Lowtax International Wealth Management and Asset Protection - The Channel Islands
By Lowtax Editorial
03 January, 2013
To stand still in the fast-paced world of financial services is to get left behind, and for this reason the UK Crown Dependencies of Guernsey and Jersey have been working hard recently to ensure that they adapt to new trends emerging in the wealth management and asset protection industry, notably by targeting the rising population of wealthy individuals in Asia and the emerging markets, and tailoring their offerings to suit these new clients.
According to the World Wealth Report by CapGemini and RBC Wealth Management, while overall growth in the global high net worth individuals (HNWIs) population is slowing, in the Asia-Pacific region it is growing at a fairly rapid rate.
After robust growth of 8.3% in 2010, the global population of HNWIs grew only marginally by 0.8% to 11m in 2011. Most of the growth can be attributed to HNWIs in the USD1 to USD5m wealth band that represent 90% of the global HNWI population. Global HNWI wealth in 2011 fell by 1.7% to USD42 trillion versus 9.7% growth in 2010, but the number of HNWIs in Asia-Pac expanded 1.6% to 3.37m in 2011, making it the largest HNWI region for the first time, surpassing North America's HNWI population of 3.35m. Asia-Pacific had seven of the top 20 fastest growing HNWI populations globally in 2011.
On the Promotional Trail
It is because of this growing reservoir of untapped wealth that the investment promotion agencies of Guernsey and Jersey have been in overdrive recently selling their respective wealth management and asset protection services in countries like China, India and the United Arab Emirates.
In October 2012 for instance, the Jersey government announced its intention to employ the advice of Hong Kong-based finance and legal experts to help the territory better target the Chinese market with the island's financial services offerings.
Jersey Finance, the promotional agency for the island's financial services industry, said that following a visit to Hong Kong, it had agreed to launch the 'China Jersey Advisory Group' to involve local senior individuals, including regional banking heads, wealth management advisers, senior partners at major law firms and corporate listing experts in Jersey's strategy to target the East. The Group is to meet on a regular basis, and provide the Jersey government with advice on how best to focus Jersey's representative efforts and business development activities in the region, and to discuss networking opportunities in Hong Kong and China.
Also during Jersey Finance's five-day visit to the SAR, a meeting was held between Jersey Finance and local firms with a presence in the region to exchange details on progress being made.
In addition, Jersey Finance was also an exhibitor at the major three-day Society of Trust and Estate Practitioners (STEP) Asia Conference, entitled ?Wealth Management in Asia: The Future is Now?, at which Jonathan White, the Chairman of Jersey Finance, gave an overview of the island's wealth management expertise.
White said of the trip:
?The launch of the China Jersey Advisory Group is a really important development for Jersey in the Far East, and it was a real pleasure to welcome a group of such highly regarded individuals to our inaugural meeting. That there is clearly so much interest in Jersey amongst senior professionals in Hong Kong is hugely encouraging. Their combined insights and knowledge will undoubtedly prove invaluable in the years ahead."
?With around GBP6bn of deposits emanating from the Far East currently being held in Jersey banks and a growing amount of corporate and funds business coming to Jersey from the region, there is no doubt that maintaining visibility through initiatives like this trip is vital in keeping Jersey firmly on the map.?
Speaking at Jersey Finance?s quarterly update on May 29, 2012, Zhaoan Li, Head of Business Development for Hong Kong and Greater China, told finance professionals that there was a real opportunity for Jersey to support the development of the Chinese Renminbi (RMB) market, while Sean Costello, Head of Business Development for the Gulf Cooperation Council (GCC) region and India, told of the opportunities Saudi Arabia holds for the provision of wealth management services.
Li, who has headed up Jersey Finance?s permanent office in Hong Kong since it was established in 2009, highlighted that the development and internationalization of the RMB currency and related products presented Jersey with an opportunity to access a significant new market. Jersey?s cross-border expertise, she suggested, could prove attractive for managing RMB bonds and administering funds, whilst Jersey vehicles were ideal for structuring investments in the currency, she said.
