guernsey 2015

HFMWEEK
S P E C I A L
R E P O R T
GUERNSEY 2015
AIFMD
Both EU and non-EU funds are supported
FLEXIBILITY
Business-friendly regulators seek to work with the industry
TAXATION
Guernsey’s tax environment offers advantages
FEATURING Appleby // BDO // Carey Olsen //
Deutsche Bank // Guernsey Finance // Ogier
OFFSHORE
REACH
Intelligent and insightful offshore
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For more information, please contact:
Kate Storey
$PVOTFM]'VOET*OWFTUNFOU4FSWJDFT](VFSOTFZ
+44(0)1481 755 620
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applebyglobal.com
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INTRODUCTION
uernsey is continuing to embrace its status as a
Europe-based hedge fund domicile outside of the EU.
The Guernsey regulatory body, the GFSC, has spent
the last year busily touting the offshore domicile as
an alternative for managers looking to market their
funds both inside and outside of the EU and wanting
to divide their regulatory requirements accordingly.
This proactive response to the introduction of the
AIFMD has placed Guernsey in a strong position
to attract a large variety of funds thanks to its developed infrastructure and
flexible regulatory regime. As a result, the island’s operators are showing an
overwhelming confidence in the domicile’s recent growth continuing in 2015
and beyond.
In this latest HFM Guernsey Report 2015 we speak to Guernsey-based
industry experts who explain the benefits of the various fund structures
available in Guernsey as well as the multiple tax incentives it boasts compared
to onshore ‘home’ jurisdictions. We also discuss how the island’s regulatory
framework remains responsive to the evolving demands of the industry. The
recent changes affecting US bank relationships with funds is testament to this
commitment.
The report also analyses how the future challenges of the Beps project will
affect Guernsey’s status as a premier offshore domicile as well as the potential
opportunities for more fund structures being supported there.
Drew Nicol
REPORT EDITOR
HEDGEFUNDMANAGER
HFMWEEK
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H F M W E E K . CO M 3
CONTENTS
GUERNSEY 2015
06
LAW
NEW INTERNATIONAL TAX RULES – WHERE NOW
FOR HEDGE FUNDS?
13
Chris Hutley-Hurst, senior associate at Carey Olsen, Guernsey,
highlights the key areas where the Beps project has potential to
impact hedge funds and raises issues that hedge fund managers
should be thinking about now
09
ACCOUNTING
INVESTING IN ILS THROUGH GUERNSEY
Richard Searle of BDO discusses the ILS market in Guernsey and his
expectations for future growth
11
LEGAL
TOTAL FLEXIBILITY
Ogier’s William Simpson and Val Rouse outline some of Guernsey’s
fund structures and how the evolving regulatory landscape
maintains Guernsey as a premier domicile
4 H F M W E E K . CO M
FINANCIAL SERVICES
REGULATORY PRESSURES HIT GUERNSEY FUNDS
INDUSTRY
Sinéad Leddy, technical director at Guernsey Finance, examines
how the current European landscape is affecting the funds sector
in the Island
17
LAW
GUERNSEY’S CHOICE OF FUND STRUCTURES
Kate Storey examines the key features and benefits of the different
structures in Guernsey and the factors that commonly influence
the choice of structure
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GUERNSEY 2015
NEW INTERNATIONAL TAX
RULES – WHERE NOW FOR
HEDGE FUNDS?
CHRIS HUTLEY-HURST, SENIOR ASSOCIATE AT CAREY OLSEN, GUERNSEY, HIGHLIGHTS THE KEY AREAS WHERE THE BEPS PROJECT HAS
POTENTIAL TO IMPACT HEDGE FUNDS AND RAISES ISSUES THAT HEDGE FUND MANAGERS SHOULD BE THINKING ABOUT NOW
C
Chris Hutley-Hurst
senior associate with
Carey Olsen Guernsey acts
for financial institutions,
Guernsey businesses and
leading law firms in London
and elsewhere on corporate,
private equity, fund and
listing matters. As an
experienced tax lawyer, he
also advises on international
fiscal matters, including
the OECD’s project on Base
Erosion and Profit Shifting
and FATCA/CRS.
urrent international tax rules are based on
principles that have not kept up with globalisation and the rise of the digital economy. Over
the years the rules have been patched up but,
almost two years ago, the Organisation for
Economic Co-operation and Development
(OECD), acknowledging that a substantial overhaul was
needed to combat base erosion and profit shifting (Beps),
launched its ambitious 15-point action plan designed to re-write the
rules for international taxation.
With the support of the G20 and
many other countries, the OECD is
working hard to meet the goals of
its action plan, with the final selfimposed deadline being this December. This will give countries the
domestic and international tools
they need to eliminate double nontaxation of income and prevent tax
minimisation strategies while continuing to prevent double taxation.
