The release in 2016 of the Panama Papers and then the Paradise Papers a year later reignited a global discussion about the use of offshore jurisdictions for financial services. Revelations of concealed fraud, tax evasion and sanctions dodging using Panama entities, and the exposure of the tax arrangements of high-profile corporates across a collection of offshore ‘tax paradises’, has created what several market watchers describe as a ‘smell’ around offshore jurisdictions.
“The Paradise Papers put the spotlight on offshore structures and created [a] view that offshore was tainted,” says a London-based funds lawyer. “Fund managers are questioning now whether they want to set up offshore.”
From a tax perspective there is little difference between setting up an offshore fund in the Cayman or Channel Islands compared with Luxembourg, Ireland or Delaware, says Robert Mellor, PwC private equity funds partner. “Limited partnerships are either tax-transparent or exempt,” he says. “They all have the same tax characteristics. Tax is not a real differentiator.”
The issue is more about reputation and regulation, which IQ-EQ group fund client services leader Stuart Pinnington says “are a massive piece” when assessing investor preferences regarding a fund domicile. “A German pension fund [for example] would be prohibited by its investment memorandum from investing in a BVI [British Virgin Islands] fund,” he says. Pinnington adds that overall, “we are moving toward a more regulated future.”
Some LPs may not want to expose themselves to the scrutiny of investing in an onshore structure, but others are also “nervous of jurisdictions perceived as unregulated” says Hong Kong-based Debevoise & Plimpton partner Gavin Anderson. “Asian funds are still using Cayman if they’ve been there historically,” he says. “But some investors are turned off and would prefer funds in an onshore jurisdiction rather than a post box in the Caribbean. That’s a long-term trend.”
Off the list
The EU’s decision in February to include Cayman on its list of non-cooperative jurisdictions for tax purposes has cemented its status for European investors as a domicile to be avoided – for the time being, at least. The designation is widely expected to be rescinded following Cayman’s introduction of a new private funds law shortly after the EU’s decision, which brings the territory’s regulations in line with its international peers’.
In the meantime, Luxembourg and Delaware appear to be the main beneficiaries of any moves onshore. However, Guernsey and Jersey have sought to exploit the differences between offshore jurisdictions by updating their laws to facilitate the migration of funds, with an eye, it seems, to catching ex-Cayman business.
Although the debate about onshore or offshore may be intensifying, no one sees a rush to rehome funds. In the end, “there is a list of acceptable investment hubs that funds always consider and others that they don’t,” says IQ-EQ group head of funds, Justin Partington. “Consistency in rule of law and tailored fund regimes and transparency get a domicile on the list. And from there you might whittle it down to investor preference, relationships with service providers, and the nuances of structure.”