Why and Where Do You Need to Be Offshore?25 August 2023
A deep dive into the world’s most popular domiciles for offshore funds — and the impact on fund managers in Asia.
“At the end of 2020, approximately 70 percent of foreign fund investment in China by nationality was via a tax haven affiliate of a Chinese firm,” researchers wrote in a January 2023 working paper titled China in Tax Havens.
SS&C Intralinks recently met with Wendy Au, legal director at Loeb Smith Investment Funds Group — to explore what makes offshore destinations attractive to Asia-based fund managers and the different options available for fund domiciles.
SS&C Intralinks: Tell us about Loeb Smith and your legal practice.
Wendy Au: Loeb Smith is an offshore corporate law firm with a proven record of providing creative and insightful legal advice and solutions in respect Cayman Islands law and British Virgin Islands [BVI] law. Our clients chose us for our clear focus on delivering in respect of Cayman Islands law outstanding service and our ability to successfully assist them across the globe. We work with our clients, other law firms and advisers, and with each other, to efficiently maximize our clients’ commercial advantage whilst minimizing their legal risk.
I am a legal director in Loeb Smith’s Investment Funds Group in Hong Kong, advising on the formation, launch and ongoing regulatory and compliance matters regarding BVI and Cayman Islands investment funds and fund managers. I advise fund managers on their Cayman and BVI fund launches, restructuring, and ongoing regulatory and compliance issues.
As borders have reopened in this post-COVID-19 era, we observed that there has been a substantial number of China or Asia-based managers launching funds offshore. What makes offshore destinations attractive to fund managers based in the region?
The reasons for offshore jurisdictions such as Cayman and the BVI being so attractive for mainland Asia-based managers are many: 1. There are no taxes on the investment funds. 2. There are no economic or political tensions or instability in these jurisdictions, and their governments are keenly focused on enhancing and developing their financial services industry because it forms the mainstay of their respective economies. 3. Each jurisdiction has a well-developed jurisprudence based on English common law, with decades of investment funds-specific case law. 4. The regulatory requirements and the enforcement of them are robust but not overbearing for clients, and are not as expensive or as time-consuming as it can be in some onshore jurisdictions. 5. There are experienced service providers in the Cayman Islands, the BVI and significantly also in Hong Kong, for example, who advise on the various legal, compliance, fund administration and auditing aspects of Cayman and BVI funds, which means that Asia-based managers can be dealing with service providers in any time zone that suits their operational needs.
Offshore structures such as Cayman funds are still preferred by institutional and sophisticated investors around the globe. Setting up funds in offshore jurisdictions is typically easier for fund-raising at the same time in multiple jurisdictions. There are usually a variety of offshore fund structures, such as the Segregated Portfolio Company (SPC), to choose from.
What are some key considerations when choosing a fund domicile?
Choosing a domicile for a fund is a critical decision that could affect the fund’s operations, tax implications and attractiveness to investors. Based on our observations, here are some key considerations when choosing a fund domicile:
- Regulatory environment and legal system: The fund’s domicile determines the regulatory environment it will operate in. The regulations can affect how the fund is structured, its operations, reporting requirements, and the level of investor protection. Offshore jurisdictions such as the BVI and the Cayman Islands are autonomous British Overseas Territories that apply English common law rules and principles. They are politically stable and have a sophisticated system of financial services legislation, courts and judges. There is a well-tested and efficient judicial system in both jurisdictions, with a final right of appeal to the U.K. Privy Council.
- Taxation: Taxation is a crucial consideration when selecting a fund domicile. This includes not only the taxes levied on the fund itself, but also the tax implications for investors. This is one very important reason why a lot of fund managers choose the BVI and the Cayman Islands as their fund domicile. There is no income, corporate, capital gains or wealth taxes, withholdings or other similar taxes imposed on BVI and Cayman investment funds vehicles as a matter of local law. There are also no exchange control restrictions in either jurisdiction.
- Reputation of the domicile: The reputation of the domicile could affect the fund’s attractiveness to investors. Investors may perceive funds domiciled in jurisdictions with a history of political and economic stability, such as BVI and Cayman, as less risky. If the fund targets specific investor groups, it can be beneficial to domicile in a jurisdiction that those investors are familiar with or prefer. For example, the Segregated Portfolio Company (SPC) in the Cayman Islands has a history of over 20 years since it was introduced and is still a very popular structure in the investment funds space.
- Availability of service providers: The availability of experienced service providers in these two jurisdictions, such as fund administrators, lawyers, and auditors, is another factor to consider.
The Cayman Islands has been a dominating offshore destination for fund domiciles, and we understand that the BVI is also becoming increasingly popular. Can you share your observations on how the two jurisdictions compare?
We see that the Cayman Islands is still a dominating offshore destination for fund domiciles, especially for well-established institutional fund managers. However, the BVI becoming increasingly popular among start-up managers, in particular. The availability of the incubator fund and the approved fund regimes in BVI — with low maintenance costs and a lighter regulatory touch for funds with smaller fund sizes and smaller number of investors — are favored by start-up managers. Both incubator funds and approved funds have a maximum number of 20 investors, and a maximum net asset value (NAV) of USD 20 million and USD 100 million, respectively. They are not required to have an auditor appointed. Furthermore, an incubator fund, which only allows the fund to receive investment from sophisticated private investors, does not require an administrator to be appointed. These features reduce start-up managers’ ongoing maintenance costs. As the fund size grows, the managers will have the option to upgrade the incubator fund and the approved fund to traditional professional funds with no limit on the maximum number of investors and maximum NAV of the fund.
What are your observations of new fund structures and domiciles offered in Hong Kong and Singapore?
We are delighted to see new fund structures and domiciles offered in Hong Kong and Singapore. The success of new Hong Kong and Singapore fund structures is indicative of an expansion of the alternative investment fund industry, and we believe that this is good news for fund managers in Asia because it provides more fund domicile options. We understand that these fund structures and vehicles are still young and therefore do not currently provide some of the economies of scale benefits that the genuine offshore jurisdictions such as Cayman and BVI. We also observed from our clients that the process of obtaining the relevant licenses in these jurisdictions is not as straightforward as one thinks. Some of them turn to the BVI, for example, to establish an approved manager.
Adrian leads SS&C Intralinks’ alternative investments business in North Asia. Leading a team dedicated to addressing the needs of alternative investment managers, Adrian facilitates the fundraising, fund reporting and transactional activities of private equity, venture capital, hedge and real estate funds of all sizes, strategies and vintages across the region.
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