On the face of it the initiative
is aimed at multinationals but its
reach will be far wider and will affect hedge funds whether they are
based onshore or offshore.
of a ‘virtual permanent establishment’ in a country where
a server is located or contracts are habitually concluded
through technological means with persons located in that
country. A new taxable nexus based on having a ‘significant
digital presence’ in a country is also proposed.
Hedge funds that use high frequency trading,
particularly co-location, will need to keep an eye on these
proposals as, for example, a taxable presence of the fund
could be created in a country
where the fund’s server is located.
Such funds will need to consider
their digital infrastructure in preparation for the implementation of
these new rules.
ON THE FACE OF IT THE
INITIATIVE IS AIMED AT
MULTINATIONALS BUT ITS
REACH WILL BE FAR WIDER
AND WILL AFFECT HEDGE
FUNDS WHETHER THEY
ARE BASED ONSHORE OR
OFFSHORE
”
THE KEY ISSUES ARE:
Taxable nexus
In ascertaining whether a business has a taxable nexus in
a particular country the current rules for businesses that
are not resident in that country, generally look at whether
the business has a physical presence or ‘permanent establishment’ there. Such a presence can include an office or
agent but there are a number of exclusions to the concept
so that, for example, a distribution warehouse, a server or
a significant customer base in a particular country are not
typically enough on their own for a business to have a taxable presence there.
This is set to change soon. Proposals coming out of the
Beps project include extending the concept of permanent
establishment to cover a number of other situations. In
addition to capturing the physical presences that are not
currently counted, the proposals also include the creation
6 H F M W E E K . CO M
Profit allocation
Closely tied to taxable nexus is
profit allocation which is the most
complex area of the BEPS project
and the one that is likely to take the
longest to implement. It could also
result in the most litigation because
different countries may well have
different views as to what or where
the profit allocation should be.
The ability to demonstrate substance will be paramount but there
are a number of other factors that
will be relevant, including value
creation, capital at risk, personnel
and physical presence.
At the heart of profit allocation is transfer pricing and
the OECD aims to change the rules around this to ensure
that taxable profits are allocated to the jurisdiction where
the value was created. The OECD is focusing on the following three criteria:
1. Intangibles including ensuring that such profits are
appropriately allocated in line with value creation, developing transfer pricing rules for hard-to-value intangibles and updating guidance on cost-contribution
arrangements
2. Risks and capital including allocating income on the
basis of the location of business operations and disregarding related-party contractual and risk-shifting
arrangements
L AW
THERE IS BROAD POLITICAL
SUPPORT FOR THE BEPS PROJECT
BUT COUNTRIES WILL NEED TO
HARMONISE THEIR LAWS IN CERTAIN
AREAS FOR IT TO SUCCEED
”
3. High-risk activities including re-characterising transactions that would not, or would only very rarely, occur between third parties.
For high-frequency traders a number of factors will
need to be taken into account such as the location of the
programmers that create and maintain the algorithm, and
the capital put at risk, which could make the allocation of
profits a complex and costly task.
Treaty abuse
Model treaty provisions dealing with limitation of benefits, a general anti-abuse rule and targeted anti-abuse rules
have all been proposed to prevent the inappropriate use of
double tax treaties to obtain relief such as the minimisation of local withholding or capital gains tax.
This could affect illiquid investments in structures that
rely on tax treaties to minimise the impact of taxes in the
jurisdiction where the investment has been established.
Both onshore and offshore structures could be affected
because companies resident in tax treaty jurisdictions may
be directly affected and holding companies resident in offshore jurisdictions indirectly so.
THE FUTURE
It must be stressed that the OECD can only produce ‘soft
law’ in the form of reports, recommendations, model legislation, model treaty provisions, guidance and a model multi-national treaty. These are not backed by the weight of law
and so countries will still need to take action to adopt them.
While some actions are likely to happen in the near future others are likely to take much longer and it is also recognised that some proposals do not yet adequately address
funds – meaning further work needs to be done.
There is broad political support for the Beps project but
countries will need to harmonise their laws in certain areas
for it to succeed. To prevent base erosion it must first be
established which country’s tax base is being eroded and,
where businesses are located over various countries, this
is not an easy thing to establish. Therefore it is likely that
some businesses will end up with more than one country
laying claim to taxing rights over its profits.
It was the prevention of such double taxation that gave
rise to the international tax rules we currently abide by.
While the OECD firmly maintains the goal of preventing
double taxation the focus of individual countries on eliminating double non-taxation could cause them to jump the
gun and bring in domestic anti-BEPS legislation designed
to protect their own domestic tax base, which would not
be in step with the laws of other countries. The UK, for
example, has recently implemented a ‘diverted profits tax’
– an extra-territorial tax that is aimed at contrived or artificial arrangements used by large multinationals to erode
its tax base. Crucially this new tax is designed not to be
subject to the 100 plus double tax treaties that the UK has
entered into.
