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International Company Formation - Fees on the Rise

Global Incorporation Guide [GIG] Editorial

May 1, 2013


There are many variables to consider when deciding where to incorporate a company. But one of the most visible measures of the costs of forming a company, especially in an offshore or low-tax jurisdiction, is the level of initial registration and ongoing annual fees, and this has been tending to rise in recent years.

In jurisdictions where there are no taxes on company income, or where taxes are very low by international comparison, Governments have traditionally levied fees for company formation and registration as a means to raise revenue. However, the financial crisis hit many international offshore financial centres hard, and in response to falling revenues and rising budget deficits, some Governments have had to increase existing fees, or introduce new ones.

Another factor putting upward pressure on company fees is the changing global regulatory landscape. In the wake of the financial crisis the workload of regulators in small jurisdictions in particular has increased substantially, in turn increasing the cost of regulating the financial sector. As a result, licence fees for banking, insurance and other industries are also on the rise in many jurisdictions.


The Isle of Man

The Isle of Man is one jurisdiction feeling the financial strain of regulation, and the Manx Financial Supervision Commission has recently confirmed fee increases for 2013/14. The hikes are intended to increase funding for the regulator, which has seen its workflow increase as a result of a number of key international regulatory developments.

The Commission had intended to introduce a new fee of GBP10,000 for Class 1 license holders (deposit taking institutions) to bring the territory's fees closer in line with its main competitors (Guernsey and Jersey). Following discussions with the industry, it was agreed that it would be more appropriate to dispense with the proposed new fee and instead increase the existing fee for branches/subsidiaries to a level more compatible with those elsewhere. Therefore a branch/subsidiary fee of GBP6,000 has been agreed.

Fees for other classes of regulated activity are due to rise by between 10% and 25%.

The new Fees Orders are due to be considered at the May session of the island's parliament, the Tynwald and, if approved, will come into effect on May 23, 2013.

Since 2003, the Manx FSC has increased fees in line with the retail price index. However, the Commission has proposed to hike fees above this benchmark, "to establish an appropriate level of fees to ensure that the island can maintain a high level of supervision."

The Commission explained in a consultation on the proposals published in December 2012 that the increase in fees reflects the fact that: the island's fees are considerably below those of its competitors; new international standards and legislation are requiring greater regulatory effort; and, specific sectors are incurring significantly high levels of regulatory oversight.

According to the consultation paper, the Commission's fee income currently only meets 71% of the cost of supervision and only 43% of the cost of regulation in total. This is despite, in the past three years, various initiatives undertaken by the Commission to reduce its costs.

In March 2013, the Isle of Man's Insurance and Pension Authority forwarded the Registered Scheme Administrators (Fees) Order 2013 and the Insurance (Fees) Regulations 2013 to the Tynwald, aiming to hike application and annual fees for providers of insurance and retirement benefit schemes from April 1, 2013.

The Authority aims to raise GBP1.9m (USD2.85m) over the next three to four years including through a one-off levy across the insurance sector on April 1, 2014, which will generate approximately GBP765,000.

In respect of fees for the Manx insurance industry, the most significant hike is on Class 1 and Class 2 (life) insurance companies. Entities falling into this category will pay a fee of GBP25,000 if the insurer manages assets worth less than GBP1bn, and GBP50,000 above that threshold. Under the existing fee structure these entities pay a flat fee of GBP19,000. The registration fee for insurance intermediaries is also to be hiked to GBP2,080 from GBP1,400. Other insurance sector application fees will also rise by up to 10%.

For pension providers, application fees will remain the same, but annual fees will rise for professional scheme administrators from GBP3,500 to GBP4,000; and in-house schemes administrators in charge of 100 or more retirement benefits schemes will see fees rise fractionally from GBP270 to GBP280.


Guernsey

Another jurisdiction adjusting to the new regulatory environment is Guernsey, which announced in October 2012 that company fees will rise from 2013 to meet the rising costs of regulating the financial sector.

In a consultation paper outlining the proposals, the GFSC said that its operations are costing around GBP12m (USD19.2m) a year. It is the Commission's policy to retain reserves worth at least six months' operational costs, but these are presently lacking and need rebuilding despite efforts to reduce operational costs.

