Jersey - The Model Of A Modern Offshore Financial Center
By Lowtax Editorial
14 June, 2017
Undoubtedly, a major reason why international investors are drawn to Jersey is because of its low taxation. However, there is more to Jersey than just low taxes, and as this feature shows, it is Jersey's expertise in specialist wealth management and financing techniques, its favorable regulatory regime, good international reputation, and high quality financial infrastructure that are drawing investors to the island.
Introduction to Jersey
Jersey is situated off the north-west coast of France in the English Channel. It is the largest and most southerly of the Channel Islands with an approximate area of 45 sq miles. The resident population in July, 2016 was an estimated 98,000. English and French are both official languages and used widely.
As a British Crown dependency, the United Kingdom is responsible for defense and external relations, but by long established constitutional convention Jersey is self-governing in matters of domestic policy.
The island has its own legislative assembly, the States of Jersey, and a comprehensive independent legal, fiscal and administrative system. Apart from the few senior offices in the gift of the Crown, most executive powers are administered by committees of the States. This provides for direct, effective administration, but may be short on checks and balances. However, over many years the States has aimed at creating a well-regulated, efficient financial center with up-to-date legal, judicial and regulatory frameworks. Broadly, it seems to have succeeded.
Jersey is not a member of the European Union, and Protocol No 3 of the UK's Treaty of Accession to the UK excludes the island from most of the effects of the Treaty, other than those concerning trade in goods. The island does though apply the external common customs tariff of the EU, but, EU (and hence UK) VAT does not apply to Jersey (although the island recently introduced its own goods and services tax, which is currently set at five percent).
Jersey's constitutional position in relation to the EU cannot be changed without unanimous agreement of the member states, including of course the UK. However, this issue is especially pertinent as things stand, given the uncertainty surrounding the UK's future relationship with the EU following the 2016 membership referendum, and the 2017 general election. However, Jersey remains confident that it will remain a leading offshore financial center come what may.
Low Taxes, But High Reputation
Obviously, a major reason why international investors are drawn to Jersey is because of its low taxation. Under Jersey's zero-10 corporate tax system, most corporate income is taxed at 0 percent, with a special rate of 10 percent for specified financial services companies (banks).
Meanwhile, individuals in Jersey are taxed at single rate of 20 percent, and social security contributions are also paid by employers and employees.
Notably, there is a lack of other taxes on income and assets which are commonly found in other countries, including capital gains tax, capital transfer tax, inheritance tax or wealth tax in Jersey.
Indeed, Jersey was named as having one of the least complex tax regimes in the world in TMF group's first Financial Complexity Index report for 2017. According to this report, only Hong Kong, the United Arab Emirates, the British Virgin Islands, and the Cayman Islands have more benign tax systems.
However, there is more to Jersey than just low taxes, and as this feature shows, it is Jersey's expertise in specialist wealth management and financing techniques, its favorable regulatory regime, good international reputation, and high quality financial infrastructure that are drawing investors to the island.
This is evidenced by the number of awards that Jersey has won recently in the world of offshore investment and finance, including the recent WealthBriefing Europe Awards 2017. This particular award showcases "best of breed" providers in the global private banking, wealth management, and trusted advisor communities, by recognizing those who have demonstrated innovation and excellence during 2016. Jersey has been recognized as best international finance center four times in the Award's five-year history.
Jersey also was named "International Financial Centre of the Year" at the 2017 Citywealth IFC Awards, which highlight expertise and service excellence of advisers and managers in the private wealth sector in major international financial centers.
Geoff Cook, CEO of Jersey Finance, the island's financial services promotion agency, said: "The fact that Jersey's strengths in the areas of regulation and high-quality financial services are being recognized in this way, year on year, is very encouraging and shows to investors and other stakeholders why Jersey is still considered a top international finance center."