If countries adopt an uncoordinated approach to protect
their tax bases, especially in rules relating to taxable nexus
and allocation of profits, then we could see more uncertainty in the application of international-focussed tax rules as
well as an increase in associated litigation and overall costs.
Australia has suggested that it will implement a diverted
profits tax and, if other countries follow the UK’s lead, then
existing double tax treaties could become less relevant and
the risk of double taxation will increase significantly.
Businesses such as hedge funds may consider either increasing their presence in an offshore jurisdiction, such as
Guernsey, or relocating offshore altogether. While such a
move may not protect a business from anti-Beps laws entirely it can protect it from the uncertainty, and associated
cost climbs, that could arise if rules are introduced in an uncoordinated manner. Q
H F M W E E K . CO M 7
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ACCOUNTING
GUERNSEY 2015
INVESTING IN ILS THROUGH
GUERNSEY
RICHARD SEARLE, OF BDO, DISCUSSES THE ILS MARKET IN GUERNSEY AND HIS EXPECTATIONS FOR FUTURE GROWTH
Richard Searle has
over 25 years of audit,
assurance and advisory
experience and has been
audit partner on over 100
funds and insurance entities.
His sector specialisms
include real estate and
private equity funds, ILS and
Shariah-compliant insurance
structuring.
HFMWeek (HFM): How has the global insurancelinked securities (ILS) market developed over the past
12 months?
Richard Searle (RS): The global ILS market has developed significantly in recent years with 2014 showing a
record breaking year with over $24.3bn on risk covering
catastrophe bonds at 31 December 2014, according to
the Aon Benfield fourth-quarter 2014 update. Strong
investor demand has fed larger transactions across the
market with coverage being extended into a variety of
risks, some of which are outside the traditional catastrophe bond market.
HFM: Will the changes announced in this year’s UK
budget (allowing ILS to be domiciled in the UK) affect other jurisdictions in terms of competition and
volumes of business? What can
Guernsey offer that the UK cannot?
RS: The timing of George Osborne’s announcement on 18
March 2015 that the government
will explicitly target ILS in a plan
to grow the London insurance
market was particularly interesting
considering it fell on the same day
that Guernsey Finance presented
its ILS Insight London at the British Museum. The general response
to the announcement was that this
reinforces recognition of the ILS
market as an important piece of the
financial services jigsaw. One could
take the view that London would
be a new competitor to Guernsey
in this particular sector though I see
a broader welcoming of the announcement. Specifically,
this demonstrates recognition of the maturity of this market and of ILS as an asset class that is now considered to be
more mainstream than alternative.
Regarding other jurisdictions, there are clearly a number of locations that have been offering ILS products
very successfully for many years. Any successful product
is bound to attract new entrants to the market and this is
to be welcomed. In terms of the impact on Guernsey and
what it can offer that the UK cannot, I think it is more beneficial to focus on how Guernsey offers solutions to the
market as opposed to looking for unique selling points.
The long history of innovative insurance, PCC and ICC
structures in Guernsey, supported by the mature fund, fiduciary, accounting and legal industries means that there
is a high concentration of extensive expertise in Guernsey
operating under a stable regulatory environment, the size
and experience of which means that Guernsey can respond rapidly to changes in the market place.
HFM: There has been a growth in hedge funds launching reinsurance arms. What do you think of this trend?
RS: The growth in hedge funds launching reinsurance
arms could be seen as a natural development in an industry that is always on the lookout for opportunities for its
investors. A number of hedge funds have operated in this
space for quite some time and the formalisation of this
structuring through reinsurance arms again reinforces the
attractiveness of insurance products as part of an investment strategy.
When considering yields across
certain asset classes in recent years
it is easy to see why insurance would
be an attractive option, particularly
given the lack of correlation between insurance risk and the market risk that affects many other asset classes. Nevertheless, there are
clearly hurdles to be overcome for
any fund managers considering a
foray into the insurance market, not
least being the regulatory environments, costs and minimising management’s distraction from the core
business of the hedge fund.
One solution that we have seen
working very well to this is where
fund managers have invested into
ILS products through existing ILS
structures, which are typically in cell company models
such as Aon’s White Rock Insurance Company PCC Limited, White Rock Insurance (Guernsey) ICC Limited and
Robus Group’s Hexagon Insurance PCC. The advantage
of such structures is that they allow investors to diversify
their asset class risk whilst still giving them the reassurance
that comes with a well regulated and governed structure in
an established and stable environment, yet in a relatively
low cost investment platform.
Cellular structures can operate with multiple investment
managers investing into different cells as in the aforementioned models, or alternatively with a single investment
manager invested into an entire PCC or ICC using multi-
THERE IS A HIGH
CONCENTRATION OF
EXTENSIVE EXPERTISE
IN GUERNSEY
OPERATING UNDER A
STABLE REGULATORY
ENVIRONMENT
”
H F M W E E K . CO M 9
GUERNSEY 2015
ple cells for different funds, as in the case with Secquaero
Re (Guernsey) ICC Limited, managed by Aon Insurance
Managers Guernsey. Both solutions have equally compelling arguments in their favour and the adoption of one or
the other really depends on the specific circumstances of the
individual manager, fund(s), and investor bases involved.
