Focus on substance bodes well for Jersey
Recent years have seen International Finance Centres (IFCs) having to contend with a growing raft of regulation and international policy initiatives.
As well as tax information reporting initiatives coming via the OECD and the US, fund executives have also had to assess the detail of the EU Alternative Investment Fund Managers Directive (AIFMD).
Nevertheless, macro trends continue to suggest that those IFCs that specialise in funds business and that can demonstrate a mature response to regulatory change have the opportunity to play an increasingly important role in global fund structuring.
Estimates indicate, for instance, that the global asset management industry will grow to in excess of US$100trn within the next five years (Asset Management 2020, PwC). Emerging markets in particular are witnessing growth in wealth and wealth creators, driving the demand for sophisticated investment support across the globe.
Further, a shifting business environment for fund managers and recent recommendations from the OECD relating to Base Erosion and Profit Shifting (BEPS), are prompting some consideration amongst managers of where to domicile both themselves and their funds. Jersey’s commitment to transparency initiatives, and its standing as a jurisdiction of substance, is likely to have a positive impact on Jersey’s long-term future as a funds domicile.
Against this backdrop, Jersey’s funds industry has continued to perform extremely well. The latest figures (June 2015) show that the net asset value (NAV) of regulated funds being administered in Jersey grew 9% year-on-year to stand at £218.7bn, the third highest level since 2009.
The alternative asset classes, which form around 70% of Jersey’s total funds business, continued to do particularly well, with total alternatives business including hedge, private equity, real estate and infrastructure funds growing annually by 15%.
There are a number of reasons for this success. Jersey has certainly benefitted from being subject to more certain economic, political and regulatory conditions than other fund domiciles specialising in alternative fund servicing.
Jersey also offers unrivalled market access. It is notable, for instance, that since the AIFMD was introduced the trend evidenced in Jersey has been one of building future management substance. As at June 2015, according to figures from the Jersey Financial Services Commission, 84 Jersey fund managers had received private placement authorisation from the JFSC, and 205 Jersey funds were being marketed into Europe through national private placement regimes (NPPRs).
The private placement option into Europe offered through Jersey is giving fund managers a welcome element of flexibility, without the headache and costs of reporting under full AIFMD ‘passporting’ compliance. Further, with ESMA recommending in July that Jersey should in due course be granted the EU-wide passport option, managers can be confident that the optionality Jersey offers stands them in good stead. Being approved so early in the process has given Jersey a great level of comfort and certainty as to its long-term sustainability.
NPPRs are working well and recent announcements from ESMA clarifying that the passport and NPPR will run in parallel with the passport once granted for three years will provide real added confidence. Meanwhile, other non-EU centres will have to play the waiting game until 2016 at the earliest to see if they too are given ESMA’s blessing.
Jersey’s ability to offer a ‘rest of the world’ regime outside the scope of the AIFMD has also positioned it strongly and uniquely as a European time-zone jurisdiction that can cater for funds targeting both assets and investors in growth markets.
Meanwhile, a number of developments are putting the issue of ‘substance’ at the heart of the decisions being made by managers.
The 15 point action plan set out by the OECD as part of the ‘BEPS’ agenda, for example, is likely to result in fundamental changes to international tax standards. Its broad scope means that fund managers may well be impacted to some extent.
The action points related to substance will place a greater emphasis on managers being able to demonstrate substance in the jurisdictions in which they operate. There is also likely to be an impact arising from changes in the approach of tax authorities, and fund managers can expect greater scrutiny of their activities, particularly those that benefit from access to Double Tax Agreements.
With substance being a major factor in the success of Jersey’s finance industry, the recommendations emerging from the BEPS project are considered to provide significant opportunities. Fund managers could benefit hugely from relocating to Jersey as they factor BEPS into the other benefits of the jurisdiction, such as tax transparency and AIFMD stance.
Recent months have also seen sizeable changes in the UK taxation of alternative fund managers. For example, tax changes relating to fund management and performance fees and whether they be treated for tax purposes as capital gains (28%) or income (up to 45%) are causing some uncertainty, whilst non-domiciled individuals have seen a considerable change in their UK effective tax rate with the introduction of Carried Interest legislation.
Combined, these changes mean that effective tax rates will inevitably rise and that the taxation of aspects of a fund is becoming more complex than ever before, leaving fund managers reviewing the potential impact.
Given that Jersey provides a clear and attractive low tax environment, with no Capital Gains Tax, and a dedicated regime for ‘high value residents’, it has a very clear edge as a result of these changes. Moreover, being close to the UK and Europe but outside of the EU has given rise to expectation that greater numbers of managers will relocate to the jurisdiction in the coming months.
Indeed, recent manager relocations have demonstrated the clear substance that exists in Jersey. Jersey is now home to around 125 fund promoters, up from 70 five years ago, with at least 24 of these managing in excess of US$1bn. An analysis of Jersey’s private equity sector also shows substantial growth of new LPs being registered in Jersey both around the implementation of AIFMD and a clear acceleration around November 2014. Sixty-one GPs have also been registered in Jersey so far in 2015, compared to seven in 2014 and four in 2013.
In an increasingly complex landscape where substance will undoubtedly grow in importance for managers, Jersey has positioned itself strongly both as a preferred fund servicing centre in Europe and as an ideal choice for fund management too.
This article was first published in Funds Europe, November 2015