Under the proposed changes laid out in the consultation paper, application and annual fees would generally rise by 2%. However, fees for insurance cells would rise by GBP580 (41%) for applications and GBP350 (21%) for annual renewal. This would allow the Commission to post a surplus of GBP84,000 during 2013, against a projected deficit of GBP306,000 if fees were to be retained at 2012 levels.

The Commission emphasised that its proposal comes after a fee freeze in 2011, and it stressed that the introduction of an intermediate level of fees for the fiduciaries sector had the effect of reducing fees for some licensees during 2012.

In anticipation of criticism of its proposals that the fee hike may render Guernsey uncompetitive in relation to the other Crown Dependencies, Jersey and the Isle of Man, the consultation paper states that it is not straightforward to compare fee structures, given their different structures, funding commitments and expenses. For example, while fees in Guernsey's banking sector are typically higher than in Jersey and the Isle of Man, funds are considerably cheaper to set up and maintain in Guernsey than in Jersey.

Following the consultation, the Guernsey FSC announced in December that there would indeed be a 2% increase in company fees across the board, and that the significant fee increases planned for the insurance sector would not be taking place.  This exceptional increase for application and annual fees was proposed to compensate for the increasing use of cells for captive operations and away from captives, for which higher fees are charged. The justification for this proposal was that supervising a cell uses almost as much resource as a corporate captive. However, the Commission said that, following consultation with industry, "it has been decided not to proceed at present with higher increases for cells." It remains the policy of the regulator to review licence fees on an annual basis, however.


Jersey

In the same month, neighbouring Jersey also launched a public consultation on proposed changes to certain fees incurred in the trusts sector. Specifically, this consultation sought industry input on improving the fairness of the island's International Services Entities (ISE) regime, which was introduced in parallel with the Goods and Services Tax (GST) in 2008 as an alternative to GST registration for businesses that mainly serve non-residents.

The ISE regime was created primarily to raise revenue from businesses in the financial services industry while helping to reduce the administrative and compliance burden that GST would place upon them. Businesses that meet certain conditions can become an ISE if they pay an annual fee. That fee varies depending on the type of business.

The Green Paper followed a review in 2011, during which the Government consulted businesses on the ISE regime, in part to achieve greater equity between the ISE fees charged to different kinds of businesses. The government reported that this exercise made it clear that businesses in Jersey value the ISE regime and consider that, on the whole, it achieves its aims of collecting revenue with a minimum of cost and complexity. However, respondents also considered that ISE fees are proportionately greater in some sectors than others, particularly for trust companies.

Introducing the latest consultation paper, the island's Minister for Treasury and Resources, Philip Ozouf, explained: "The ISE regime was developed to raise revenue whilst minimizing the compliance burden on companies that are primarily exporters. It is important that the regime is seen to be fair for the businesses involved."

He added: "Respondents to the 2011 consultation said most aspects of the ISE system are working well, but trust companies felt that charges could be made more equitable. This Green Paper explores ways of doing that. I would encourage all affected businesses and interested parties to respond to the Green Paper in order to ensure that their views are heard."

The annual fees payable by ISEs have been increased twice in the recent past, and now raise a total of GBP9.3m (USD15m) for island coffers. The government hopes to make revenue-neutral changes, and the consultation specifically considers options for amending the fee structure for trust companies so the current "basic" GBP7,500 fee element is replaced with scaled charges that better reflect the size of the business in question. Clarification of who is liable to pay the GBP200 "vehicle" element of the trust company fee is another aim of the consultation exercise.


Cayman Islands

October 2012 also saw the publication in the Official Gazette of the Cayman Islands of new legislation hiking fees payable by Cayman Island companies. The amendment to Section 156 of the principal Law increases, from KYD50 (USD61) to KYD75, the fee relating to a request on behalf of a company for removal from the companies register. Section 200 of the principal Law has been amended to add a fee of KYD400 for an application for registration in the case of a merger. The fee relating to an application for the registration of a change of name has been hiked from KYD75 to KYD100. Schedule 5 of the principal Law was amended to increase the annual fee payable by an exempted company by KYD100. Lastly, a hike of KYD25 has been legislated for "certain other fees for which no fee is elsewhere prescribed".