HFM: How does the ILS market in Guernsey compare
to rival domiciles?
RS: As mentioned before, there are a number of jurisdictions that offer ILS products and it would be difficult to
select the unique selling point that can be used to claim
dominance over all other domiciles. Similarly within each
jurisdiction there will clearly be appropriate pairings between ILS providers and their typical client base and
geographies. I think Guernsey enjoys a concentration of
core expertise with significant experience in insurance and
investment management as well as accounting and legal
experience. Furthermore, the nature of the fund and insurance industries in Guernsey has created a significant level
of experience not just in locally-based structures but also
in international financial services regulation and structuring. Finally, the regulatory environment has developed
over the past three decades to evolve into a robust yet
proportionate regulatory framework in which a key selling
point for Guernsey is the speed of response and ease of
access to the regulator.
HFM: In which direction do you predict cat bond
yields will go over the next 12 to 18 months?
RS: The prediction of cat bond yields is a complex matter
which is far beyond my level of investment qualification!
10 H F M W E E K . CO M
ACCOUNTING
That said, it is clear that cat bond yields have been falling
in recent times as have reinsurance rates, and these may
well be a simple effect of supply and demand. It is important that any investment manager continues to look not
just at yields but also at the level of returns relative to the
risks involved in the asset class and the diversity of the
fund’s portfolio.
HFM: How do you see the ILS sector developing over
the next five years in terms of investor interest?
RS: The next five years promise to be an interesting and
exciting time in the development of the ILS sector. The
increasing level of awareness in recent years in this sector
has created additional demand which has most likely had
an effect on pricing. I think there will continue to be an
expansion of ILS products into other risks in addition to
the more traditional catastrophe bond products, and we
have already seen this in the market with a Shariah-compliant listed bond accessing life assurance risk, and with
longevity risk transfer products. There will also likely be an
impact of technology and a greater move towards insurance products reporting in-line with investor demands. In
fact we have already seen this with discussions around the
reporting of daily NAVs on one ILS client to its investor
funds. This will present an interesting balancing act between investors’ desire to respond quickly to events and
what is essentially an illiquid and long-term underlying
asset class. In summary, the future looks exciting for the
ILS sector with greater interest and investor appetite being seen from funds and it is encouraging that Guernsey
is very well placed to provide innovative solutions to meet
investor needs. Q
LEGAL
GUERNSEY 2015
TOTAL FLEXIBILITY
OGIER’S WILLIAM SIMPSON AND VAL ROUSE OUTLINE SOME OF GUERNSEY’S FUND STRUCTURES AND HOW THE EVOLVING REGULATORY
LANDSCAPE MAINTAINS GUERNSEY AS A PREMIER DOMICILE
Val Rouse specialises
in investment funds and
regulatory matters and has
extensive knowledge of
the Guernsey investment
fund regulatory regime
having worked in the
fund industry and at
the Guernsey Financial
Services Commission before
becoming a Guernsey
advocate.
HFMWeek (HFM): What are the different fund types
that have been set up in Guernsey?
WILLIAM SIMPSON and VAL ROUSE (WS&VR):
Guernsey, as an established offshore jurisdiction, continues to be a popular home for all fund types, including many
open-ended funds as well as for the administration of nonGuernsey funds. Guernsey’s closed-ended investment funds
are currently a particular growth area in terms of recent setups and new enquiries. Examples of recent closed-ended
fund structures advised on by Ogier include a fourth Guernsey fund for Mid Europa investing in Central and Eastern
Europe and Turkey, which closed at €800m, a London main
market listed infrastructure fund for Sequoia raising £150m,
and a fund raising $500m investing in a pan-African portfolio of private equity investments for Development Partners.
Ogier is also seeing many more enquiries and has received
instructions on various new funds for launch later this year,
including debt funds and London main market listings.
HFM: What are the advantages of
these fund structures?
WS&VR: Guernsey has always offered a very flexible open-ended
funds’ regime, which lends itself to
all types of fund structures, including
hedge funds. The lack of restriction
on investment parameters (other
than a requirement for the spread of
risk) means that many different types
of open ended funds may be quite
easily established in Guernsey. There
is also flexibility in the closed-ended
fund regime. A Guernsey closedended investment fund may be either
registered or authorised. The main
difference can be found in the application process, where a
lighter regulatory touch applies. A registered fund may normally be established within a shorter overall timetable than
an authorised fund.
rience of and are well placed to administer general partner
and carry vehicles associated with such structures. Ogier can
also assist with licence applications and all Guernsey related
matters.
HFM: How has the Guernsey regulatory system developed to accommodate these fund structures?