?RMB products are being developed in international markets, including London, at a rapid rate, and we believe there is huge potential for the offshore marketplace, whether investments, bonds, funds or deposits. The commitment Jersey has shown to doing business in the region, such as the signing of the Double Tax Agreement in February, is resulting in Chinese investors and institutions demonstrating an increasing level of confidence in Jersey as their preferred European financial centre. If we are quick off the mark, there is a real opportunity here,? Li told attendees.
Li also explained that, whilst Jersey has built excellent relationships in China?s major cities, such as Shanghai and Beijing, there is real merit in focusing increasingly on the country?s quickly developing ?Tier 2? cities, including Tianjin, Guangzhou and Hangzhou. Investment from Hong Kong and China in Jersey remains substantial, with nearly USD10.8bn of banking deposits emanating from the Far East.
Costello also spoke of the significant opportunities in Saudi Arabia for providers of wealth management services: ?Saudi Arabia boasts one of the highest proportions of ultra-high net worth individuals in the world, presenting Jersey with an opportunity to extend the reach of its wealth management services. In addition, Saudi Arabia is serious about quickly developing its own major business and finance centre in Riyadh, which will be extremely impressive. The development will attract financial institutions that we will seek to build relationships with over the coming months. It is a challenging marketplace, but one that we intend to explore thoroughly across the wealth management, corporate and expat banking sectors.?
In 2011, Jersey Finance established a representative office in Abu Dhabi to increase Jersey's footprint in the Gulf region. Subsequent initiatives aimed at cementing Jersey?s presence in the region have included the signing of a double tax treaty with Qatar in 2012, and the signing at the end of 2011 of a Memorandum of Understanding between the Central Bank of the UAE and the Jersey Financial Services Commission. The Gulf market is also important to the island's banking sector, with 13% of all deposits in Jersey emanating from the Middle East.
"Jersey has a tradition of being first on the scene in new and emerging markets,? said Geoff Cook, chief executive of Jersey Finance. ?We were one of the first international finance centres to establish a presence in Hong Kong, India and the GCC, and have been successful in building a good reputation in those markets. Now we are looking to evolve our service offering further in both China and Saudi Arabia. First mover advantage is absolutely vital in this highly competitive world and we are fortunate to benefit from the expertise of Li and Costello as we explore these new opportunities.?
Meanwhile, Guernsey has been busy promoting itself as a domicile of choice for wealth management and asset protection in India, with a delegation from the island having undertaken a five-day visit to Mumbai in December 2012.
Commenting on her return from Mumbai where she led a delegation of Guernsey-based practitioners, Fiona Le Poidevin, the Chief Executive of Guernsey Finance, said:
"We had a very busy and productive week in Mumbai. It was encouraging to see that India has Guernsey on its radar and that there is a keen interest in what we have to offer in both the investment funds and fiduciary sectors, particularly in terms of fund structuring and wealth management services."
"The Indian economy is both fascinating and complex. While government growth forecasts, which show a slowdown to growth of 5.3% in gross domestic product at the end of September, are concerning those in India, these figures are still attractive to those in the West who are looking to provide inward investment."
"The country has a population of 1.2 billion, which is expected to rise rapidly over the next decade, and in order to support this increase India needs improved infrastructure such as roads, schools and hospitals. Guernsey has expertise in structuring infrastructure funds and raising capital through the European markets. For example, the India Capital Growth Fund, Indus Gas, Kolar Gold, Skil Ports & Logistics and Mytrah Energy Limited are all Guernsey-incorporated entities which are currently listed on the Alternative Investment Market of the London Stock Exchange. We hope our track record to date will be an advantage to Guernsey in the future."
The delegation's itinerary in India included hosting two dinner debates with local professional advisers. One session focused on the investment funds sector and the second on fiduciary services. Meetings were also held with a number of financial services firms as well as Indian banking groups, business representative organizations and officials from the British High Commission in the city. In addition, the team exhibited at the International Taxation conference on December 6, 2012, an event attended by nearly 500 delegates.
