GBP4.1bn.

Malta Discovered

According to Malta’s financial industry promotional agency, MaltaFinance, the jurisdiction’s efforts to establish itself as a reputable and cost-efficient financial centre appear to be paying dividends, with solid performance reported right across the industry spectrum in 2011. Interest has been particularly strong in Malta’s funds sector, however.

Discussing Malta's success as an international financial centre in a year-end statement, FinanceMalta’s Chairman, Kenneth Farrugia said that: "The growth of the [financial services] sector speaks for itself. If you look at the growth of the funds industry as an example, 15 years ago we could describe the industry in just one word - ‘two’ - because we had two funds, two custodians and two asset managers. Today Malta has over 500 funds and in excess of 100 asset management companies, so the growth has been quite significant, predominantly in the last two or three years."

Currently the funds industry is leading the sector, having added over 100 new listings in the first half of 2011. "We’ve had compelling growth in this particular industry," notes Farrugia. "It’s clearly a sign that the industry has become truly international because we are serving fund managers based in the US, Canada, Italy, UK, Switzerland, Czech Republic, Latvia, and beyond."

FinanceMalta said that Malta is seeing substantial demand from a number of hedge fund managers who are choosing to shift their operations to Malta in response to both the rising costs of business and the growing regulatory burden in their current domiciles. Malta is emerging alongside London, Geneva, Luxembourg and the Swiss canton of Zug, as another European location for fund managers keen to maintain flexible operating arrangements and reduce tax bills, the agency said.

Malta is also an emerging regional hub and key location for wealth managers, family offices, high-net worth individuals and retirees, MaltaFinance reported. Bruno L’ecuyer, FinanceMalta’s Head of Business Development, said: "Given Malta's favourable residency and tax laws, innovative investment vehicles (including specialist funds regimes and trust companies), excellent legal and accountancy services, and a warm and sunny climate, all within the European Union, the country has begun to appeal to a wide audience in this area."

Farrugia highlighted the insurance sector as an additional future area of strong growth for Malta: "A growing body of insurers are finding their way to the island given the firm but flexible regulatory regime and access to excellent support services. Prospects for this sector look to be encouraging with Malta frequently being chosen ahead of competing jurisdictions."

The latest statistics released by the National Statistics Office show Malta has had substantial growth primarily in financial intermediation. Financial services are a significant contributor to GDP, edging towards 15% of the economy.

"We used to say that Malta is waiting to be discovered, but I think Malta is now being discovered today. The acceleration of foreign companies coming to the island is a manifestation of that. People are sometimes driven by perceptions, but you need to come to the island, meet with government, the regulator and the operators and get a first-hand view of what Malta is really about. I think when people do that, then Malta is sold to them. We don’t want to keep Malta a secret any more," Farrugia concluded.

From Strength To Strength for Hong Kong

A combination of the Special Administrative Region of China’s robust economy and the expiration of a business fee waiver scheme have pushed the number of newly registered local companies in Hong Kong to a new record.

Companies Registry data published earlier this month showed that the number of new company registrations in 2011 hit a record high of 148,329, an increase of 6.31% from 2010. The total number of live local companies registered stood at 956,392 at the end of 2011, up 92,630 from the end of 2010.

The number of companies incorporated in July also reached a monthly record of 24,957. Registrar of Companies Ada Chung said the figure doubled the average monthly incorporations of around 11,000 for 2010 and may be attributable to the local economic environment and expiration of the waiver of business registration fees for new companies in August.

The registration fee for a one-year certificate is normally HKD2,450 (USD315), made up of a HKD2,000 fee and a HKD450 levy, but a special concession was introduced in 2008 waiving the fee for business registration certificates with a commencement date in 2008-09. This waiver was reintroduced from August 1, 2009 for a further two-year period.

There were 798 non-Hong Kong companies that established a place of business in Hong Kong and were newly registered under Part XI of the Companies Ordinance, up 8.28% from the corresponding period in 2010. The total number of non-Hong Kong companies registered stood at 8,554 at the end of last year.

Chung said with the introduction of the one-stop electronic company incorporation and business registration service at the new e-Registry platform in March, 15,248 companies had been incorporated online at the end of last year.

On January 19, InvestHK announced that it assisted 303 overseas and mainland Chinese companies to set up or expand in Hong Kong in 2011 - the 11th consecutive year that it has beaten its annual target for the number of completed projects.