WS&VR: The existing flexibility within the Guernsey regulatory system means that a wide range of fund structures can
be accommodated, without (unlike other jurisdictions) the
need to amend legislation and/or design bespoke regimes.
That said, the overall legal and regulatory framework remains
under constant review and improvements continue to be
made from time to time. For example, a recent change to the
rules governing registered funds means that such schemes
may now be offered directly to the public in Guernsey. It is
understood that this will assist with the Volcker Rule, which
would appear to prevent US banking entities from sponsoring, investing in or having certain
relationships with a fund that could
not be sold to investors in its home
jurisdiction.
GUERNSEY HAS MODERN
AND UP TO DATE
LEGISLATION TO GOVERN
CORPORATE AND LIMITED
PARTNERSHIP VEHICLES
William Simpson
has more than 25 years’
offshore experience and has
spent time in the Cayman
Islands and the British Virgin
Islands, before moving to
Guernsey. He is a specialist
investment funds lawyer
and has advised on a
broad range of investment
structures for both corporate
and private clients.
HFM: Has Guernsey’s non-EU
stance played a part in which fund
types it attracts?
WS&VR: Guernsey took a very
pro-active approach to the introduction of the AIFMD. The marketing
of Guernsey funds under national
private placement regimes is generally working well in most European
countries. However, it must be remembered that the AIFMD will not
apply to all Guernsey funds. A Guernsey fund which is not marketed in the EU will fall outside of
the Directive. Certain fund structures advised on by Ogier
fall into this category. Conversely, Ogier works closely with
EU onshore counsel in the case of Guernsey funds which are
to be marketed in the EU and can advise on the application
of the Guernsey AIFMD marketing rules.
”
HFM: Why have these funds found a home in
Guernsey?
WS&VR: Guernsey has modern and up-to-date legislation
to govern corporate and limited partnership vehicles. Authorised and registered closed-ended funds established as
Guernsey limited companies have proved very suitable for
the UK listed market. Guernsey remains the preferred jurisdiction, excluding the UK, for the listing of vehicles of the
London Stock Exchange. Figures to the end of November
2014 show 119 Guernsey-incorporated entities listed on its
various markets. A structure including one or more Guernsey limited partnership is also well suited for private equity
fund purposes. Guernsey licensed administrators have expe-
HFM: Do you see new fund types being introduced in
the future. If so, which ones and why?
WS&VR: Possibly: Guernsey continues to keep its regulatory regime under review. However, the existing regulatory
regime remains flexible enough both to permit innovative
solutions and to accommodate a wide range of fund types. Q
Contact details
For further information, please contact either William Simpson, partner
of Ogier on email [email protected] or Val Rouse, senior
associate of Ogier on email [email protected] or Tel +44 1481 721672.
H F M W E E K . C O M 11
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O R V I S I T H F M W E E K . CO M FO R D E TA I L S
5
FINANCIAL SERVICES
GUERNSEY 2015
REGULATORY PRESSURES HIT
GUERNSEY FUNDS INDUSTRY
SINÉAD LEDDY, TECHNICAL DIRECTOR AT GUERNSEY FINANCE, EXAMINES HOW THE CURRENT EUROPEAN LANDSCAPE IS AFFECTING
THE FUNDS SECTOR IN THE ISLAND
Sinéad Leddy
is technical director at
Guernsey Finance, the
promotional agency for the
island’s finance industry.
HFMWeek (HFM): What are the biggest issues facing
not only Guernsey’s funds industry, but the funds sector as a whole?
Sinéad Leddy (SL): Without question it’s the regulation
and legislation coming down the pipeline. This includes
the US’s Foreign Account Tax Compliance Act (Fatca),
measures from the Organisation of Economic Cooperation and Development (OECD), such as the Common
Reporting Standard (CRS) and the Base Erosion and
Profit Shifting (Beps) project, and the Markets in Financial Instruments Directive (Mifid) and Alternative Investment Fund Managers Directive (AIFMD) from Europe.
It was this combination of new regulation and legislation which prompted us to host a technical masterclass in
London in January to demonstrate the progressive way in
which Guernsey has responded to all these developments.
HFM: What were some of the key ‘take homes’ from
that masterclass?
SL: The AIFMD was the biggest debating point because
despite the initial ‘deadline’ for full legislative transposition of the AIFMD being back in July 2013, there has been
a real inconsistency in approach
from EU and EEA national regulators in how they are implementing
it.
The transitional year ended on
22 July 2014 and a report from
KPMG showed that at that time
only 23 of the 31 EU and EEA
member states had implemented
full legislative transposition of the
AIFMD.
As such, even European fund
managers cannot distribute funds
into some EU/EEA member states
due to the inconsistency of ap-
proach between national regulators. In this climate, it is
no wonder that non-EU fund managers believe that the
AIFMD is too burdensome, with some, particularly the
US market, citing it as creating ‘fortress Europe’ and therefore choosing not to market funds into Europe.