Le Poidevin added: "The conference was very well attended and provided a great opportunity to continue spreading the Guernsey message and to build on our contact base. Indeed, the whole trip was a valuable experience, as speaking to people on the ground, including local economists, was extremely useful. India has elections coming up in 2014 and the result will have a significant impact on the country's future direction. India has recently made the decision to open up its retail sector to foreign direct investment, which could set a precedent for the future, but that will require the right government and political system."
The first official delegation from Guernsey visited India in 2010 and since then the jurisdiction has sought to build an extensive network of contacts to raise Guernsey's profile. Le Poidevin reported that there is now an increased knowledge of what Guernsey can offer, but also increased competition from places such as Singapore, which are already well known in the India market. Against that backdrop, Guernsey Finance's efforts seek to establish Guernsey as a hub for European and Western business relating to India, in much the same way as Singapore is viewed for business from the East.
Guernsey has made steady progress in establishing its reputation for financial services in Asia in recent years since the establishment of a representative office in Shanghai in 2007. In 2010, Guernsey signed a Tax Information Exchange Agreement with the Chinese central government tax authorities and a Memorandum of Understanding for exchange and cooperation with the Shanghai Financial Services Office. Additionally, in 2011, the island received approval for companies incorporated in Guernsey to list on the Hong Kong Stock Exchange and Guernsey?s financial services regulator, the Guernsey Financial Services Commission, sign a statement of cooperation with the China Banking Regulatory Commission.
Although Jersey is widely recognised in the institutional investment world as one of the leading jurisdictions for pensions and insurance fund management, other areas of expertise are perhaps more of interest to HNWIs, including its banking sector, and its company and trust formation sectors. Foundations, a new product, have been available since 2009.
The majority of the banks established in Jersey are branches or subsidiaries of the world's top banking establishments, and are well regulated and safe, with capital adequacy levels not seen in many offshore jurisdictions. Advantageous tax treatment of interest income from Jersey bank accounts combined with this peace of mind, means that alone, or in combination with other offshore structures, bank accounts in Jersey are a good bet (although the European Savings Tax Directive has dented the allure of Jersey in certain cases).
Banking deposits have declined steadily since peaking at GBP212bn at the end of 2007, to stand at GBP150.4bn by the end of June 2012. The number of licensees in the banking sector has also declined, from a high of 82 in 1997 to 40 at the end of 2011. However, the island is attracting much new business from the Middle and Far East and deposits originating from these territories represent a combined total of around 18% of all Jersey deposits, reflecting the value of recent promotional activity in Hong Kong, Greater China and the United Arab Emirates.
Geoff Cook of Jersey Finance noted in September 2012 that: "Overall deposit levels are holding up well considering the global conditions, though the gentle easing of aggregate deposits continues, which we are seeking to address through our focus on attracting new high quality banks to the island. In this regard, the number of licensed banks had increased to 41 at the half year.
Jersey can also be a beneficial location in which to establish an offshore structure, whether for the purposes of asset protection, or to serve as a business presence for global consultants and other such self-employed professionals, although in accordance with Jersey?s commitment to the ?Rollback? provisions of the EU Code of Conduct for Business Taxation, the International Business Company vehicle was abolished to new entrants with effect from 1st January, 2006. Benefits for existing beneficiaries of the International Business Company regime had been progressively extinguished by December 31, 2011.
While beneficial ownership for all Jersey-based companies and vehicles must be disclosed to the authorities, it will never be disclosed externally except by order of the Royal Court. Tax minimisation, in conjunction with the laws of the island, therefore, is eminently possible.