A Vibrant Finance Center
As we shall see by the statistics given below, Jersey has a vibrant and ever-evolving financial center. Here, we concentrate on Jersey's wealth management offerings, including banking, trusts and investment funds. However, the jurisdiction also now serves growing numbers of international corporate and institutional clients, supporting capital markets activity and institutional funding. Indeed, Jersey has attracted foreign direct investment worth more than USD65bn and distributed FDI worth more than USD75bn, according to a 2015 report by advisory firm Investment Consulting Associates.
Jersey is also one of the leading lights in offshore insurance, and in 2006 it was the first international finance center to pass legislation in 2006 to introduce the concept of an incorporated cell company.
Jersey's finance center is supported by a large workforce of advisers, accountants, lawyers, bankers corporate service providers and other specialist professionals with expertise in modern finance techniques. Attesting to Jersey's presence on the world financial stage, this is the largest workforce of any offshore finance center, according to Jersey Finance.
A Reputable Jurisdiction
The Jersey Financial Services Commission (FSC) is responsible for the regulation, supervision and development of the financial services industry in the Island of Jersey for banking, collective investment funds, fund services business, insurance business, general insurance mediation business, investment business, money service business, and trust and company service providers.
Additionally, the FSC is the supervisory body for those sectors that are subject to regulatory oversight of their anti-money laundering and countering the financing of terrorism responsibilities, which includes: accountants; lawyers; estate agents; high value goods dealers; and non-profit organizations.
It is certainly hard to dispute Jersey's claim that it is one of the world's most reputable finance centers, based on its efforts to counter financial crime and tax evasion. This is something that was recently acknowledged by the European Union, despite its traditional hostility to tax havens, with a report published by the European Council describing the jurisdiction as a "well-established international financial center, with a mature and sophisticated anti-money laundering and counter-terrorism financing regime."
The report, published on May 24, 2016, by MONEYVAL the Council of Europe's Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism also notes that Jersey's beneficial ownership regime puts it at the forefront of the transparency agenda, and that Jersey is compliant or largely compliant with 48 of the 49 Financial Action Task Force Recommendations (2003). This places it in the top tier of jurisdictions assessed under those criteria.
Indeed, an academic paper on the effectiveness of beneficial ownership central registries, published by Jersey Finance in April 2016, concluded that Jersey is one of the few jurisdictions with an existing effective, fit-for-purpose, central register of company beneficial ownership information and is a world leader in this regard. And in May 2017, Jersey's financial services regulator, the Jersey Financial Services Commission, received an international award for its work to enhance the island's central register of information on company beneficial ownership and control.
Jersey is also a cooperative jurisdiction. In April 2016, Jersey agreed to reinforce existing arrangements for the exchange of information on the beneficial ownership of companies. Furthermore, Jersey supports the OECD's new single global standard for the automatic exchange of information between tax authorities worldwide, which was unveiled on February 13, 2014, and has committed to join the OECD Multilateral Convention on Mutual Administrative Assistance in Tax Matters. The has completed automatic tax exchange agreements with the United States and with the United Kingdom, as well as with over 30 other jurisdictions.
A Stable Banking Center
Jersey is home to global banking organizations from the UK, Europe, North America, South Africa, Asia, and the Middle East. Jersey only authorizes the global top 500 banks to establish a presence in the island, a policy designed to ensure that only banks of the highest pedigree operate from the jurisdiction. At the end of 2016, there were 29 deposit-taking institutions located in Jersey. They include nearly half of the top 25 banks in the world, by Tier 1 Capital. Jersey banks had total deposits of GBP113.9bn (USD114.7bn) on December 31, 2016. Of this amount, GBP53.6bn were sterling denominated deposits and the remainder foreign currency deposits.
Traditional offshore banking, wealth management and financial planning services for individual investors have been major areas of business for Jersey's banks and the range of banking services provided from Jersey is extensive. These include multi-currency banking, offshore mortgages, investment solutions among other services.
However, the jurisdiction has also become a leading center for the provision of corporate banking services for multinational organizations, financial institutions, companies and firms with cross border interests and activities. 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.