InvestHK observed that Hong Kong's international business hub status continues to make it an ideal location in terms of attracting a broad spectrum of companies. For multinationals, 2011 saw the setting up in Hong Kong of global operations for General Electric and Schneider Electric, among others. However, Hong Kong also remained attractive to small and medium-sized enterprises from overseas, largely due to its ready pool of talent and simple business procedures.

"We are delighted to have had another record year. The numbers are testament to the enduring advantages of Hong Kong as the preferred location for overseas investors and present a substantial vote of confidence in our city," said the Director-General of Investment Promotion at InvestHK, Simon Galpin. "But looking ahead to 2012, it seems likely to be a challenging year for the global economy. This motivates us to work harder to encourage and support overseas and mainland companies to come to Hong Kong, and reinforces the importance of FDI to our economy."

The 303 completed projects last year came from 39 countries. Mainland China continued to be the largest single source of investment into Hong Kong with a total of 56 projects, followed by the US with 48 projects, the UK (30), Japan (23) and Australia (19). New additions to the place of origin list are Iceland, Mongolia, Peru, Samoa and Vietnam.

In terms of a breakdown by industry sectors, the top three sectors were tourism and hospitality, transport and industrial, and innovation and technology, respectively. Almost 31% of the 303 companies indicated that the China and Hong Kong Closer Economic Partnership Arrangement was one of their investment considerations last year.

Galpin added that the extent of any impact from the global economy on FDI into Hong Kong during 2012 remained uncertain.

"In one scenario, overseas-based investors will increase their presence in Asia Pacific because they are trying to offset tough economic times in their home countries,” he said. “But if the situation worsens so that they have difficulty getting funding, it may delay their expansion plans and hence could pose some impact on FDI into Asia, including Hong Kong."

However, despite this environment, he remains optimistic "on the back of the expansion of our overseas network into Singapore and Brazil, and the investment promotion unit in the new Hong Kong Economic, Trade and Cultural Office in Taipei, which will come online soon".

British Virgin Islands Marks Milestone Year

Last month, the BVI Financial Services Commission announced both a quarter-to-quarter and a year-on-year rise in business incorporations.

Business incorporations and registrations, at 17,056 in the third quarter, showed improvement on second quarter registrations and incorporations of 15,689. This was a marked increase on that recorded in Q3 2010, when a total of 15,946 businesses were registered or incorporated. Indeed, it looks likely that the BVI will see its best year since 2008 in terms of incorporations and registrations.

The cumulative total of business companies on the BVI register stood at 457,331 as of September 30, 2011.

A total of three banking or fiduciary service licenses were issued in the third quarter. Total assets under management in the banking and fiduciary sectors increased over the quarter, to USD2.45bn, up from USD2.418bn in Q2 2011.

A total of 44 investment business licenses were issued in Q3, down from 50 the previous quarter. However, this was an improvement on the 31 licenses approved in Q3 2010.
2012 is also a milestone year for the jurisdiction’s financial services regulator, which has now been in existence for 10 years.

Since the passage of the Financial Services Commission Act in December 2001, which formally created the Financial Services Commission on January 2, 2002, the Commission has operated as the body responsible for the regulation, supervision and inspection of all financial services business conducted in and from within the BVI.

The establishment of the Commission closely followed recommendations published in 2000 by auditing firm KPMG, which identified that a key component of a well-run financial centre is the establishment of an independent regulatory authority.

“It is through the Act that the British Virgin Islands has been able to effectively defend our record as a serious partner in the financial services world,” said Cherno Jallow the current Director, Policy, Research and Statistics at the Commission and one of the principal drafters of the Act while he was the Attorney General of the BVI. “The financial services industry wants certainty both in the application of the law and in the decision-making process as they serve clients. Through the Act and as a Commission, we are able to streamline the rules governing the same activities we regulate in order to ensure a level field in the implementation of financial services legislation.”

Charged with new duties under the Act, the Commission has focused its efforts on promoting public understanding of the financial system and its products. It also has a role to play in helping to reduce financial crime, policing the perimeter of regulated activities, and preventing market abuse.

Recounting its history, the FSC noted that the global financial community has been presented with some extreme challenges over the last decade and every jurisdiction and their respective regulatory bodies have had to be nimble to navigate and solve these challenges. During this time, the Commission and the British Virgin Islands has been no exception.