Gibraltar

Earlier in the year, the Gibraltar Financial Services Commission had already confirmed that increases in annual fees would take effect from April 1, 2012. While these largely tracked the 3% inflation rate, marked increases were introduced for industries where greater oversight is required.

Notable changes varying from an inflation-rate increase included a 10% hike in the annual fees for insurance companies, to take into account the increased cost of supervision with the incoming introduction of the Solvency II framework, which places minimum capital requirements on EU insurance companies to mitigate the risk of insolvency, from 2014.

In the area of audit business, the Commission, in consultation with the Gibraltar Society of Accountants, decided that the basis for the calculation of fees would be revised as follows:

  • GBP1,500 in respect of every firm (including those practicing as sole practitioners, partnerships as well as corporates);
  • GBP600 in respect of individuals, not including one individual who forms part of a firm described above; and,
  • GBP1,000 for every audit firm or statutory auditor that conducts statutory audits of Public Interest Entities as defined in section 2 of the Financial Services (Auditors) Act 2009;

The remainder of funding would be divided among each firm or statutory auditor, each paying an amount in proportion to their audit work turnover. This balance for 2012 amounts to GBP4,100, the Commission confirmed.

The basis of charging individuals who are authorised to act as Directors of Experienced Investor Funds (EIFs) has also changed. Previously the Regulations provided that an annual fee be paid for each fund for which the director acted. Under the revised Fees Regulations, a flat fee is charged to every director who is authorised to act as an EIF director, irrespective of the number of funds for which he acts. The annual fee has been set at GBP250.

Further to the change in EIF director annual fees it was also determined that the annual fees for EIFs be adjusted accordingly to address the increasing level of FSC resources required in this area. As a result the annual fee for EIFs was increased above inflation, and has been set at GBP840.

Fees for stock exchanges and clearing houses have been increased substantially. The application fee for this type of activity was increased from GBP40,000 to GBP75,000, and annual fees from GBP45,200 to GBP60,000.

Announcing the fee changes, the Gibraltar Financial Services Commission highlighted that the increases are favourable in comparison to changes in comparable jurisdictions in past years.


Hong Kong

Hong Kong is not a jurisdiction often associated with heavy regulation and taxation. Indeed, the Government has waived business registration fees in successive Budgets in recognition of the difficult trading environment, while the Securities and Futures Commission has done likewise for regulated firms. However, new fees look set to be introduced to cover the cost of the new insurance regulator, the Independent Insurance Authority, which is due to replace the Office of the Commissioner of Insurance, a Government department, in line with the international practice for financial regulators to be independent of the Government operationally and financially.

It is intended that the IIA should be self-financed with income streams from licence fees, service charges to insurers and licensees, and a levy of 0.1% on premiums of all insurance policies. The licence fees for insurance intermediaries will be waived for the first five years after the establishment of the IIA, and the new Authority will have to review the levy level once its reserve has reached a level equivalent to 24 months of its operating expense, after deducting depreciation and other provisions.


Switzerland

Larger jurisdictions are also feeling the strain of regulatory reform. For instance last October, the Swiss Federal Department of Finance (FDF) initiated a hearing on the revision of the Financial Market Supervisory Authority (FINMA) Fees and Charges Ordinance which would increase certain licence fees. The FDF said that subjecting most managers of collective capital investments to supervision as envisaged within the scope of the revision of the Collective Investment Schemes Act (CISA) requires an adjustment of the basic fees as of January 1, 2013, to cover the additional licensing costs. The FDF also stressed that an amendment of the FINMA Fees and Charges Ordinance was pressing due to some deficiencies discovered in practice in fee calculation.

The FDF stated: "With regard to subjecting most managers of collective capital investments to supervision within the scope of the revision of the CISA, FINMA will have to set up a licensing process. The basic charges will thus have to be adjusted to cover the additional licensing costs incurred."

The Department added: "In the insurance sector, all premium income not only from direct insurance business but also from reinsurance business should then be taken into account for calculating the additional charges. In the stock exchange area, the basic fees for providers of payment and securities settlement systems must be brought into line with those for stock exchanges. In addition, other smaller adjustments will be recommended. In particular, a more accurate user pays basis has to be established for charging in the case of directly subordinated financial intermediaries."