Probably the most appropriate vehicle in Jersey for expats or non-UK citizens in need of asset protection for estate planning or other purposes (and in addition to, or in combination with a Jersey bank account) is the Jersey trust. The normal form of trust in Jersey is a discretionary trust, and where the beneficiaries of the trust are non-resident, income arising from sources outside Jersey is not liable for income tax there, and neither are distributions to the beneficiaries.
Although the costs involved in setting up and maintaining a Jersey trust can vary considerably, the creation of such a structure is free from government duty at least. Trust law in Jersey explicitly excludes foreign inheritance laws, and except in cases of proven criminal wrongdoing, foreign judgements are rarely recognised.
In October 2012, new legislation to enhance Jersey's trusts offering was approved by the Privy Council and, once in force, is expected to make Jersey a more attractive location for private wealth management.
The Trusts (Amendment No.5) (Jersey) Law was adopted by the Jersey government in November 2011 and was approved by the UK Privy Council on October 17, 2012. Overall, the changes are designed to bring clarity and certainty in a number of key areas, in recognition of an industry shift away from simple trust structures to higher value and more complex vehicles. The salient amendments include:
- Introduction of a Definition of Purpose: this change introduces for the first time a definition of purpose which includes the acquisition, holding, management or disposal of property. Accordingly, it will be possible to establish ?ownership only? purpose trusts.
- Limitations of Actions or Prescription: a significant amendment that limits a trustee?s liability (subject to fraud or recovery of trust property claims), which previously was almost indefinite. It will mean that action against trustees will only be possible up to 21 years after the alleged breach of trust. The limitation does not apply to foreign trusts whose proper law is the law of a jurisdiction to which the Hague Convention extends.
- Definition of a Protector: this amendment introduces a definition of the ?protector? as a person, other than a trustee, enforcer or beneficiary, who holds a power, discretion or right in connection with a trust.
- Protection from Foreign Interference: the amendment is designed to further strengthen Jersey?s trust vehicles from attack by foreign courts.
- Remuneration of Professional Trustees: this will permit professional trustees to be paid reasonable fees even when the trust deed is silent on the matter, but only in respect of services provided after the amending Law comes into force. Previously, trustees were only remunerated for their services if authorized by the terms of the trust or by Order of the Royal Court.
- Position of Outgoing Trustees: this amendment relates to the transition when there is a change in trustee, giving the outgoing trustee the right to enforce a term of a contract providing reasonable protection against liabilities, i.e. indemnities, even though not a party to the contract.
- Trustees Transacting with themselves on behalf of different trusts: this amendment provides clarity in expressly permitting trustees to contract with themselves in respect of two or more trusts for which they are trustee.
Geoff Cook commented: ?Whilst specific in nature, the feeling amongst private wealth industry professionals in Jersey is that the changes contained in Amendment No.5 will make Jersey a significantly more attractive destination overall for private client business. The international private wealth management industry is constantly evolving, and clarity and certainty are absolutely vital, so it is important that we continue to evolve our trust framework and ensure that our legislation is as robust as possible."
He added: ?Jersey is a world leader in the trust industry, ranked tenth and higher than any other offshore centre in the Global Financial Centres Index for private banking and wealth management. Its original trust legislation has been widely copied by other jurisdictions since it was introduced in 1984 and these latest amendments will build on that reputation to ensure that Jersey maintains its status as one of the most highly respected trust jurisdictions globally.?
The foundation may also be an attractive possibility. In introducing the Foundation, Jersey became the first Crown Dependency to offer the structure and according to Jersey Finance, there was keen interest in the new law from the start; five Foundations were established on the day that the law came into force and more than 40 registrations to allow practitioners to establish Foundations were approved in the week after the law was introduced.
Foundations have a long history in continental Europe. In medieval times they were used for charitable or religious purposes. They are now commonly used for wealth management, and residents of jurisdictions like the Middle and Far East are more familiar with foundations than with trusts, which do not exist in their legal systems.
The regulations permit foundations to migrate in and out of Jersey. They also provide for existing Jersey companies to convert to foundations.