Resilient Jersey

Jersey’s finance industry showed stable overall growth in the third quarter of 2011, with the value of funds it administers growing to reach its highest level since June 2009, and the total number of companies registered in Jersey growing to its highest level in the previous 12 months, according to data announced by Jersey Finance in December.

Geoff Cook, Chief Executive of Jersey Finance Limited, saw signs of resilience for Jersey in what continues to be a challenging environment, citing particularly positive news for the funds sector, which recorded 10.5% year on year growth in the net asset value of funds being administered in Jersey to stand at GBP197.6bn (USD307bn). That figure does not include funds established under the Unregulated Funds Regime, of which there were 147 by the end of the period – an 8% increase on the previous quarter.

Bank deposits also showed a quarterly increase, with deposits originating from the Far East and Middle East remaining impressive, standing at GBP6.8bn and GBP20.3bn, respectively, once again reflecting the value of ongoing promotional activity in Hong Kong, Greater China and the Gulf region.

That the total number of companies registered in Jersey grew to its highest level in the past 12 months was also a positive indicator of the health of the industry, Cook said.

The statistics, collated and prepared by the Jersey Financial Services Commission, are for the three month period ending 30th September 2011. The headline figures are as follows:

• Banking deposits increased by GBP2.3bn (1.4%) during the third quarter of 2011 from GBP165bn to GBP167.3bn.
• The Net Asset Value of funds under administration increased by GBP1bn (0.5%) from GBP196.6bn to GBP197.6bn during the third quarter of 2011. The total number of regulated funds increased by 42 from 1,323 to 1,365 over this period.
• The total number of unregulated funds increased by 11 (8%) to 147 during the third quarter of 2011.
• The value of funds under investment management decreased by GBP1.4bn (6.3%) compared to the previous quarter from GBP22.2bn to GBP20.8bn.
• The total number of live companies on the register increased by 78 from 33,116 to 33,194 during the third quarter of 2011.

Cook commented: “Jersey’s finance industry performed well during the third quarter of 2011. The total sterling value of banking deposits increased by 1.4% with currency fluctuations accounting for 0.5% of this movement. Encouraging news was also received on the banking front with the announcement that Abu Dhabi Commercial Bank has successfully applied to operate in Jersey.

“We are particularly encouraged by the increase in the total number of Jersey funds, especially against a backdrop of challenging fundraising conditions. A total of 53 new funds were added to the total funds stocks during the period – the best quarterly performance since September 2010. Whilst a 6.3% decrease in the net asset value of funds under investment management was recorded, this performance is still relatively good when benchmarked against key financial market indices - the FTSE 100 index decreased by more than 15% over the same period.

“Increasingly, Jersey is a key jurisdiction for corporate listings. Our members are receiving enquiries from many Indian and Chinese businesses to set up capital raising structures using Jersey companies. This is supported by the total number of live companies in Jersey increasing for a fourth consecutive quarter.’’

Nigel Strachan, Chairman of the Jersey Funds Association, added: “That the funds sector in Jersey continues to perform well in difficult conditions, recording an increase in the value of funds under administration for the fifth consecutive quarter, will give investors confidence in Jersey. It’s also pleasing that the alternative asset classes remain strong, with the value of Private Equity, Venture Capital and Real Estate funds being administered in Jersey all showing increases on the previous quarter.”

Full Steam Ahead for the Isle of Man

The Isle of Man Ship Registry reported this month that Gross Registered Tonnage increased by 12% during 2011, from 12.36m GRT at the start of the year to 13.84m GRT, evidence that vessel registration in the Isle of Man continues to be in high demand.

With registered tonnage at record levels, the Isle of Man is now among the top fifteen ship registries in the world in terms of registered tonnage. This demonstrates significant growth in terms of the registration of larger vessel types, given that the register topped 10m GRT for the first time in its history in April 2009.

The Ship Registry reported that the Isle of Man has in particular seen increased demand from companies in the Asia Pacific region, notably Japanese and Singapore-based corporations.

Dick Welsh, Director of the Isle of Man Ship Registry, said: "The growth in numbers shows that we are well placed to provide a more cost effective solution for registration without any compromise in quality or service for ship operators and owners. Having just recovered from the global crisis of 2008, ship owners are bracing themselves for another rocky year in 2012. An oversupply of ships together with the global economic downturn is keeping freight rates down and making it difficult to keep vessels operating profitably in many sectors.”