In addition, Jersey's banking sector provides services to support the fast-growing alternative investment funds industry, in particular the real estate, private equity and hedge fund markets, offering, for example, loan facilities to acquire assets and bridging facilities where appropriate.
Depositors into Jersey banks are protected by Depositors Compensation Scheme, which was introduced in November 2009. At present, the scheme provides protection of up to GBP50,000 per person, per Jersey banking group, for local and international depositors in line with international standards.
As of June 2017, the Jersey FSC was currently in the process of implementing changes to the liquidity management, monitoring, and reporting obligations of banks under its supervision. This new standard is based on Basel III, the regulatory framework for banks developed by the Basel Committee on Banking Supervision.
A Leading Trust Jurisdiction
Jersey regards itself as the leading common law trust jurisdiction and it has an extremely well-developed legal and financial infrastructure for trust management. Jersey has approximately 900 regulated trust company businesses and total trust assets looked after on the island total GBP400bn.
Trust management, particularly for wealthy UK individuals, was Jersey's traditional business. However, the emphasis today has shifted away from the very simple trust and underlying company structure for UK families, to high value and more complex structures involving trusts, companies, limited partnerships and now foundations (see below) for international families.
Jersey trusts are governed by The Trust (Jersey) Law 1984, which codified trust law largely along the lines of English-based common law. "Purpose" trusts were recognized in 1996. Jersey trust law allows for the formation of the following types of trust: Discretionary trusts; Reserved powers trusts; unit trusts; charitable trusts; non-charitable purpose trusts; accumulation and maintenance trusts.
There is no rule against perpetuities for a Jersey trust, and a Jersey trust may continue in existence for an unlimited period.
An amendment to Jersey's trust legislation came into force on October 25, 2013, strengthening the territory's legislative framework and providing greater clarity for the courts, practitioners and those who work with or benefit through Jersey trusts.
An Innovative Jurisdiction Common Law Foundations And Fintech
Jersey was one of the first common law jurisdictions to introduce the concept of foundations into its wealth management offering. With a long history in continental Europe and other civil law jurisdictions, foundation companies are commonly used for wealth management, and residents of jurisdictions like the Middle and Far East are more familiar with these entities than with trusts, which do not exist in their legal systems. Jersey was the first of the Crown Dependencies to bring in a genuine foundation product.
The Jersey Financial Services Commission began accepting applications for the formation of Jersey foundations on July 17, 2009, when the Jersey Foundations Law came into force. According to Jersey Finance, 327 jurisdictions were registered in Jersey in mid-2017. Previous statistical publications have indicated that around one-third of Jersey foundations were formed to achieve charitable or philanthropic objectives.
Jersey is also looking to create a business environment that is attractive to fintech start-up businesses looking to establish themselves on the island, and made a major step towards this objective in 2016 when a new regulatory regime for virtual currencies was introduced.
The new regime, which came into effect on September 26, 2016, is intended to give the island more control over the way individuals and businesses exchange virtual and physical currencies, mitigating the potential risk of financial crimes such as money laundering and terrorist financing. The regulations was developed in collaboration with industry and government bodies including the island's digital sector advocate, Digital Jersey, the island's financial services regulator, the Jersey Financial Services Commission and Jersey Finance, the island's financial services marketing and promotion agency.
Tony Moretta of Digital Jersey commented: "As we continue to make steps towards realizing Jersey's fintech potential, it's essential for us to introduce the right regulatory regime to encourage confidence in our jurisdiction. The introduction of this regulation proves that our strengths lie not only in our excellent financial services, but also our digital sector and government. This vital relationship is why we are able to ensure we are ahead of the curve when it comes to forward-thinking regulation for fintech businesses. I hope that our robust framework will encourage more digital start-ups to consider Jersey in the future."