The revised Ordinance was adopted by the Swiss Federal Council on November 21, 2012, and went into effect on January 1, 2013.


Onshore Governments

Onshore Governments are also feeling the pinch of the rising cost of regulating the financial sector, such as the United Kingdom, where the Financial Services Authority, faced with a huge workload of new and proposed European Union legislation, has increased its fees by 15.6% for 2012/13 and has raised fees by an average of 13% in each of the last five years.

Rising regulatory and administrative costs have also prompted the New Zealand Government to put in place a new fee structure for the Companies Office and new levies for both the Financial Markets Authority (FMA) and the External Reporting Board (XRB), effective August 1, 2012.

The FMA, established in May 2011, is an independent Crown entity and acts as New Zealand's financial services and market conduct regulator. The XRB is responsible for all aspects of financial reporting and auditing and assurance standards setting. As a result of these changes, the FMA and XRB levies are now included within most registration fees, annual return fees and those for the filing of a prospectus. They are expected to provide NZD16.4m (USD12.5m) in funding for the FMA and NZD3.66m for the XRB annually.

The FMA levy now operates under a tiered system. Different market participants pay differing amounts, according to their size and the benefits they receive from a well-functioning financial market. The majority of the levy is collected through the Financial Service Providers Register.

The government also re-introduced the company annual return fee, saying that the Companies Office can no longer continue to provide this service for free. The fee was set at NZD45, including a NZD25 registration fee, a NZD10 FMA levy and a NZD10 XRB levy. Registration fees for NZ and overseas Companies largely remain the same, with a slight reduction to NZD150 once the two new levies are included. The fee for registering a prospectus with the Companies Office now includes an FMA levy of NZD2,000.

New Zealand's Commerce Minister Craig Foss said that the "new levy and fee structures will help fund a well-regulated market that all investors can trust". He added that it is important that New Zealand's regulators are properly resourced, and stressed that businesses need well-functioning capital markets to provide a vital source of finance. The government aims at restoring investor confidence and driving economic growth through the use of the FMA and XRB.

Foss explained: "The tiered levy system was finalized following a thorough consultation period with stakeholders. I'm confident we've struck the right balance."


Dubai and Bermuda Buck the Trend

Some jurisdictions are bucking this trend however by reducing fees. Not entirely unexpectedly, Dubai is found to be one of them.

Last September, it was announced that members of Dubai SME would benefit from reduced annual fees during their first three years doing business in the Emirate.

According to Dubai SME, which is the agency of the Department of Economic Development (DED) tasked with aiding the development of the SME sector, small business start-ups in the region will pay no more than AED1,000 (approximately USD270) per year during their first three trading years, as a result of a reduced license fee, the elimination of the labour security deposit (AED3,000 payable as a bank guarantee for every employee hired), and reduced charges which would otherwise be payable to the DED, Dubai Municipality and Civil Defence, and the Dubai Chamber of Commerce & Industry.

Commenting on the move in the regional media, Abdul Aziz Al Mazam, Senior Manager, Business Start-up & Development at Dubai SME observed that: "For example, Dubai Municipality levies a 5 per cent fee on rent from all businesses. Considering that rent in certain areas in Dubai is quite high, the flat rate presents a huge saving in this respect alone."

Bermuda also cut some registration costs last year, in particular halving the annual fee imposed on Bermuda Special Insurance Partnerships.

As a result of this change, from April 1, 2012, all new SPIs licensed in Bermuda pay BMD6,000 (USD6,000) for annual registration, a substantial reduction from the previous fee of BMD11,600.

Greg Wojciechowski, President and CEO of the Bermuda Stock Exchange, said that the decision to reduce registration fees for SPI structures was "significant development and underscores Bermuda's firm commitment to provide regulatory and commercially sensible support to the global reinsurance industry."

However, reductions in company registration and licence fees would appear to be the exception rather than the rule in the current environment, a situation that is likely to continue as the regulatory burden increases in weight.


 

Tags: fees | tax | insurance | business | Dubai | Jersey | Guernsey | Bermuda | audit | Gibraltar | Isle of Man | Insurance | New Zealand | inflation | Switzerland | legislation | environment | regulation | licensing | Hong Kong | banking

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