HFM: What has been Guernsey’s solution to this uncertainty?
SL: Guernsey is not in the EU (although it is in the European time zone). A large proportion of business relates to
the EU in some form yet we also have a substantial amount
of funds business which originates outside of Europe.
As such, the island has introduced a dual regulatory regime so that it is possible to continue to distribute Guernsey funds into both EU and non-EU countries: the existing regime remains for those investors and managers not
requiring an AIFMD fund, including those using EU National Private Placement (NPP) regimes and those marketing to non-EU investors; and there is an opt-in regime
which is fully AIFMD-compliant.
Guernsey’s opt-in equivalent regime, which has been
in place since January 2014, is appropriate for funds requiring full AIFMD compliance.
However, Guernsey’s position as
a third country means our managers and funds who want to access
Europe continue to be able to use
NPP regimes.
We continue to hear positive
feedback from promoters and their
advisers that Guernsey’s regulatory
environment is straightforward
and, more importantly, things can
progress in a timely manner. The
turn-around times in Guernsey are
low compared with our competitor
territories where delayed applica-
IN THIS CLIMATE, IT IS NO
WONDER THAT NON-EU
FUND MANAGERS BELIEVE
THAT THE AIFMD IS TOO
BURDENSOME
”
H F M W E E K . C O M 13
FINANCIAL SERVICES
GUERNSEY 2015
GUERNSEY FUND FORMATIONS – YEAR-ON-YEAR
tions can cause issues when bringing a new product to
market.
HFM: There is much debate surrounding the future
of NPP and third-country passporting. What are your
thoughts?
SL: Many managers have continued to use NPP regimes due to the reduced burden in comparison with
the AIFMD and they are working well. Figures from the
GFSC show that at the end of January 2015, 46 Guernsey
AIFMs had used Guernsey’s NPP regime to market AIFs
into 15 European countries. Indeed, it is understood
that several Cayman Islands domiciled funds are being
migrated to Guernsey to take advantage of the effectiveness of our route for distribution into EU countries using
NPP regimes.
The statistics show that NPP from Guernsey is being
used to target the key countries into which promoters
wish to market. A fund typically markets in between two to four countries and NPP is the ideal
approach for this model.
The European Securities and Markets Authority (Esma) has been consulting on the current and
future implementation of the AIFMD with regard
to extending the passport to third countries and
Guernsey has been closely involved in this process.
For those marketing into Europe, the NPP
route will be favoured by many due to the depth
and breadth of requirements that fund managers
will have to satisfy under full AIFMD. Indeed, it is
expected that full-blown AIFMD compliance will
only be sought if there are particular commercial
reasons to do so.
Guernsey’s attraction is that it can provide a European platform but one which is not actually in
the EU and therefore can offer a variety of options.
For example, it makes commercial sense for
a fund manager marketing almost exclusively to
Europe to have a fully AIFMD compliant platform. However, this does not have to be based
in a mainland European domicile and, indeed, it
could be a Guernsey platform because the island
has also introduced a fully equivalent, opt-in AIFMD
route to market.
150
120
90
60
30
0
14 H F M W E E K . CO M
2013
2014
investors. European mainland platforms do not offer the
ability to separate the reporting obligations away from
non-EU investors, as with a Guernsey platform.
In addition, managers and funds with no connection to the EU continue to be able to use regulatory
regimes which are completely free from the requirements associated with the AIFMD and as such, will
have significant operational and cost benefits. For
example, Investec Asset Management recently redomiciled a $1.2bn fund focused solely on non-EU
investors from Ireland to Guernsey to take advantage of our dual regime response to the AIFMD.
MANAGERS SHOULD LOOK
CAREFULLY AT WHETHER
THE PAN-EUROPEAN
PASSPORTS BEING
OFFERED ARE RELEVANT
TO THEIR INVESTOR BASE
GIVEN THAT IT IS LIKELY
TO BE INCREASINGLY
GEOGRAPHICALLY DIVERSE
HFM: What should fund managers be wary of in the
current climate?
SL: Managers should look carefully at whether the panEuropean passports being offered are relevant to their
investor base given that it is likely to be increasingly geographically diverse. European Directives – such as the
AIFMD but also the Undertakings for Collective Investment in Transferable Securities (Ucits) Directive – cater
for European (retail) investors but add to compliance
obligations and costs. As such, if you do not need Ucits/
AIFMD or only need limited access to them for certain investors, then it is possible to break the non-EU business
away into a parallel or feeder structure for which AIFMD
compliance would neither be required nor necessary.
Conversely, if a manager has a platform in a mainland
European domicile then it will have to comply fully with
the AIFMD even if there is a large proportion of non-EU
2012
”
HFM: What substance is Guernsey able to
demonstrate and offer in a post-AIFMD world?