A Specialist In Funds
While the Cayman Islands is the undisputed offshore jurisdiction of choice for hedge funds and mutual funds, Jersey has developed a respected funds sector that offers a broad range of fund regimes. However, in recent years, Jersey has carved out a niche as a more specialist funds center, concentrating on alternative funds, including hedge funds, real estate funds, and private equity funds; alternative assets now account for 73 percent of Jersey's total funds business.
2016 was an especially good year for the Jersey funds sector. Figures published by the FSC in My 2017 show the total value of funds being serviced through Jersey rose by 15 percent over the year to stand at GBP260bn, the highest value ever recorded. This growth was driven by alternative asset classes, which increased annually by the same proportion to GBP189.2bn.
Within the alternative asset classes, private equity fund values performed particularly strongly, rising by almost a third year-on-year (30 percent) to stand at GBP59.7bn, whilst there was a significant jump in the combined total of "specialist" funds, including infrastructure, credit, and debt funds (48 percent). Real estate fund values also rose by seven percent during the course of the year, whilst hedge fund values remained steady, ending the year at GBP52.4bn.
In February 2004, Jersey introduced "expert" investor fund legislation. This gives qualifying fund managers freedom to offer funds to licensed investors without previously clearing them with the FSC, provided they stick to the guidelines. The Expert Fund regime was subsequently extended to closed-ended investment funds listed on European and other leading stock exchanges including the Channel Islands Stock Exchange.
In 2008, Jersey introduced an Unregulated Funds Regime designed to provide promoters and other fund introducers with the simplicity, certainty and speed they seek when setting up certain types of specialist fund.
Jersey funds may be established as companies, limited partnerships or unit trusts, and be open or closed-ended, providing significant flexibility for investor needs.
Jersey has built up an experienced range of fund administrators, both as part of the services supplied by major custody banks and large specialist fund administration firms, and by boutique groups who can provide bespoke services to meet individual investor needs.
Jersey was the first offshore jurisdiction to offer an opt-in Alternative Investment Fund Managers Directive (AIFMD)-compliant regime back in 2013. This means that a Jersey fund manager can establish different Jersey funds to access the EU market through National Private Placement Regimes (NPPR), or the rest of the world under existing regulations.
The number of Jersey funds marketing into Europe through NPPRs under the AIFMD broke the 200 barrier in mid-2015. By June, a total of 205 Jersey funds had been marketed into the EU through NPPRs, representing an increase of 10 percent on December 2014 levels. 84 fund managers had received private placement authorization in the first half of the year, up 40 percent over the previous six months.
Significantly, in July 2015, the European Securities and Markets Authority recommended that Jersey be granted a 'third country' passport under the AIFMD. Whilst Jersey's current marketing route into Europe via NPPRs is likely to remain in place until at least 2018, it is expected to be in the first wave of "third non-EU countries" whose managers could seek authorization for a passport to market their alternative investment funds to professional investors throughout EU member states.
Jersey is hoping to improve its competitiveness as a funds domicile through the introduction of a new regulatory framework for private funds, which will enable funds with up to 50 investors to take advantage of a fast-track authorization process and lighter ongoing regulatory requirements.
Known as the Jersey Private Fund, the new fund class is intended to be a more flexible and versatile framework, which will further improve the speed and ease with which funds marketed to professional investors can be established. It will also be available to managers seeking to market funds into Europe through NPPRs, which as mentioned above has been a growth area for Jersey's funds industry.
The launch of the Jersey Private Fund product in 2017 will see the phasing out of all other Jersey private products, although existing private funds will be able to continue to operate until the end of their natural life. Alternatively, existing private funds can apply to the Commission to convert into another Jersey fund product, including a Jersey Private Fund.
Jersey Drawing Closer To The EU MiFID II On The Cards?
The FSC is also considering whether the island should seek equivalency with the European Union's Markets in Financial Instruments Directive (MiFiD) II regime. MiFID regulates the activities of financial service providers and market operators in respect of buying, selling, and issuing financial instruments, such as shares and bonds. MiFID II, which is considered an improvement on the MiFID I regime, strengthens consumer protection, increases market transparency, and raises the governance requirements for financial service providers and market operators.
