Why do offshore asset management centres remain popular and can offshore investors thrive under renewed global regulatory pressure?
In conversation with a friend recently, I was surprised to hear him tell me that he was taking US citizenship. Nothing wrong with that of course, except that he has been a UK resident with non-domicile status for as long as I have known him. He has long enjoyed the ability to have investments held in offshore locations without any onshore tax consequences. But this is no longer the case, therefore moving his residency to the US, with all of its global earnings taxation is no longer a net loss.
The collective countries of the EU are actively encouraging the movement of assets onshore using both stick (taxation) and carrots in the form of new onshore vehicles such as the impending Ucits IV which allows a yet wider breadth of asset types to be held.
So, why do offshore asset management centres remain popular? Indeed, can offshore investors thrive under renewed global regulatory pressure?
Of course, taxation, or the lack of it, has long ceased to be the ultimate driver of the offshore asset management industry in the sense of ultimate gains made. Most onshore jurisdictions pick up the tax on gains made when repatriating funds. However, it is the ability on non-tax payers, such as pension funds to avoid with-holdings and other taxes within funds (which would then have to be forensically examined for reclamation on repatriation) which remains a very significant rationale for using offshore vehicles.
It is the freedoms afforded when investing offshore that is of so much use to asset managers and investors based in taxed, regulated onshore locations that is continuing the popularity of the form.
The hedge fund world remains a very significant of offshore funds. This has led to the uninformed to believe that hedge funds are therefore outside of any regulatory control. This is far from the case as, particularly in Europe, the managers of those funds are very tightly regulated. It is the efficiency afforded by the light-touch rules available off-shore and away from the necessarily tighter onshore regimes. The use of leverage and the ability to go short are two of the key tools used in modern fund management which are enabled at the behest of the manager in an offshore fund.
When the ability to receive gains within the offshore funds free from duty is added into the mix, the advantages afforded by offshore funds are clear. Indeed, an step up in the corporate governance and regulatory regime in many of the key offshore centers’ is providing good comfort to investors without bringing the investment restrictions associated with onshore regimes.
Quality of Infrastructure – the near-term issue
Of greater importance to the ability of the offshore locations to survive and thrive is their ability to meet the ever more exacting demands of good Governance being demanded by investors. Being able to offer robust legal frameworks that provide strong levels of investor protection and effective manage the powers of Fund Advisors is key to ensuring appropriate credibility.
Many offshore locations are making sure that they are able to meet the latest thinking in legal structures with strong levels of ring-fencing between different asset pools thus avoiding cross-contamination of asset pools.
The range of fund structures is now wide and includes both corporate and trust-based funds, umbrella structures and protected cell companies bring added flexibility to multi-fund providers. However, have done the hard work in establishing the correct frameworks, ensuring that the human resource, particularly the fund directors/trustees, are highly skilled, effective and capable of fulfilling high standards of Governance is a key determinant.
Knowing what credit quality you are investing in
One of the first pages that prospective investors turn to when first looking at an offshore fund is the page detailing the various service providers. Only a complete list of well regarded entities will do.
- Law firms need to be part of a global network with deep pockets;
- Administrators need to be of significant scale;
- Custodians must have solid balance sheets;
- Auditors need to demonstrate that they have solid resources.
Following the near meltdown of the global financial system last year the investor sensitivity to the strength of the key service providers has increased dramatically, particularly amongst the institutional investor community. Custody of assets is a particular importance – if your custodian goes bust then all of your careful fund structuring is of no worth. Getting the right service providers is both increasingly costly and increasingly necessary.
So offshore jurisdictions remain useful for their core USP of enabling tax efficiency and asset management flexibility. If they get the Governance right then they will have a happy future.
John Godden, CEO of IGS Group