The wealth management industry in Guernsey is similar in design, sophistication and regulation to Jersey, with offshore banking and asset protection representing an important segment of its financial services industry.
Banks in Guernsey are regulated and licensed by the Guernsey Financial Services Commission (GFSC) under the Banking Supervision (Guernsey) Law 1994 as amended. The Commission is extremely careful to exclude doubtful operations.
Originally, banks coming to Guernsey set up fully-staffed local branch offices or subsidiaries, but in recent years, as in many other IOFCs, in response to shortage of resources, the administered unit has become more popular. Under this scheme, an established Guernsey bank provides services for an incoming bank, which therefore does not need to open its own office or recruit staff. However, the Financial Services Commission applies the same standards of supervision to an administered bank as to an established bank. About one third of the banks in Guernsey are 'administered'.
The banking sector, in common with other financial services businesses, is subject to stiff money laundering controls.
Guernsey?s banking sector is in a more positive position than the continuing decline in deposit levels might suggest, according to the head of the promotional agency for the Island?s finance industry.
Figures from the Guernsey Financial Services Commission (GFSC) show that the value of Guernsey bank deposits fell by 5.8% during the final quarter of 2011. This took the total value of deposits to GBP107.5bn at the end of December 2011 ? a 3.1% decrease from twelve months previously.
The decline was partly due to the increase in value of Sterling against the Euro and Swiss Franc. Swiss Franc deposits dropped by 19.1% in the last quarter of 2011.
Philip Marr, Director of Banking commented:
?Swiss fiduciary deposits remained unattractive to private clients in Switzerland because of the continuing low interest rate environment. Continuing uncertainties in the Eurozone, capital pressures and the subdued economic recovery led to further deleveraging by global banks and this was transferred through to lower balance sheets of banks in Guernsey. If these global trends continue then we may see deposit levels continuing to decline. That said, the total liabilities and total assets figures have been holding up rather better reflecting the greater diversity of funding sources at some of the larger banks. ?
The reported total deposit figures were impacted to some extent by the strengthening of sterling against the major currencies. This exchange rate effect also led to some differences in the overall currency mix with sterling deposits increasing slightly to 24.3% and deposits in US Dollars increasing to 48.2%, Euro deposits decreasing to 19.8% and Swiss Franc deposits decreasing to 3.4%.
Speculation that the EU Savings Tax Directive would impact on balances held offshore has so far proved unfounded.
Trust management, particularly for wealthy UK individuals, was the island's traditional business. Successive tightenings of UK anti-avoidance legislation have reduced the possibilities for UK citizens, but Guernsey's trust business has continued to grow based on a more international clientele.
As of February 2008, the Island hosted more than 140 licensed fiduciaries; but by 2012 this figure had risen to well over 500, ranging from large organisations to independent, boutique operations. Together, they held between GBP200 and GBP300bn worth of assets in trust. The island has a very well-developed legal and financial infrastructure for trust management; the highly sophisticated professional services which support the trust sector include lawyers, accountants, investment managers and stockbrokers.
The Trusts Law 1989 (updated in 2007) provides a modern statutory basis for trust management activity. Individuals and businesses involved in the provision of fiduciary services must be licenced by the Guernsey Financial Services Commission under the Fiduciary Law, which came into effect on April 1, 2001.
Another string has been added to Guernsey?s asset protection bow in the form of a new Foundations law, which was approved by the island?s legislature in July 2012 and is, at the time of writing, awaiting Royal Assent from the Privy Council (expected in early 2013).
Local practitioners in Guernsey have already reported receiving a number of enquiries from private clients interested in migrating their existing foundations to Guernsey.
Fiona Le Poidevin, said: ?What I am hearing from a number of local practitioners is that they have had inquiries from clients who have foundations currently domiciled in other jurisdictions but they are now considering the migration of these to Guernsey once the legislation is enacted. This is principally due to the specific provisions of the new law but also due to the heritage we have in providing trust and corporate services as well as, of course, our reputation for being a well regulated and tax transparent international finance centre."