SL: A huge advantage for us as a fund domicile is
the existing standards we already employ regarding oversight and the substance which is already
present in existing Guernsey domiciled structures.
There are more than 50 fund managers, administrators and custodians servicing assets valued at
more than $300bn.
Guernsey already plays host to a number of
major asset managers, such as Apax, BC Partners,
Credit Suisse, Investec, JP Morgan, Man Group,
Mid Europa, Permira and Terra Firma which all
have offices and staff in the island. There is a range of fund
administrators too, from major international names such
as Citco, Northern Trust and State Street to boutique, independent operations, coupled with a significant pool of
qualified non-executive directors who are experienced in
providing management functions.
Quality of service is evidenced by the fact that Guernsey
providers administer or manage nearly 250 open-ended
funds which are domiciled in other jurisdictions, typically
the Cayman Islands, where there may be local substance
challenges.
Unlike many competitor jurisdictions, Guernsey also already has well-established custody businesses. They are increasingly being complemented by administrators who are
setting up depositary functions to service private equity and
real estate clients new to the requirement for a depositary
under the AIFMD. However, it should be noted that those
taking advantage of NPP regimes are able to access a lighter touch regime for non-financial assets compared to that
which would be required under the full blown AIFMD. Q
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L AW
GUERNSEY 2015
GUERNSEY’S CHOICE OF
FUND STRUCTURES
KATE STOREY EXAMINES THE KEY FEATURES AND BENEFITS OF THE DIFFERENT FUND STRUCTURES
IN GUERNSEY AND THE FACTORS THAT COMMONLY INFLUENCE THE CHOICE OF STRUCTURE
Guernsey offers a flexible choice of business vehicles for
structuring funds and associated management and special
purpose vehicles. The types of investment vehicle most
often encountered in Guernsey are closed ended or open
ended companies and unit trusts and closed ended limited
partnerships. Additionally, Guernsey recently introduced
its form of limited liability partnership, which has already
proved popular as a vehicle to house fund managers and
general partners (including of non-Guernsey funds).
Kate Storey is a
senior funds lawyer
in the Guernsey office
of Appleby. She has
extensive experience
in the establishment,
listing and regulation of
Guernsey investment funds
of all asset classes, as
well as fund finance and
restructurings. She sits on
the technical committee of
the Guernsey Investment
Fund Association.
TYPES OF VEHICLE
1. Company
The Guernsey limited liability company provides investors
with limited liability to the amount unpaid on their shares.
It also has the major advantage of not being subject to any
capital maintenance principle. Accordingly, there are no
authorised share capital or minimum issued share capital
requirements, and distributions can be made out of capital subject only to satisfaction of the prescribed solvency
test. Shares can be issued at par value, denominated in any
convertible currency and with or without premium, or with
no par value. There may be multiple classes of shares with
different rights.
An alternative to having different classes of shares in a
standard non-cellular company is to use a Guernsey cell
company – either a protected cell company (PCC) or
incorporated cell company (ICC). In such a company
shares can be issued in separate cells to shareholders who
may be different for each cell and different from the shareholders of the ‘core’ of the PCC or umbrella ICC. Crucially, unlike for share classes in a non-cellular company, the
assets and liabilities of each cell are legally segregated from
those of the other cells and the core of the PCC/umbrella
ICC. Therefore a cell company lends itself well to guaranteed or protected products.
The key difference between a PCC and an ICC is that, in
an ICC, the cells are incorporated as separate companies in
their own right, thus providing an extra layer of legal segregation of assets and liabilities.
There are clear cost and time savings in using a cell company rather than setting up multiple fund structures - adding a cell to a PCC will be cheaper than forming a brand
new legal entity, and the regulatory application and annual
fees for cells will be lower than for separate funds. Further,
there are reduced operating costs for cell companies, in
that there is one board of directors and administrator, and
audit fees can be shared across the cells.
Cell companies can also be used as rent-a-cell platforms
to white label to multiple investment advisers who each
take a separate cell or cells for their separate fund(s). This
is more cost effective for investment advisers than setting
up a standalone fund structure and helps new investment
H F M W E E K . C O M 17
L AW
GUERNSEY 2015
advisers build a track record in an already established investment vehicle.
The standard rate of Guernsey corporation tax
is currently 0%; alternatively a Guernsey corporate fund may apply for exempt status so that it is
exempt from Guernsey tax other than in respect
of Guernsey source income (excluding bank interest).
WHICHEVER BUSINESS
VEHICLE IS CHOSEN,
GUERNSEY DOES NOT IMPOSE
ANY ADDITIONAL LAYER OF
TAX ON FUNDS OR THEIR
INVESTORS. IN ADDITION TO
INCOME TAX NEUTRALITY,
THERE IS NO CAPITAL GAINS
TAX AND NO WITHHOLDING
TAX OR STAMP DUTY IS
APPLICABLE
2. Unit trust
A unit trust is not a legal entity but a trust arrangement whereby the trustee holds the fund
assets on trust for the benefit of the investors who
hold units in the unit trust. A unit trust is constituted by a trust instrument entered into between
the trustee and the manager of the fund, to which
investors adhere upon subscribing for units. The
trustee acts as custodian (having a custodian
which is independent from the manager is a requirement for Guernsey open ended funds).