Welsh added: "The uptake on the flag registration has been encouraging. We are seeing an increased level of enquiries for vessels under construction or in-service which are planning to register, or change to Isle of Man registration. This hopefully will translate to an increased level of activities for us over the next two to three years especially across the Asia Pacific region.”

Alex Downie, the Department of Economic Development political member with responsibility for shipping, noted: “2011 was another very successful year for the Ship Registry, despite continuing global economic pressures. These figures demonstrate that, due to its world class service and support, the Isle of Man Ship Registry continues to be a flag of choice for merchant ships. I would like to congratulate the team at the Registry on this success and for continuing to provide a high level of customer service throughout this growth period.”

Downie went on to comments that: “The ship registry’s high quality and service levels combined with a low cost fee structure are continuing to attract larger corporations involved in wet cargo (oil and gas) as well as dry bulk trades. The cost savings offered by the Isle of Man Ship Registry are significant, especially for their larger vessels.”

Cayman Doubles Captive Insurers

Last November, the Cayman Islands Monetary Authority (CIMA) reported a 93% increase in captive insurance company formations during the first nine months of 2011 compared to the same period in 2010, albeit from quite a low base.

Statistics published by the Authority show that a total of 29 captive insurance companies established operations in the Cayman Islands during 2011, up from 14 in the first three quarters of 2010. The increase, according to the Authority, “shows the continued resilience of Cayman's captive insurance sector”.

Total premiums breached records, amounting to USD9.6bn as at September 30, a 12% increase on that recorded at the end of 2010. Total assets though have risen only marginally since the start of the year, to USD58.3bn.

CIMA’s Managing Director, Cindy Scotland, commented: “This 93% increase in captive formations and close to USD10bn in premiums are indicators of the health of our captive insurance industry, despite the generally soft international insurance market conditions. In all of 2010 there were 25 new captives formed, so for our 2011 numbers to already be at 29, and with new applications pending, we anticipate this calendar year to reflect significant growth in new captives.”

The total number of captive insurers registered in the Cayman Islands, as recorded on September 31, 2011 (729), is, however, down on the number reported at the end of 2010 (738). The Authority noted this was predominantly as a result of companies placed into liquidation but said that since the start of the year active company numbers have increased steadily.

The Cayman Islands has continued as the leading jurisdiction for health care captives. As at September 2011, health care was the primary line of business for 256 companies (35%). Workers’ compensation remained the second largest line of business with 157 companies (22%).

Of the captive licensees active as of September 30, 418 were pure captives (57%), 120 segregated portfolio companies (16%), 75 group captives (10%), 51 association captives (7%), 34 special purpose vehicles (5%), 31 open market insurers (4%) and one was classed as a rent-a-captive. The 120 segregated portfolio companies comprise a total of 634 active segregated portfolios.

The Cayman Islands captive insurance industry is composed mainly of companies insuring risks in North America. As of September 31, 2011, premiums originating from North America accounted for 84% of the Cayman market, followed by Europe at 3%, Caribbean and Latin America at 2%, and the remaining global market at 11%. In terms of captive numbers, North America accounts for 90% of the Cayman market, followed by the Caribbean and Latin America at 3%, Europe at 2%, and the remaining global market at 5%.

The Cayman Islands are of course better known as the jurisdiction of choice for offshore mutual funds, and the number of total mutual funds contracted by 0.8% (or 77) in the year to June 30, 2011, to total 9,409. However this was still 1.6% higher than in the first quarter of 2011.

During the first half of 2011, total new company registrations stood at 4,844, an 11% increase compared to the first six months of 2010. With the exception of non-resident companies, all remaining sub-categories accelerated. This overall performance represents the second consecutive year of positive growth for new company registrations within the past five years since falling to its lowest level in 2009.

In Summary

As InvestHK’s Simon Galpin observes, 2012 is likely to be a “challenging year”, even for the high-growth low-tax economies like Hong Kong, and nobody is quite certain how events will unfold with the Eurozone deb crisis still far from resolved. The renewed emphasis on offshore transparency, which began at the 2009 G20 Summit in London, coupled with the European Union’s ongoing attack on ‘harmful’ tax competition (essentially low-tax jurisdictions), and the Obama administration’s anti-offshore initiatives like FACTA, are other areas of concern going forward. However, since the initial post-Lehman Brothers phase of the financial crisis, when trading activity and investment fell sharply across the globe, business activity in IOFCs has been growing steadily, and with their significant tax advantages still intact, the world of offshore will be looking to the future with at least some degree of confidence.

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