The Commission has said that introducing a similar regime to MiFID II in Jersey would create the opportunity for local firms to export their services to professional clients across the EU. Local financial service providers and consumers are being asked whether they consider this an appropriate move for the island.
However, Mike Jones, Director of Policy at the Commission, observed that the introduction of a MiFID II equivalent regime in Jersey "could lead to significant changes in Jersey's financial services legislation and codes of practice." Thus, the FSC launched a three-month consultation on the proposals on April 26, 2016.
The Jersey Financial Services Commission has said it will take a decision on whether to pursue MiFID II equivalence in the first half of 2017.
Jersey And BEPS
Jersey is not only determined to stay compliant with the latest standards of tax transparency, but is a keen participant in the OECD's base erosion and profit shifting (BEPS) project, which seeks to reduce avenues for multinational companies to avoid tax through mismatches between national tax regimes.
Jersey demonstrated this commitment in October 2016, when along with Guernsey and the Isle of Man it signed the OECD's Multilateral Competent Authority Agreement for the automatic exchange of country-by-country (CbC) reports.
CbC reporting requires multinational enterprises to provide aggregate information annually, in each jurisdiction where they do business, relating to the global allocation of income and taxes paid, together with other indicators of the location of economic activity within the MNE group. Agreement provides for signatories to automatically exchange CbC reports multilaterally, as proposed by base erosion and profit shifting Action 13. The OECD said this will help ensure that tax administrations obtain a complete understanding of how multinationals structure their operations, while also ensuring that the confidentiality of such information is safeguarded.
Jersey also joined its fellow Crown Dependencies signing the BEPS Multilateral Convention in June 2017. The Conventions, also known as the multilateral instrument, has been designed to ensure that existing bilateral tax agreements become BEPS-compliant by allowing jurisdictions to add part or all of an agreed text to their bilateral tax treaties.
The European Union, Brexit and the Future
In recent weeks and months, many people have begun to ask questions about the future of the Crown Dependencies in the event the United Kingdom leaves the EU, including foreign investors and local stakeholders in these jurisdictions. And while nobody is in a position to answer these questions yet given that, at the time of writing, the Brexit negotiations had yet to commence, the Crown Dependencies have been in regular contact with the UK Government and each other to ensure that their interests are recognized in a final Brexit agreement.
The third meeting in a series of regular talks between the Crown Dependencies and the UK was held in April 2017, at which a wide range of topics were discussed, relating to key priority areas that have a direct impact on islanders and businesses, including free movement of persons, customs, fisheries, agriculture, and financial services. Work regarding each of these priorities has already begun between the Crown Dependencies and the relevant UK Government Departments. The extension of the UK's membership of the World Trade Organization to the Channel Islands was also discussed, with the UK Government said to be offering its support.
However, despite all the uncertainty, Jersey Finance is of the opinion that the island's position as an international financial center of excellence will not be affected by Brexit negotiations. Commenting on the matter in April 2017, Geoff Cook, observed: "There is clearly uncertainty about the outcome of the Brexit negotiations, and what the relationship between the UK and EU will look like in two years' time, but for Jersey's financial services industry, trade with the EU and UK is governed by bilateral agreements which are unaffected by Brexit. Our access to European markets continues under the same terms, and we continue to be a conduit for investment into the UK and EU."
It certainly seems to be the case that the fundamentals of Jersey's offering a low tax, flexibly regulated and innovative finance center would still be in place Brexit or no Brexit, and increasingly, investment is being soured from emerging centers of wealth in the Middle and Far East regions, which does not necessarily depend on Jersey's existing relationship with the EU.
Whatever the outcome of the Brexit negotiations, the Jersey Government believes that there is a bright future ahead for the Jersey IFC, and on the evidence of the above, it may well be right.
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