Guernsey unit trusts have been commonly
used for real estate funds, hence the acronym
‘GPUT’ (Guernsey property unit trust), but are
by no means confined to such use.
Neither the trustee nor the assets of a unit trust
will be liable to Guernsey income tax on the unit
trust’s income arising outside Guernsey (nor on
Guernsey bank interest). In certain jurisdictions
a unit trust may be treated as tax transparent for
income and non-transparent for capital distributions.
3. Limited partnership
Again, a limited partnership is not a legal entity separate
from its partners and must act through and be managed
by its general partner(s), of which there may be more than
one, with different functions. Usually a Guernsey SPV is
established to act as general partner, which again may be a
company, limited partnership, or since May 2014, a limited
liability partnership.
The limited partners have no liability for the debts of the
partnership beyond the amount of their investment (provided they do not participate in management), whereas
the general partner has unlimited liability for the debts of
the partnership. There is no limit on the number of limited
partners. A limited partnership is generally treated as being
tax transparent and is therefore an attractive structure for
various tax planning purposes and particularly favoured for
structuring private equity and venture capital investments.
4. Limited liability partnership
The Guernsey limited liability partnership combines the
most advantageous features of a partnership and a company. This gives the flexibility of operation of a partnership with reduced regulation compared to a company,
combined with the benefit of its being a body corporate
that can contract in its own right, with limited liability for
its members which is not lost by participation in management. This may be attractive for real estate joint ventures
and other investment ‘clubs’ where investors want to take
a more active role.
The LLP is transparent for Guernsey tax purposes. It has
been used to act as general partner of a UK limited part18 H F M W E E K . CO M
”
nership in light of the changes to the UK’s Partnership Accounts Regulations, which impose
certain accounting standards and public filing
requirements. These requirements do not apply
to English or Scottish limited partnerships which
have an LLP as their general partner.
It has also been used to house an investment
management firm, which is something we are
likely to see much more of given Guernsey’s thriving funds industry and in the wake of AIFMD,
due to which many EU-based fund managers are
looking to relocate their operations outside of
the EU; the ability to migrate existing LLPs into
Guernsey will be attractive in this regard.
FACTORS INFLUENCING CHOICE OF STRUCTURE
There are six main factors to consider:
1. Investment strategy
Whether the fund is to be closed or open ended
will be relevant. A limited partnership is not as
suitable for open ended funds because it is relatively cumbersome to add and remove investors.
If a proposed fund has multiple strategies, or
investments are to be staggered or participated in
by different investors, then a cell company, using
a separate cell for each strategy, vintage or group
of investors, may be the most suitable.
2. Asset type
Illiquid assets are more suited to a closed ended structure,
and in the private equity and property fields this will often
mean that a limited partnership is chosen.
If the fund is to invest in a diverse range of assets then
this could be achieved by using a cell company to segregate
assets and associated liabilities by asset class or geography
in separate cells.
3. Investor expectation
Investors in particular jurisdictions may be more familiar
with one type of structure than another and there may be a
preference according to the investor type; for example, institutional investors will be familiar with investing through
a limited partnership structure.
4. Listing
If it is intended that the fund will be listed then the most
suitable structure will be a company. If a cell company is
used it is possible to have listed and unlisted cells and have
cells listed on different markets.
5. AIFMD
A company has the option of being self-managed for
AIFMD purposes.
6. Tax implications
Tax implications for investors in their home jurisdiction
will generally be the determining factor. Whichever business vehicle is chosen, Guernsey does not impose any additional layer of tax on funds or their investors. In addition
to income tax neutrality, there is no capital gains tax and no
withholding tax or stamp duty is applicable. Q
“alternative class? BDO are best in class!”
Guernsey Funds & Insurance
BDO audit more Guernsey ILS (Insurance Linked Securities) cells and structures than
any other firm, offering investors access to alternative asset classes, not correlated to
general financial markets.
Our experience across both the funds and insurance sectors positions us perfectly to
help our clients bridge these specialisms for both listed and unlisted funds.
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RICHARD SEARLE
+44 (0)1481 746 067
[email protected]
Understanding that
relationships are key.
It’s in our nature.
The qualities you need in a Guernsey law firm come naturally to us. We provide a
broad range of services including: fund establishment, structuring, listing services
and regulatory advice to investment funds, investment managers and intermediaries.
We have a flexible and commercial approach and are focused on delivering
outstanding client service.
To find out how we can assist your business, please contact William Simpson or
Frances Watson on +44 1481 721672 or email [email protected]
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