?We do not necessarily expect a flurry of activity, with huge numbers of new foundations being established but we are looking at quality and not just quantity," Le Poidevin continued. "Indeed, we believe that our expertise in servicing private clients means that we are especially well placed to administer complex structures and in particular, where they are for philanthropic purposes. Obviously, we are not saying that a foundation, as opposed to a trust, is always the right option or that a Guernsey foundation is always going to be the most appropriate route but we believe that it does offer some important advantages over others already in the market.?
Another interesting addition to Guernsey?s suite of financial services laws is The Image Rights (Bailiwick of Guernsey) Ordinance, 2012, which was approved by the jurisdiction?s legislature on November 28, 2012.
The legislation positions Guernsey as the first jurisdiction to have a legislative framework to register an image, enabling effective management and control of the commercial use of a person's identity, and images associated with that person including distinctive characteristics such as signature, voice, mannerisms and gestures.
The legislation not only establishes image rights as a new and separate branch of intellectual property law, it will also provide clearly defined safeguards for celebrities and sports personalities looking to further protect and capitalize on their image.
The register enables the legal recognition of a "registered personality" (i.e. the exclusive rights to the images associated with or registered against the personality). Once registered, the image right, as an identifiable asset, can be placed within a Guernsey structure, adding flexibility to allow image rights income to be channeled into a wealth management structure such as a trust, or a partnership structure to overcome complex asset ownership arrangements.
A team from Carey Olsen, acting on behalf of corporate and branding specialist Lesley Everett of Walking TALL International Ltd., made the first ever successful application for the registration of a personality and associated image rights on the morning of December 3, 2012.
Fiona Le Poidevin observed:
"Guernsey has been bold and innovative in introducing legislation and the associated infrastructure which means that the island is the first jurisdiction in the world where personalities and their associated image rights can be registered under the protection of statutory law."
"Indeed, we believe that our new offering will be attractive to global brands and in particular sports and entertainment stars where their image is a particularly important asset both to be protected and exploited for commercial gain. The hope is that they will use Guernsey for its unique image rights capability as well as the island?s broader wealth management offering to service their wider financial needs."
"There has been considerable interest in the progression of these developments and it is particularly pleasing to see that this has now translated into what is the first ever registration of a personality and associated image rights. Demand is also evidenced by the number of on-island practitioners registering as image right agents and I am hearing from many of them that there are serious enquiries in the pipeline which will hopefully lead to further registrations."
According to Le Poidevin, more than 100 local advocates, financial service providers and intellectual property specialists have attended Intellectual Property Office training courses on the new legislation and associated infrastructure. The course also forms one part of the requirements for qualification as a registered image rights agent in Guernsey.
John Ogier, Guernsey Registrar of Intellectual Property and architect of the image rights legislation, said:
?The interest in the UK and internationally covers the wide fields of sports rights, the entertainment industries of music, arts and media, business leaders and the managers of the estates of deceased persons for succession planning and charitable works."
?The legislation has been carefully drafted to balance the commercial interests for a strong right with the interests of protecting public expression and freedom of news reporting. There are therefore specific provisions ensuring the continued right to news reporting together with public expressions of parody, satire and use of images in research, education, public administration and law enforcement. In addition, the legislation specifically makes the applications and the register available for viewing on the Internet. This transparency, as well as publicizing the protection of image rights will support the island?s reputational interests."
"As for any new product, registrations may take time to build, but even if other jurisdictions follow our lead, Guernsey will have firmly established a reputable market presence from which the island can then benefit by way of mutual protection agreements."
Figures suggest that the Channel Islands have not had an easy time of it economically speaking, with banking deposits and fund deposits all having taken something of a hit during the financial crisis. However, the willingness of both territories to proactively seek out new markets and adapt their legislation to meet the demands of a new breed of wealthy individuals means that they will remain in the ?premier league? of wealth management and asset protection jurisdictions.
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